Afghanistan Public Policy Research Organization

Afghanistan and Regional Trade: More, or Less, Import from Central Asia
APPRO Policy Brief May 2013

Table of Contents
Acknowledgements
About this Policy Brief About the Authors About APPRO

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Afghanistan and Regional Trade: More, or Less, Import from Central Asia
Introduction Current Operating Environment Ways Forward Recommendations For Further Research

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Acknowledgements

About this Policy Brief This Policy Brief is based on research conducted by Afghanistan Public Policy Research Organization (APPRO) in late 2011 and early 2012, for a project funded by Foreign Aairs and International Trade Canada (DFAIT) through the University of Central Asia. APPRO is grateful for the feedback provided during a number of consultations with Bohdan Krawchenko and Roman Mogilevskii of the University of Central Asia during the course of this research. About the Authors Saeed Parto is Director of Research at APPRO and Lecturer at Maastricht University, the Netherlands. Matt Trevithick is APPROs Director of Communications. About APPRO Afghanistan Public Policy Research Organization (APPRO) is an independent social research organization promoting social and policy learning to benet development and reconstruction eorts in Afghanistan. APPRO is registered with the Ministry of Economy (Registration Number: 1212) as a notfor-prot, non-government organization and headquartered in Kabul, Afghanistan. APPROs mission is to measure development progress against strategic reconstruction objectives and provide insights on how to improve performance against the milestones set by the government of Afghanistan and the international donors. APPRO is staed by personnel with many years of collective experience in various facets of development and scientic research.

APPRO takes full responsibility for all omissions and errors. Photo Credit: Matt Trevithick

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Afghanistan and Regional Trade: More, or Less, Import from Central Asia
Introduction
How to to form closer trade ties between Afghanistan and Central Asian countries has been a major topic of debate in regional trade by debates among international donor organizations and governments active in Afghanistan since 2002. A substantial part of the literature on post-2001 development in Afghanistan is focused on rehabilitating and expanding crossborder transportation infrastructure between Afghanistan and Central Asian countries, revitalizing key economic sectors in Afghanistan, assisting in the harmonization of border systems, and the rationalization of trade agreements to support improved security and governance. Despite eorts to expand trade with Central Asian countries, however, Pakistan remains the single largest trade partner and the most convenient source and transit route for much of Afghanistans imports including arms, fuel, and food. Since early 2011 Pakistans central role in trading with Afghanistan has come under question due to two key developments. First is the growing perception that the Pakistani establishment is complacent towards the Taliban at best, and

is increasingly suspected of harboring them and using them to implement its own agenda in Afghanistan. This has caused Afghans to remain highly suspicious of Pakistan. Second is the current socio-economic and political crisis within Pakistan itself due to internal political strife, all of which was reinforced by the devastating natural disasters of 2008 and 2011. In addition, the Afghanistan-Pakistan Trade and Transit Agreement (APTTA), signed in 2011, now obligates Afghan traders to insure their cargo, which for many is a lengthy bureaucratic process and can lead to spoilage of perishable consumables.1 The combination of these developments provides a signicant opportunity for Afghanistan to explore options to diversify its heavy reliance on Pakistan. Increased trade within the region involving Afghanistan would likely create conditions conducive to intensied value adding regional economic cooperation and, by extension, cooperation on political and security grounds. This policy brief is based on research conducted by Afghanistan Public Policy Research Organization (APPRO) during late 2011 and early 2012, which took stock of current and historical ows of imports of selected products into Afghanistan and identied potential import niches that could be utilized by suppliers in Central Asian countries.

