Afghanistan: Trade Policy and Integration

Emerging from nearly a quarter-century of protracted conflict in late 2001, Afghanistan inherited a highly differentiated import tariff regime (including 25 tariff bands with a maximum rate of 150% and a simple average rate of 43%). This, however, translated into a very low effective tariff as an artificial exchange rate – overvalued by as much as 10-20 times – was used in calculating import duties. The erosion of the state during the conflict meant that the national government lost control over borders, and that customs revenues were to a large extent usurped by armed factions who controlled the border points. There has also been a thriving unofficial trade involving re-exports into highly protected markets of neighboring countries, most notably Pakistan, with annual volume estimated to have exceeded $1 billion in the late 1990s.

Although data are limited, Afghanistan has a highly unusual trade structure, with exports dominated by illicit narcotics (opium and its products, morphine and heroin), with an estimated total value of $2.7-2.8 billion per year, and unofficial re-exports into neighboring countries. By contrast, officially recorded exports are only in the range of several hundred million dollars. The country is highly import-dependent for basic goods like petroleum products, construction materials, machinery and equipment, medicines, textiles, and in bad harvest years food, with imports financed largely by aid and (to a considerable extent) drug proceeds. Growth and diversification of licit exports will be critical for the country’s longer-term development success.

Improving trade policy and customs administration has consistently been a high priority for the Afghan Government in recent years. There has been a major rationalization of the tariff structure, introducing use of the market exchange rate in calculating import duties and reducing the number of different tariff rates to six (2.5, 4, 5, 8, 10, and 16%) with a relatively low level of dispersion. The simple average tariff rate correspondingly declined to 5.3%, making for one of the lowest and least differentiated tariff structures in the region (nevertheless this is considerably higher than the actual collection rate under the previous regime using artificial exchange rates).

Afghanistan maintains import bans on only a few products (largely for religious reasons) and imposes no seasonal restrictions, quotas, or other non-tariff barriers. Furthermore, licensing requirements have been drastically simplified; the import license application process, which previously involved 42 steps, 58 signatures, and several weeks of processing, now requires only three steps, six signatures, and two days to process. Overall, Afghanistan’s trade regime is currently rated the same as the EU and USA in the IMF’s Trade Restrictiveness Index.

Notwithstanding these major improvements, numerous problems remain, which hinder the actual conduct of trade and tend to keep it in unofficial channels. These include (i) severe weaknesses in the business climate and de-facto regulatory environment for trade, reflecting among other shortcomings lack of capacity in the concerned government agencies; (ii) transport and other infrastructural constraints (although rehabilitation of some of the major highways has greatly improved the situation on some routes); (iii) lack of key support services, such as commercial insurance, freight forwarding; (iv) restrictions against use of foreign trucks (in Afghanistan as well as regional trading partners); (v) fees imposed on transport by local authorities; and (vi) cumbersome customs clearance in some of the more problematic border areas. More generally, security issues may to varying degrees obstruct and distort trade.

Afghanistan has embarked on a major program to strengthen and reform the Customs administration, with support from the World Bank and other external partners. The country has been pursuing trade and transit agreements at bilateral level with regional countries, and at the multilateral level it has recently initiated the WTO accession process.