Background
Afghanistan’s economy has been in crisis since the Taliban’s return to power in August 2021. The abrupt halt of international aid that was previously a major component of the country’s GDP, triggered a severe economic decline and contracted GDP by 27%. Despite the official suspension of aid, the US has disbursed more than $2.98 billion for humanitarian and development assistance via cash shipments over the past three years. Despite the significant amount of assistance provided, most of it has been directed toward immediate relief efforts. As a result, it has failed to prevent the country from slipping into a severe economic crisis that is characterized by widespread stagnation and a growing reliance on humanitarian aid.”
The scale of the crisis is stark: the UN Office for the Coordination of Humanitarian Affairs (OCHA) reports that in early 2024, 23.7 million people—More than half of Afghanistan’s population—require humanitarian aid. This alarming statistics underscore the fundamental shift in approach to supporting vulnerable populations, moving from crisis management to creating sources for more sustainable livelihoods. The persistence and growth of humanitarian needs, despite significant aid, highlight the challenges of addressing systemic economic issues under the current political circumstances.
Meanwhile, the international community remains reluctant to deepen engagement with Afghanistan, citing concerns over human rights, adherence to international law, and financial transparency. Conversely, the Taliban continue to seek normalized political, diplomatic, and economic relations without addressing these concerns. This impasse creates a challenging environment for aid prospects, with little indication of improvement in the near future.
Alternatives to Humanitarian Aid?
In light of Afghanistan’s ongoing challenges, the international community is exploring strategies to revitalize the fragile economy and promote sustainable growth. One approach highlighted at the Doha III meeting emphasizes the development of the private sector as a key driver of economic recovery. This strategy aims to achieve two critical objectives: enabling economic engagement without legitimizing the Taliban government and fostering sustainable development that moves beyond short-term humanitarian aid. By focusing on creating sustainable livelihoods, reducing dependency on foreign assistance, generating employment, and jumpstarting grassroots economic activity, this approach holds the potential to catalyze a broader economic revival. However, a key question remains: Is Afghanistan’s private sector robust enough to serve as the engine of growth and provide a viable alternative to humanitarian aid?
Private Sector in Afghanistan
Afghanistan’s private sector is predominantly informal, with small and micro enterprises constituting the majority of business activity. Despite lower productivity and competitiveness compared to formal entities, these informal enterprises remain a crucial source of income for Afghan households. Approximately 90% of workforce employed in private sector work in micro-enterprises with fewer than five employees. This high concentration in very small businesses underscores the fragmented nature of the Afghan economy and the limited scale of most private sector operations.
Large enterprises, while few in number and contributing marginally to overall employment, play a crucial role in several key areas. These larger businesses are significant contributors to government tax revenue, attract foreign direct investment (FDI), provide critical services (particularly in telecommunications and construction), introduce new technologies and management standards, and often catalyze the establishment of smaller, supporting enterprises.
Multifaceted Challenges to Private Sector Growth
The private sector in Afghanistan faces a host of challenges and uncertainties, which severely limit its ability to drive economic growth and recovery. These challenges stem from institutional weaknesses, resource constraints, and market conditions, as outlined below:
1. Economic and Policy Environment
Economic uncertainty: The Afghan economy is grappling with severe instability, as highlighted in the latest World Bank report. Many enterprises struggle with sharp declines in demand leading to reduced revenues and difficulties in maintaining operations. This drop in demand is exacerbated by a highly uncertain economic climate, where deflation, currency fluctuations, and lack of access to international financial markets further strain business viability. The inconsistency of the regulatory framework under the current regime has made it even harder for enterprises to engage in long-term planning. Without clear rules governing investment, property rights, or labor, businesses face overwhelming challenges in making informed decisions about future growth or expansion. This policy vacuum discourages both local entrepreneurs and potential foreign investors, creating a vicious cycle of underinvestment and stagnation.
