Afghanistan’s Economy Hostage to Aftermath of U.S. Combat

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Photographer: Victor J. Blue/Bloomberg

A vendor displays fabric to customers browsing his supply in downtown Kabul, Afghanistan.

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Photographer: Victor J. Blue/Bloomberg

A vendor displays fabric to customers browsing his supply in downtown Kabul, Afghanistan. Close

A vendor displays fabric to customers browsing his supply in downtown Kabul, Afghanistan.

Photographer: Gopal Ratnam/Bloomberg

A worker arranges ceramic tiles at Mahmood Hanifi's tile showroom in Kandahar city. Close

A worker arranges ceramic tiles at Mahmood Hanifi's tile showroom in Kandahar city.

Photographer: Gopal Ratnam/Bloomberg

Afghanistan's Finance Minister Omar Zakhilwal at his home in the Wazir Akbar Khan neighborhood in Kabul, Afghanistan. Close

Afghanistan's Finance Minister Omar Zakhilwal at his home in the Wazir Akbar Khan neighborhood in Kabul, Afghanistan.

Photographer: Victor J. Blue/Bloomberg

A shopping center stands sparsely tenanted in Kabul, Afghanistan, Aug. 7, 2013. Close

A shopping center stands sparsely tenanted in Kabul, Afghanistan, Aug. 7, 2013.

Afghanistan’s economy remains hostage to the country’s politics and security after more than a dozen years of American intervention.

Mahmood Hanifi sees it every day in his tile shop in Kandahar city. Sales, he said, have fallen by half in two years because customers are postponing home remodeling projects until after Afghanistan’s April 5 presidential election and the departure of most international troops by the end of next year.

“People are waiting because they don’t know what will happen after the elections,” Hanifi said through an interpreter, looking out from a glass-enclosed cubicle onto his showroom of marble and ceramic tiles decorated with designs and Islamic inscriptions. “They’re keeping the money. Even if some projects are completed 50 percent, they’ve stopped work.”

The World Bank predicts that Afghanistan’s economic growth will decline to 3.1 percent this year from 14 percent last year as consumers, entrepreneurs and investors can only guess what’s ahead for a nation long dependent on foreign troops and aid, with mineral resources that have never been tapped and agriculture still dominated by opium exports.

“The upside in Afghanistan is very unclear, but the downside is very clear,” said Ahmad Bassam, managing director of Kabul-based Afghan Holdings Ltd., an investment advisory firm. “If the Taliban take over, we’ll all leave,” he said of Afghan investors, many of whom already have second homes in Dubai and regularly move much of their money there.

The outflow of capital from Afghanistan since 2009, including the proceeds of illegal drug trafficking, has roughly equaled American financial assistance in the same period, according to two U.S. officials who asked not to be identified discussing a classified estimate.

Karzai Balking

Afghan President Hamid Karzai’s refusal so far to sign a security agreement that would permit some U.S. and coalition forces to remain in his country beyond 2014 is exacerbating the economic anxiety.

For the fiscal year that ended in March, 78 percent of Afghanistan’s development budget and 44 percent of its security budget came from international aid and donor agencies, according to the Ministry of Finance. Failure to reach a security agreement would jeopardize pledges of as much as $10 billion a year in economic and military assistance through 2017.

Without a security agreement in place, “we’ve seen capital flight,” Marine Corps General Joseph Dunford, the top commander of U.S. and allied forces in Afghanistan, told reporters in Kabul this month. “We’ve seen real estate prices go down.”

Juice Factory

Registrations of new companies declined 43 percent in the first seven months of this year, to 2,000 from 3,500 in the same period a year earlier, according to the World Bank, citing data from Afghanistan’s Investment Support Agency.

For Afghan entrepreneurs such as Mustafa Sadiq, business decisions are a daily exercise in country risk assessment. They must weigh the approaching departure of U.S. and allied combat forces after 12 years, the threat of attacks by resurgent terrorist groups, persistent corruption and uncertainty over who will succeed Karzai, who’s ruled for 10 years.

In 2009, Sadiq said, he invested $25 million from his family’s century-old imports business to start Omaid Bahar Fruits Processing Ltd., which makes concentrates and juices from pomegranates, apples and other fruits in an industrial park in Kabul. This year, Sadiq said sales have dropped as much as 40 percent.

“Business is declining rapidly because of uncertainty after 2014, as Afghan buyers do not earn as they used to, and that’s why they spend less,” he said in a phone interview.

Under Capacity

The plant, which employs 450 workers, was damaged in a December 2012 suicide car-bomb attack, forcing him to spend $7 million to rebuild, Sadiq said. While the project was completed two months ago, the factory still runs at only 40 percent of capacity, he said.

Sadiq said he’s put on hold a planned $70 million expansion to produce yogurt and fruit-flavored milk products because of the attack, falling demand and a lack of official support. He said the government canceled plans to give him a three-year tax break for the plant’s losses in the bombing.

