1. Reviving Afghanistan’s economic growth through a vibrant business sector Aynul Hasan Director Macroeconomic Policy and Development Division United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) 1

2. Main messages Near-term economic growth outlook is improving on greater political stability and low inflation, but – Projected growth rates remain below past trends – Growth has to be more inclusive A more vibrant private sector would help to revive Afghanistan’s medium-term growth – Reform effort to streamline business regulations is moving forward – A broad-based policy reform to ensure social order, improve governance, provide high-quality infrastructure, enhance human capital, and facilitate access to finance is also needed

3. Despite its subdued growth, Asia-Pacific still drives the global economy 3 Source: ESCAP and IMF.

4. Economic growth in South and South-West Asia is trending up, led by India 4 Source: ESCAP.

5. Afghanistan’s growth outlook is improving… but still below potential trends 5

6. Low inflation is supporting Afghanistan’s economic growth 6 Source: ESCAP.

7. Faster and more inclusive growth is needed During 2008-12 when economic growth was already higher than that in recent years, – The poverty rate was stagnant at a high level of 36%. – Income inequality (Gini index) widened. The bottom 40% of the population accounts for only 21% of total consumption. A majority of population engages in basic agriculture, and is vulnerable to becoming poor. 7

8. Some policy options for more inclusive growth Expanding the provision of and ensuring equal access to basic public services – Out-of-pocket payments for healthcare reach almost 80% – Access to education, water facilities and sanitation is limited, especially in the rural areas. – At least 85% of population does not receive any form of social protection. Boosting agricultural productivity – Expand the irrigation system, ensure access to credits, make available more agricultural land, and promote crop diversification. 8

9. Key constraints to Afghanistan’s medium-term growth (1) Domestic security issues – Civilian casualties rose to almost 3,000 during January-April 2015, or 16% higher year-on-year. Weak government revenue collection – The tax-to-GDP ratio is low at 9%. – External grants account for 70% of government revenue. – The provision of basic public services, e.g. internal security and education, relies on foreign aid – Weak government revenue collection Governance Issues - Afghanistan ranks 172 nd out of 175 economies in the Transparency International’s Index 2014. 9

10. Key constraints to Afghanistan’s medium-term growth (2) Limited domestic production capacity – Trade deficits were about 40% of GDP in 2013. – Merchandise exports are only around 6% of GDP. – Key export items are unsophisticated (e.g. carpets and dried fruits) and destined mainly to India and Pakistan. – About 75% of domestic energy use and 60% of cereal consumption are imported. Poor business climate – Afghanistan ranks 183 rd out of 189 economies in the World Bank’s Doing Business 2015. 10

11. A more vibrant business sector would help support Afghanistan’s medium-term growth Private sector-led growth is missing – Manufacturing accounts for only 13% of GDP – Services are mostly basic, e.g. retail trade and transport A more dynamic business sector helps to: – Create more jobs – Increase production capacity, reduce reliance on imports – Contribute to much needed government revenue – Reverse the declining trend in foreign direct investment – Integrate Afghanistan with other Asia-Pacific peers and the world markets 11

12. Some aspects of the business climate are enabling Investment Incentive Policy (July 2013) – Liberal allocation and renting of government land – Tax holidays and exemptions – Subsidized power tariff – Concessional loan in agriculture – Exemption to small and medium-sized mines from bidding Full foreign ownership allowed in most sectors with full repatriation of profit Low-tax environment – Corporate income tax rate at 20% – Income tax rates at 0-20% 12

13. Top 5 most binding business obstacles Source: World Bank Enterprise Surveys, based on 410 firms surveyed in 2013-14. 13

14. Enabling business environment is already a government priority The new government’s priority areas are all conducive to better investment climate – Improving security and political stability – Tackling corruption – Building better governance – Bolstering private sector confidence The Afghanistan National Development Strategy 2008-13 (June 2014) notes: – “The current trade balance is not tolerable…we have to focus more on improving our domestic products capacity, further enabling environment for domestic investment…”. 14

15. Effort is being made to improve business climate $1.3 billion under Afghanistan National Development Strategy 2008-13 was spent to promote private sector development. Laws to improve economic governance made progress in legislation – Banking, anti-money laundering and state enterprises laws A high-level National Economic Council is set up to coordinate policies to enhance investment climate. – Streamline the issuance of trade and investment licenses – Set up a one-stop services shop for private businesses – Reduce duplications of government agencies working on investment promotion – Introduce a mechanism to monitor and disclose reform progress 15

16. Sustained implementation of a broad-based policy reform is needed Improving the investment climate requires a regulatory and institutional setting and economic structure that: – Reduce economy-wide risk and uncertainty – Make necessary inputs available: land, workers, financing, infrastructure, energy, etc. The needed reform is beyond easing business regulations – It involves policies aimed at ensuring social order, enhancing economic governance, building qualified workforce, providing high-quality infrastructure, and facilitating access to finance. A sustained implementation of government plans to address these development issues is key to success. 16

17. Thank You! escap-mpdd@un.org www.unescap.org