The insurance was meant as a counter-smuggling measure and to ensure that goods des4ned for Afghanistan would not be sold in Pakistan. It is dicult for Afghan transporta4on companies to obtain this insurance from Afghan or Pakistani insurers. Not having insurance leads to delays. See, for example, hDp://m.afghanistan-today.org/ar4cle/?id=197.
4 2012 | Afghanistan and Regional Trade: More, or Less, Import from Central Asia APPRO

Figure 1: Total Imports to Afghanistan 2002-2011 (in million $ US)

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Current Operating Environment

The Government of Afghanistans approach to trade is largely liberal with minimal restrictions. Import bans are maintained on only a few products, largely on religious grounds, and there are no seasonal restrictions, quotas, or other non-tari barriers on imports. In ocial communiques by international donors and the Government there are repeated references to reforming the countrys business licensing procedures as a major milestone toward supporting private sector development in Afghanistan and facilitating trade with its neighbors. Reportedly, the import license application process, which prior to reform in 2006 involved 42 steps, 58 signatures, and several weeks of

processing now requires only three steps, six signatures, and two days to process.2 The main licit exports out of Afghanistan are dried fruits and nuts, carpets and rugs, and wool. Limited quantities in fresh fruits, cotton, animal by-products, gemstones, and more recently, saron are also exported. The main imports are capital goods, construction materials, foodstus, pharmaceuticals, textiles, other manufactured goods, electricity, and petroleum products. Figure 1 shows the increasingly dominant role Pakistan is playing as the major source country for imports into Afghanistan since 2002, albeit with a major reduction since 2009. 3 Figure 1 also shows a diversication of source countries since 2001 and an overall in-

CAREC (2007). Quan%ta%ve Restric%ons on Trade. Revised version of paper presented at the Seventh Trade Policy Coordinat- ing CommiDee Mee4ng of the Central Asian Regional Economic Coopera4on Program 6 September 2007 Manila, Philippines. Later research in 2011 by APPRO shows, however, that the number of steps in the licensing process has gone up to over twenty.
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This trend started during the Taliban regime, when Pakistan was Afghanistans prime trading partner.
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crease of imports. This is due to the integration of Afghanistan into international markets, the presence of international forces and organizations, and the improved recording of import ows. Recognizing Afghanistans reliance on imports and poorly maintained or tampered records at the border crossings, international donor programming since 2002 has placed particular emphasis on improving and expanding customs facilities and practices at major border crossing points.4 In 2005 work began to implement the Automated System for Customs Data (ASYCUDA), which is currently ongoing. The Five

Year Master Plan of the Afghan Customs Department (Ministry of Finance) reports an estimated total project expenditure of 202 million USD for strengthening and expanding the customs system.5 Key areas of intervention and reform according to the Five Year Master Plan are minimizing leakage in duty collection through rationalization of laws, procedures, and automated processes to facilitate clearance of goods and minimize corruption among system users and operators. 6 Reportedly, due to the above reforms Afghanistan currently has one of the most sophisticated customs systems in the region. 7 The

Figure 2: Problems at Ports of Entry into Afghanistan

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For ! a detailed discussion on and assessment of reform in Afghanistans customs system see Parto and Saadat (2011), Customs Reform in Afghanistan: Moving Between Introduced and Pre-exis%ng Structures, available from: www.appro.org.af/publica4ons
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Afghanistan Customs Department (2007). Afghan customs Department: A Five Year Strategic Plan (2007-12). (Kabul: Govern- ment of Afghanistan).
6 7

ACD 2007. Parto and Saadat (2011).