Afghanistan’s unemployment rate reached an estimated 40 percent in 2012, Abdul Hadi Arghandiwal, the country’s economy minister, said in a phone interview. He said the jobless rate may climb to 50 percent with the loss of work for Afghans as international forces and their contractors depart.

Creating jobs through private investment will be a “mammoth, mammoth task” for the Afghan government, said Ken Yamashita, the Kabul-based coordinating director for the U.S. Agency for International Development, which has spent about $17 billion on development programs in Afghanistan since 2002.

Mineral Riches

“If you think about the employment that needs to be generated, it’s about 150,000 to 200,000 jobs needed per year,” Yamashita said in a phone interview.

Big enterprises -- including exploring and extracting Afghanistan’s mineral riches, valued by the Pentagon and the U.S. Geological Survey at about $1 trillion -- will require a substantial investment in infrastructure that will take years to build, according to Vahid Alaghband, founder and chairman of London-based Balli Group Plc, which has about four decades of experience in mining projects in central and eastern Europe and South America.

Alaghband was among a group of international investors who visited Afghanistan in June on a trip arranged by McKinsey & Co., the New York-based consulting firm, and the Pentagon’s Task Force for Business and Stability Operations.

Starting Small

After examining the prospects for mining, Alaghband said he decided to start small with an investment in the “millions, not hundreds of millions” of dollars to create a network of print and publishing shops in Afghanistan, as well as a chain of auto dealerships.

Beginning in 2014, executives from the Balli Group’s operations in Dubai will “roll out the two sets of businesses into Afghanistan to see how it goes and learn about the place,” Alaghband said.

In meetings with investors, Afghan officials talked about “export of agricultural products and other agricommodities,” Alaghband said. “Those things may generate about $1 billion of exports each year, but won’t fill the massive gap that military spending will leave” when international troops depart the country.

Opium remains Afghanistan’s most lucrative agricultural export, and U.S. officials have acknowledged that the effort to eradicate it has failed. Opium production “remains a substantial portion of overall agricultural output and will continue to fuel corruption and fund the insurgency,” the Pentagon said in a report to Congress last month.

Clinics, Grants

In addition to fighting insurgents, U.S. and coalition forces ran development projects and health-care clinics, provided grants and brought in agricultural experts, said Barna Karimi, a former Afghan ambassador to Canada who’s now managing director of Capitalize LLC, a Washington-based consulting and investment advisory firm.

“What is the substitute for all that?” Karimi said in an interview. “For Afghanistan, it’s not clear who will fill the gap. Although the government of Afghanistan should fill the gap, does it have the resources, the ability and capacity?”

Hanifi, the tile merchant, said the lack of reliable power hobbles business in his shop near Highway 1, which connects Kandahar to Kabul about 313 miles (504 kilometers) to the north.

He said he lacks a dependable source of power for machinery to cut the tiles he imports from Iran, Pakistan and China for his customers’ kitchens and stairs. “If we don’t have enough petrol or diesel, then we won’t be able to have electricity from generators,” he said.

Power Failure

A power failure in the wealthy Wazir Akbar Khan neighborhood of Kabul left the home of Afghan Finance Minister Omar Zakhilwal without electricity when he received a visiting reporter on a weekday morning. That didn’t daunt Zakhilwal as he dismissed the grim prognosis others see for Afghanistan.

Exports of fresh and dried fruits, trade and transit, and service industries will help keep the economy going until the mineral and mining industries take off in the next decade, Zakhilwal said over a breakfast of eggs, fried potatoes, pomegranates and Afghan bread.

“Unfortunately, there’s a doomsday analysis for Afghanistan which is not based on facts or reality on the ground,” Zakhilwal said. “They compare Afghanistan of today with Afghanistan of 1992 -- the post-Soviet period. The international forces here are not the same as Soviet forces, and the people of Afghanistan are not the same people.”

Armed Guards

Zakhilwal’s optimism is shared by Ismail Ghazanfar, chief executive officer of the Ghazanfar Group. He said his family business that began selling televisions in Afghanistan 40 years ago now employs more than 3,000 people at its refinery in Hairatan, near the border with Uzbekistan. The group also owns banks, mining and construction companies.

A group including Ghazanfar, the state-owned Turkish Petroleum Corp. and Dubai-based Dragon Oil Plc (DGO) won a $150 million bid in October to explore for gas in the Afghan-Tajikistan basin.

“It’s completely risk capital,” Ghazanfar said in an interview, referring to his company’s 20 percent stake in the project. “If we discover gas, then we have to invest $1 billion.”

The personal safety of investors is at greater risk than their investments are, said Ghazanfar, whose family lives most of the time in Dubai.

Security measures such as armed guards to protect against kidnappings and attacks add to the cost of doing business, Ghazanfar said, “but it’s not so much that you can’t accept it.”

To contact the reporter on this story: Gopal Ratnam in Kabul, Afghanistan at gratnam1@bloomberg.net

To contact the editor responsible for this story: John Walcott at jwalcott9@bloomberg.net

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