Afghanistan Private Sector Growth Estimated at Two Hundred Twenty Percent Not Enough to Attract Investors-Still a Long Way to Go

The private sector in Afghanistan is very small with only a few foreign companies (less than 2%), few exporters and few companies owed by women. It consists predominantly of agribusiness, construction and trading firms. Companies are mostly small with fewer than 100 employees and primarily produce for domestic market.

According to the World Bank Afghanistan Investment Climate in 2008 report, the private sector in Afghanistan is growing and has doubled in size since 2005 in spite of widespread corruption, crime and theft, weak economics regulation and policy enforcement, weak electricity supply and weak access to land and finance. Average growth in the surveyed companies is very high, estimated at 220%.

The World Bank's 2008 survey of 1066 Afghan companies in 10 cities showed that 77% of firms planned to expand in 2009, 8% of them internationally. Access to finance and electricity supply were listed as the biggest obstacles to expansion. However, lack of innovation and low productivity can considerably slow down the growth in the future.

Smaller firms in politically stable and secure areas have higher productivity, so do firms that have access to the electricity. The city of Mazar-e-Sharif is the most productive city. The productivity gap between Mazar-e-Sharif and other cities is 170%.

Only half of all firms have a bank account. These are mostly exporters, larger companies, and firms in the construction industry. A meager five percent have a loan with financial institution. The companies cited "no need" and Islam as the main reasons for not seeking a loan.

Since the dependence of all Afghan firms on bank financing or credit is minimal, retained earnings are the main financing source. Approximately 85% of all fixed-asset purchases and financing investments come from retained earnings.

The World Bank Afghanistan Investment Climate in 2008 report claims that share of new investments from financial institutions and banks stands at 2%.

Very few companies are using foreign-licensed technology. Computer and Internet use is also very weak, with construction companies and those with more than 100 employees being the most likely users. Internet connectivity is a major problem with constant interruptions.

Skills of labor force are very weak. Not many companies are offering formal training.

Corruption is widespread. Afghan companies pay on average 2% of their sales as bribes to public officials, especially for electricity or water connection, construction permits and other licenses, and registration. Corruption is a big problem for construction firms, with larger firms being more vulnerable. Exporters are also more likely to pay bribes than other companies.

Access to land with electricity and water services is one of the major obstacles to business operations of Afghan companies, especially in medium-sized and large companies. Additional land is very difficult to obtain. According to the report, in the past 3 years, 68% of the companies that tried to obtain additional land haven't been able to do so.

Electricity is also a major problem, especially for companies in manufacturing sector. Unreliable connection and power outages, often lasting for hours, are very costly for the companies. Seventy-five percent of them are having a generator.

Women are part of Afghan private sector, though in small numbers. In 2005, only six companies had a woman owner. That number increased by 2008 to 35 companies. These companies are usually small and do not export. Women represent 3% of owners, 1% of top managers, 9% of employees in the manufacturing sector and 20% of employees in all other sectors.

Taliban-led insurgency, unpredictability of government policies and regulations, poor judicial effectiveness, weak business regulations, overwhelming corruption, lack of innovative and productivity-enhancing behavior, narrow and non-diversified industrial sector are but a few reasons why Afghan companies can not attract investments.

Source: The Afghanistan Investment Climate in 2008, World Bank,
Finance and Private Sector Development, South Asia Region