Illegitimate government: Fostering widespread, sustainable economic growth requires a basic level of engagement with local actors. However, in Afghanistan’s case, such engagement with the Taliban is being deliberately avoided by the international community. A well-functioning private sector relies on stable institutions, secure property rights, reliable banking systems, and basic infrastructure—areas traditionally influenced by government policies. In the absence of a legitimate government, the private sector is left without the basic frameworks that businesses depend on to flourish. Furthermore, the lack of an internationally recognized government limits access to global financial systems, cutting off vital funding sources, trade opportunities, and much-needed development aid that would otherwise facilitate private sector growth.
Security concerns: Security remains a significant barrier to private sector activity in Afghanistan. The Afghanistan Private Sector Rapid Survey (Round 3) revealed that 26% of men-owned and 39% of women-owned businesses, many of them small enterprises, reported a notable decline in security conditions. These security issues include threats of physical violence, kidnapping, and extortion, which directly affect business operations. Women, in particular, face heightened risks due to mobility restrictions imposed by both the Taliban and the broader security landscape. These restrictions not only prevent women from traveling safely to and from work but also hinder their ability to access markets for either obtaining inputs or selling their products. This disproportionately affects women-owned businesses, limiting their economic participation and contributing to overall economic fragility. Security concerns also discourage investment in infrastructure and enterprise development, which are essential for economic recovery.
Tax Burden: The Taliban’s focus on increasing domestic revenue has placed additional strain on the private sector, especially small and medium-sized enterprises. Businesses have reported a significant rise in operational costs due to increased taxes and more cumbersome regulatory requirements. According to recent surveys, 55% of businesses reported facing heavier regulatory burdens, while nearly half of small businesses and over half of large firms experienced higher taxes. Customs duties, in particular, have become a critical pain point for firms engaged in trade, as the cost of clearing goods through customs has risen sharply. This tax burden is particularly challenging for small businesses, which already operate on thin margins. The increased costs of doing business are not only stifling growth but also forcing many enterprises to either scale back operations or shut down entirely, further hampering economic recovery efforts.
2. Resource Challenges
Raw materials: Access to raw materials is crucial for the growth of Afghanistan’s private sector, particularly in industries such as manufacturing, construction, and agriculture, which rely heavily on both domestic and imported inputs. However, according to the World Bank a staggering 57% of businesses that rely on locally produced materials face difficulties in obtaining them. These challenges stem from a combination of supply chain disruptions, insufficient infrastructure, and logistical constraints. Compounding this issue, unstable diplomatic relations with Pakistan, one of Afghanistan’s primary trading partners, have led to frequent border closures. This has significantly disrupted the flow of imported goods, affecting 73% of firms reliant on international inputs. Without reliable access to raw materials, businesses struggle to maintain production levels, meet market demand, or expand operations.
Human capital constraints: A skilled workforce is a fundamental driver of economic growth, but Afghanistan’s private sector is suffering from severe human capital constraints. The Taliban’s shift in curriculum,, replacing technical and vocational training with Islamic studies, has weakened the quality of education, resulting in a workforce with diminished technical and professional skills. This erosion of knowledge directly impacts workforce productivity, particularly in fields requiring specialized training. Moreover, the Taliban’s restrictive policies on women’s education have further compounded these challenges, as half of the population is barred from accessing education and employment opportunities. This drastic reduction in women’s participation has significantly hindered economic productivity, especially in sectors like healthcare, education, and administration where women traditionally played vital roles. Additionally, the exodus of professionals and skilled workers following the Taliban’s rise to power has created a profound shortage of expertise, exacerbating the human capital crisis and further crippling the private sector’s potential to innovate and grow.
Financial limitations: Access to finance remains one of the most formidable obstacles for businesses, particularly for small and medium-sized enterprises (SMEs), which are the backbone of Afghanistan’s economy. The formal banking system in Afghanistan is severely underdeveloped, and the imposition of sanctions on specific individuals and entities has further complicated the financial landscape. Although international sanctions are targeted and provide exemptions for basic human needs, there is widespread overcompliance and confusion in the financial sector, especially in Central Asia and the Middle East. Many banks and businesses mistakenly believe that the entire Afghan economy is sanctioned, this misunderstanding has effectively cut off many Afghan firms from international banking services and correspondent banking relationships, severely restricting their ability to trade globally or secure financing. With formal financial channels limited, businesses are increasingly reliant on informal systems like hawala for money transfers, which, while effective within the region, is not widely accepted internationally.
