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Afghanistan’s private sector not the engine of economic growth. Why?

in Afghan Business

Afghanistan’s private sector not the engine of economic growth. Why?

A new report by the Stockholm International Peace and Research Institute (SIPRI) and the International Council of Swedish Industry (NIR) examines the states of the Afghan private sector and the nexus with development and security.

The private sector, in its current state, is not the engine of economic growth or instrument of social inclusion it has the potential to be, says the report.

The decades-long conflict, low state capacity, foreign interference and influx of aid resulted in the synthesis of a complex mix of informal, formal, illicit and aid-sustained Afghan economy.

The formal Afghan private sector contributes a mere 10-12% to the country’s official gross domestic products.

The reasons why the private is still struggling are: Popular dissatisfaction with unequal access to economic resources, flawed public services and goods, the adverse security situation, and predatory government activity.

The NUG has expressed clear commitment to fostering the private sector. However, fundamentally, the private sector has witnessed limited positive change to date since the NUG took over in September 2014. The Afghan Government will have to come up with bold, ingenious, and well-coordinated solutions to gradually break the economy out of this stalemate.

The report highlights the following ways that stakeholders can assist the Afghan private sector to become a source of economic growth and an instrument of social inclusion:

  1. Provide direction by developing a realistic private sector growth strategy with clear measurable milestones, division of labor between international and national actors, and implementation, monitoring and follow-up mechanisms;
  2. Increase the capacity of state economic institutions that support the productive potential of the private sector, including through continuous training of the civil service. Relevant public institutions must be given unambiguous mandates;
  3. Take immediate carefully tailored measures to curb corruption starting at the highest government echelons. Curb corruption in regulatory processes through increased use of digitalized processes;
  4. Improve the business climate in close coordination with the organized business community through realistic growth promoting economic policy reforms and by prioritizing sustainable development of strategic industries. Instruments such as tax relief, state supply contracts and public-private partnerships (PPPs) should be considered;
  5. Evaluate and update the strategy for trade policy instruments that can enhance Afghan competitiveness and protect infant industries. Full digitalization of customs procedures could help to eliminate exiting gaps in regulation;
  6. Tackle the hurdles that limit access to economic resources, in particular land and capital. Access to resources should be combined with clearer and enforced property rights. Mobilize state landholdings for use by the private sector through favorable long-term lease agreements. Leverage the potential of existing and developing unbanked credit mechanisms. Sector-oriented banks that provide demand-led financial products are recommended;
  7. Invest in infrastructure critical to economic activity. In light of government financial limitations, rapidly move to pass and implement the new PPP law; and
  8. Prioritize women’s full and equal participation in the economy, leveraging women-to-women economic networks, while promoting male endorsement. Support policies should be mainstreamed within all economic plans.

The report also calls on the international community to work together with the National Unity Government on the above-stated points. Other recommendations for the international community include: Support full value-chain development projects in the agriculture sector, which have high labor intensity and job creation potential and consider diversifying geographic focus of aid by aiming to target communities based on need rather than political or security priorities.

The private sector and other Afghan stakeholders must strengthen the capacity, transparency, and member representation of organized business and must strive to curb supply-side corruption.

The report claims that in the absence of such initiatives, the economic ‘transition’ will simply be a continuation of a largely aid-sustained status quo.

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