Trade as a vehicle for growth in Afghanistan: challenges and opportunities

With an average annual population growth rate of 3 percent and an estimated 400,000 individuals entering the labor market each year, Afghanistan needs much higher growth rate to improve per capita incomes and to provide quality employment opportunities for the expanding workforce.

Growth has exceeded expectations over the last two years, but remains low because of ongoing insecurity, a decline in foreign aid, and the lack of domestic and foreign investment. With the anticipated normalization of aid levels over the long term, Afghanistan needs to urgently explore new sources for revenue generation and foreign exchange earnings.

While trade and regional integration can help boost Afghanistan’s growth, a new World Bank report, Trade as a Vehicle for Growth in Afghanistan: Challenges and Opportunities, argues that a successful trade strategy needs to take into account the country context and assess risks and opportunities.

Key findings:

• Afghanistan’s largest constraint to trade is insufficient production capacity. Lack of economic diversification and high product concentration further limits Afghanistan’s export potential. Improving competitiveness in high potential sectors such as agriculture will help meet domestic demand, substitute imports, and potentially promote exports in the short and medium-term.
• Poor logistics and trade infrastructure, rather than lack of market access, explain Afghanistan’s trade underperformance. In the short term, exports could be improved by 20 percent by tackling export delays related to customs and border procedures, or high risks during transportation. In the long run, improvements in trade facilitation and logistics coupled with productivity improvements could lead to a more than six-fold increase in exports.
• The potential for services trade is underappreciated. While the export of services is constrained by Afghanistan’s small domestic market size and low human capital endowment, promoting the import of services, and thereby reducing cost, could help overcome current gaps in service delivery.
• Given the security environment, the potential of commodities transit trade might be modest and slow to materialize. Moreover, it would require large investment and strong policy effort to reduce Afghanistan’s distance from the frontier in infrastructure and logistics services. However, the drivers of the currently high transportation cost need to be better understood to design a successful transit trade strategy.

Original source: World Bank
Published on 16 November 2017