Need to Create Market-Enabling Environment

Sound private sector environment is crucial to a market-led economy. In August 2002 the government replaced a 1987 law on private investment which had a negative impact on foreign direct investment. The new law provides 3-7 year tax holidays to eligible companies, according to the type of investments, as well as a 4-year exemption from export tariffs and duties. Under the law, a High Commission on Investment, chaired by the Minister of Commerce and comprising the ministers of finance, justice, foreign affairs, planning and reconstruction and two private sector representatives, is responsible for all policy decisions regarding domestic and foreign investment. The Office of Private Investment (OPI) established within the Ministry of Commerce determines which investments qualify for tax holidays.

However, most investments to date have been in the hotel, restaurant, and telecommunications businesses that are induced by donor activities. There is a plan by a consortium of Afghan-American and Turkish investors to build a Hyatt Regency hotel. Outside these areas, a US-based trading company is recently finding some success in marketing Afghan craftworks to a global market with the help of the Internet and has opened a warehouse in Kabul.¹⁹

Rationalization of SOEs is also a critical element of Afghanistan’s transition to a market-led economy. Preliminary data suggest that, from the 174 public enterprises which operated under the communist regime, only 80 survived, accounting for a total of somewhat more than 35,000 employees. A Commission for the Evaluation of State-Owned Enterprises was established in June 2002 and started operating in January 2003. Its main activities include the assessment of SOE operations and assets, preparing recommendations for possible liquidation or privatization, and drafting of transparent procedures. However, the reform in this area has so far been limited to establishing a census of SOEs. Audits of the SOE assets are facing difficulties with finding proper records.

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