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achievements since 2003 include the construction of infrastructure facilities at major border points, enactment of a modern customs legislation, harmonized system for the classication and coding of goods, development of a single customs form for customs declarations, computerization of transit procedures through implementation of ASYCUDA in 2005, importrelated exemptions policy and procedures, automated data collection, and production of customs statistics among others. This said, there are serious problems with incorrect recording of trade data by customs ocials in Afghanistan, corruption and other impediments within the customs system (Figure 2), and, more generally, various coordination and cooperation-related regional issues that cannot be addressed through technology or procedural change on the Afghanistan side alone.
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shadow, customs system.9 Also, despite major reform there remain a number of key challenges for importers particularly in terms of the number and complexity of procedures for clearance, licensing, and payment of duty.10 Finally, the available data on trade ows are incomplete and unreliable. The importers of pharmaceuticals, cooking oil, baby foods, and fuel pointed to assistance in acquiring visas as one of the main preconditions in considering switching supply sources.11 Assistance with better marketing was underlined by a signicant number of the respondents for imports of pharmaceuticals, cooking oil, and fuel (Figure 3). Marketing, in this case, was expressed in terms of Afghan consumer familiarity with products from Central Asia and familiarity of Afghan importers with Central Asia produced products. Perhaps surprisingly, given the poor state of Afghanistans infrastructure, better transportation was not seen as a major issue by a large number of the respondents importing pharmaceuticals, cooking oil, baby foods, and salt rock. Transportation was agged as an issue only by the fuel importers. It has to be noted that better

Major internal challenges for the Afghan customs system include lack of electricity and/or generators or lack of fuel for generators, lack of adequate running water and sanitary facilities, low salaries of customs sta, deteriorating security, and the emergence of a parallel,

See, for example, Lewis, D (2010), High Times on the Silk Road: The Central Asian Paradox, World Policy Journal, 27(1): 39-49 and Parto and Saadat (2011) for further details and discussion.
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See, for example, CommiDee on Foreign Rela4ons (United States Government) (2011), Central Asia and the Transi%on in Af- ghanistan. A majority sta report prepared for the use of the commiDee on foreign rela4ons United States Senate, 112th Con- gress, 1st session, December 19, 2011, UNECE- United Na4ons Economic Commission for Europe (2010), Strengthening Regional Coopera4on in Central Asia: A contribu4on to long-term stability and sustainable development of Afghanistan, Background Note: 2010 SPECA ECONOMIC FORUM. ESCAP - United Na4ons Economic and Social Commission for Asia and the Pacic, and Parto and Saadat (2011).
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Havrylyshyn, O. (2010). Trade and Ins%tu%onal Environment: The Interna%onal Experience and a Proposed Agenda of Meas- ures for CAREC Countries, Reference Document For Session 4 of the Trade Policy Coordina4ng CommiDee.
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Torkham and other entry points in eastern Afghanistan bordering Pakistan are almost open with minimal or no border con- trol. Many Afghans travel through these points without visa though running the risk of being harassed by Pakistani police who turn a blind eye in return for receiving peDy bribes.
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Figure 3: Pre-conditions for Afghan importers to switch Import sources

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transportation in the case of fuel imports may imply better security in transportation since fuel trucks are favorite targets for the antigovernment forces in Afghanistan with fuel convoys being regularly attacked particularly between Torkham (Pakistan border) and Kabul but also on other routes.

agreements. The provision of quality substitutes for the current imports is, however, a much more manageable task. Products such as plain and manufactured steel, construction materials, fuels, home ware, cooking oil, and conserved and basic foods from Russia and Central Asian countries have a repu tation of superior quality dating back to the 1970s, 1980s, and early 1990s. Since 1992 there has been a general weakening of the links between Afghanistan and Central Asian countries due to the Afghan civil war and its continuing crisis-ridden aftermath. Most traders do not have adequate knowledge about or access to supply sources in Central Asian countries for local products or Russian origin re-exports. Most traders are aware of their poor knowledge of Central Asia as the potential source of many of their imports with some suggesting

Ways Forward
With Pakistan falling out of favor with many international organizations as the choice transit country for land access to Afghanistan and Iran not being prospected as a close (formal) trading partner, there is a unique opportunity for the Central Asian countries to seize the moment and seek ways to act as the new transit routes to and from Afghanistan and, more importantly, to provide quality substitutes for the generally lower quality imports. Establishing the transit routes is for the most part a function of major regional infrastructure programs and