Infrastructure deficits: Inadequate infrastructure remains a critical barrier to the development of Afghanistan’s private sector. Basic services such as electricity and transportation are inconsistent and often unreliable, forcing businesses to operate with higher costs and reduced efficiency. For example, frequent power outages disrupt production lines and increase reliance on costly alternative energy sources, such as diesel generators. The country’s transportation network, essential for the movement of goods both within and outside Afghanistan, is also underdeveloped, limiting businesses’ ability to reach markets and obtain necessary materials.
Technology: Technology has the potential to revolutionize Afghanistan’s private sector, offering innovative solutions to many of the country’s economic challenges, from digital financial services and e-commerce to agritech and renewable energy. However, significant barriers stand in the way of realizing this potential. While mobile phone subscriptions cover 69% of the population, internet penetration remains low at 22.9%, reflecting a substantial urban-rural divide. Smartphone adoption is limited, with only 20-25% of mobile users having access to smart devices, and digital literacy rates are particularly low in rural areas. This digital divide not only limits access to modern business tools but also stifles innovation and the adoption of new technologies. Furthermore, access to financial technology is abysmally low, with only 1.9% of men and 0.3% of women possessing a credit card, and less than 0.5% of the population engaging in online purchases or bill payments. Mobile money accounts are used by just 0.9% of adults, reflecting the nascent state of Afghanistan’s digital economy. With the information and communication technology (ICT) sector contributing a mere 1.8% to GDP, the country remains far from achieving digital transformation, which can boost the private sector.
3. Market Access Challenges
Domestic market constraints: Afghan businesses face significant constraints within the domestic market, primarily due to widespread poverty and economic instability, which have severely weakened local purchasing power. With much of the population living below the poverty line, demand for non-essential goods and services remains low, limiting the market size and opportunities for growth. Infrastructure deficits, especially in rural areas, further exacerbate these challenges. Poor road networks and inadequate transportation systems hinder the efficient distribution of goods, resulting in high logistical costs and reduced access to remote regions where much of the population resides. Additionally, the absence of cold chain facilities is particularly problematic for the agricultural sector. Post-harvest losses, especially for perishable goods, are alarmingly high, as farmers and traders lack the necessary infrastructure to store and transport these products. Adding to these complications, local markets are often saturated with cheaper imported goods, many of which are smuggled into the country, bypassing formal customs and taxes. These imports, often of inferior quality but lower in price, undermine the competitiveness of domestically produced goods, making it difficult for Afghan businesses to maintain market share.
International market barriers: Breaking into international markets presents numerous challenges for Afghan businesses. The appreciation of the Afghan currency has reduced export competitiveness by making Afghan goods more expensive, while high production costs further disadvantage them against cheaper alternatives from other countries. Additionally, Afghan firms struggle to meet stringent international quality control and certification standards due to limited access to modern technologies and quality assurance systems. Logistical barriers, such as complex customs procedures and frequent border delays, add to the cost and time of exporting goods, creating further obstacles. Exacerbating these challenges, many Afghan businesses lack the market information, branding expertise, and trade finance necessary to penetrate foreign markets effectively.
Conclusion
The potential for private sector growth to revitalize Afghanistan’s economy, while theoretically promising, faces significant constraints. Although smaller-scale, localized, or niche projects can be feasible and provide valuable benefits, these efforts alone are insufficient to drive substantial nationwide economic development. Community-based enterprises and localized agricultural initiatives may effectively address specific local needs and create job opportunities, but their impact remains limited and does not tackle the broader systemic challenges facing the country. Achieving broad-based, sustainable economic growth and reducing dependency on humanitarian aid requires comprehensive and coordinated efforts, including substantial improvements in governance, infrastructure, and security. These critical areas are heavily influenced by government policies and actions, which are currently uncertain and unlikely to evolve significantly in the near term.