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that the old linkages between Afghan traders and Central Asian suppliers could be revived through intensication of coordinated eorts such as marketing, trade exhibitions, and product and produce fares organized by Afghanistan and Central Asian countries. Eorts could also be intensied for the use multilingual labeling, particularly for Central Asian products aimed at the Afghan market. Afghan traders face enormous diculties such as delays and nancial and in-kind bribes at all border crossing points. Quality seems not to be a major concern for the majority of the traders or the consumers while imports from Central Asian countries are associated with relatively higher costs, partially associated with inadequate transportation networks. A few of the traders argued for more regional investment in infrastructure such as roads and rail links to reduce transportation time and cost for Afghan importers. While this is an enormous undertaking by any one regional government, it is possible to work toward a more expansive and integrated transportation system through funds from international entities such as the Asian Development Bank, the World Bank, and major international development organizations with a stake in the region such as USAID. Advocacy for such infrastructure will need to be justiable on longer term economic benets which are very likely to surpass the shorter term costs. A possible explanation for the bulk of the fuel supplies coming into Afghanistan to transit through Pakistan, apart from the preference of the international military forces, is the com-

bined eect of purchase price and relatively low transportation costs. Central Asian fuel producers may have a disadvantage in transportation costs but not necessarily for their product prices. Given the fact that Afghan importers deal through intermediary agents to purchase their fuel from Central Asian producers, measures could be taken to allow Afghan importers to purchase supplies directly from Central Asian producers. To one degree or another, all Afghan importers are locked into importing from Pakistan and Iran. Trade agreements between Afghanistan and Central Asian countries, and associated visa issuance arrangements, are some of the issues that need to be addressed as prerequisites for increased trade links between Afghan importers and Central Asian producers. Despite the strong trade linkages with Pakistan and higher costs associated with Central Asian products there is signicant interest among Afghan traders in trading with Central Asian countries. Building on this interest will require increased familiarity of the Afghan importers with Central Asia produced products and increased awareness of the Afghan consumer. The key conclusion is that reorganizing the trade regime in Central Asia to facilitate increased regional cooperation and include Afghanistan is at best a long term goal and not a problem to be xed with short term measures such as (more) nancial aid, technology transfer, capacity building, or even infrastructure development programs.

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Recommendations
To the governments of Central Asia:

5. Better marketing strategies aimed at

the Afghan market, including labeling in Dari, trade fairs, trade delegation visits, and business to business initiatives should be formally initiated and facilitated.

1. Forums such as Regional Economic Cooperation on Afghanistan and similar economic conferences should be used to develop visions and plans for infrastructure development to link Afghanistan with Central Asia.

6. Serious consideration should be given

to programs and agreements to ease visa requirements for Afghan traders.

2. Measures should be taken to allow Afghan importers to purchase supplies directly from Central Asian bulk fuel producers, and not through intermediaries, as a means to reduce costs for Afghan importers. This will require actions by the Government of Afghanistan and/or bi-lateral agreements between the governments of Central Asia to make Afghan importers a preferred or exempted small buyer status.

For Further Research 1. Conduct a feasibility study to establish

whether Central Asian countries and their producers and suppliers are willing and able to act as suppliers of domestically produced and re-exports of Russian made products to Afghanistan.

2. As a counterpart to this research, additional research will need to be undertaken to examine Afghanistans current productive capacities and potentials for exports into the Central Asian markets. Particular attention should be paid to closer links with Tajikistan where there are some kinship ties, close geographical proximity, and shared language with Afghan Dari speakers.

3. Regional dialogue should be facilitated

on the issues around distribution of gains from increased trade activity, the role of private sector actors in nurturing and perpetuating (and ghting) corruption, and the adverse public health impacts of poorly regulated or unregulated ows of goods particularly in foodstus and pharmaceuticals.

3. Conduct a study to identify why Afghan

women traders seem to be shying away from import business and establish pathways for mainstreaming womens participation in regional trade.

4. Quality control mechanisms should become integral to current and future trade agreements between Afghanistan and Central Asian countries.

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