How Can Afghanistan Attract More Foreign Investment?

Analysis of the Investment Options in Afghanistan


Master's Thesis, 2018

111 Pages, Grade: 75


Excerpt

Table of Contents

ACKNOWLEDGEMENT

EXECUTIVE SUMMARY

LIST OF FIGURES

LIST OF TABLES

CHAPTER 1
INTRODUCTION TO INVESTMENT OPTIONS
1.1. Introduction
1.2. Definitions of Investment
1.3. Investment Types
1.4. Investment Options

CHAPTER 2
AFGHANISTAN INVESTMENT OPTIONS
2.1. Introduction
2.2. Ini1tial Investment in Afghanistan
2.3. Reasons to invest in Afghanistan
2.4. Investment Information
2.5. Key Sectors for Investment
2.6. Investment Options Available In Afghanistan
2.7. Future Investment Options In Afghanistan
2.8. Foreign Direct Investment In Afghanistan

CHAPTER 3
OBJECTIVES, LIMITATIONS & RESEARCH METHODOLOGY
3.1. Objectives
3.2. Limitations of the Study
3.3. Research Methodology

CHAPTER 4
ANALYSIS AND INTERPRETATION

CHAPTER 5
FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1. Findings
5.2 Conclusion
5.3. Recommendations
5.4. Bibliography And References

APPENDIXES:

LIST OF FIGURES

Figure 1-Afghanistan Imports by Country

Figure 2 - Afghanistan Exports by Country

Figure 3 - Agriculture Sub-Sectors

Figure 4 - Mining Sector Revenue

Figure 4.1- Gender of Respondents

Figure 4.2- Employment Status of Respondents

Figure 4.3- Qualification of Respondents

Figure 4.4- Age of Respondents

Figure 4.5- Respondents Investment Knowledge

Figure 4.6- Respondents Investment Goals

Figure 4.7- Respondents Investment Lifestyle & Investment Habits

Figure 4.8- Investment Return Expecting Time

Figure 4.9- Investment Information Sources

Figure 4.10- Investment Objectives

Figure 4.11- Investment Failure Reasons

Figure 4.12- Factors Considered before Investing

Figure 4.13- Sectors for Investment

Figure 4.14- Factors Influencing Foreign Investment

Figure 4.15- Investment for Economic Development of Afghanistan

Figure 4.16- Investment Options in Afghanistan

Figure 4.17- Agriculture Contribution in GDP (%)

Figure 4.18- FDI in Afghanistan (Net Inflows)

LIST OF TABLES

Table 1- Types of Bonds

Table 2 - Brief Profile of Afghanistan

Table 3- Import Items of Afghanistan

Table 4- Afghanistan Export Items

Table 5- Education Indicators in Afghanistan

Table 6- Export Oriented Industries in Afghanistan

Table 7- Import Oriented Industries in Afghanistan

Table 8 - Value of Industrial Production by Sector

Table 9 - Total Number of Major Active Establishments

Table 10 - Annual Production in the Mining Sector

Table 4.1- Gender of Respondents

Table 4.2- Employment Status of Respondents

Table 4.3- Qualification of Respondents

Table 4.4- Age of Respondents

Table 4.5- Respondents Investment Knowledge

Table 4.6- Respondents Investment Goals

Table 4.7- Respondents Investment Lifestyle & Investment Habits

Table 4.8- Investment Return Expecting Time

Table 4.9- Agriculture Contribution in GDP (%)

ACKNOWLEDGEMENT

Every good thing starts with something so let’s start everything with, In the name of ALLAH, the most beneficent, the most merciful.

Firstly, I am really thankful to Allah for giving me the power to trust the Journey even when I don’t understand it and gave me the ability, enthusiasm and passion to complete this journey at my best and after that I thank my great, respected and kind parents, especially father Haji Zazay for giving me the opportunity to live all my dreams, blessed me with everything and surely There is no doubt in my mind that without their extraordinary support, continuous encouragement, incomparable sacrifices and exceptional prayers; I could have never reached at this stage of my life without their support and complete this.

His every quote makes me more passionate, powerful and brave enough but one of his quotes is always inspiring me: “You are never alone, Dream a new Dream and make it live for me and make me proud”. Love You Father!

It is never easy to do something new without a proper guidance of experts. Similarly, in writing a report, the supervisor cannot be neglected. Therefore I contribute special thanks, from the core of my heart, to my lovely and respected Ma’am Ms. Bhawana Bhardwaj for being so compassionate and supportive during the process of writing my report. She not only did teach me so well during the course but also guided me wisely to write the Report successfully.

I also appreciate the encouragement of my dear friends and Family members, Zeenat Zahir & Mustafa Zahir, especially Naimullah Karimi who is too far away from his family and me and beside his more workload and busy weekends; he helped me from the beginning of selecting good topic up to the completion of my project.

Proud to have spent my more young age with you and learned many new things with great advices regarding every matter.

EXECUTIVE SUMMARY

This Study shows the analysis of various investment options currently available in Afghanistan, in this study which expresses the brief introduction to the global and international available options which people makes investment like Cash investment, Bond Investment, Stock Investment and other alternative investments and recently Bitcoin investment which got to be really famous but due to some reasons which everyone knows better than me blocked the development way of Afghanistan and Afghanistan are a step or two away from competing with the global investment options which are mentioned above.

Which sectors in Afghanistan needs more investment is carried out in this study which will keep the minds of people aware of them and what are the reasons which made the investment blur in Afghanistan so Government of Afghanistan and its people can block them or remove them and does foreign investment in Afghanistan took place properly and Why with great amount of money, the Government of Afghanistan was unable to build and Develop Afghanistan and its key sectors like: Industry, Infrastructure, Tourism, Education, Agriculture, and others.

What future options for investment can be added which means new and copied ideas from foreign countries that can work better in Afghanistan, can give both long-term benefits and can higher the standards of living, and can provide more and better welfare to Afghans.

Foreign Direct Investment in Afghanistan has also been discussed in this study with the help of graphical representations and tables.

CHAPTER 1

INTRODUCTION TO INVESTMENT OPTIONS

1.1. Introduction

Investment is the opportunity, which every business would want to avail to make growth, sustain and develop their business in the right time and pace. Everyone who needs to start a new business or continue his/her existing business, the basic need is to do investment on what they have in their pockets and according to their money and balance, they need to identify and modify more investment options which can give them low risk of losing their investment principle but also give them more profit.

Investment is in the reality a way to use your savings for acquiring and getting more benefits in the future and Investment is the criteria for performing the best use of your money in various earning and profit tools and instruments.

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Basic Investment Terminologies

Source: Islamic Investment, UNIVERSITI TEKNOLOGI MARA, Indonesia, 2017

Some of the greatest investors also described investment in the following words:

"If you spend more than 13 minutes analyzing economic and market forecasts, you've wasted 10 minutes."-Peter Lynch

"Investing without research is like playing stud poker and never looking at the cards."- Peter Lynch

Every business can have two types of expenditures that are:

1. Revenue Expenditures: Cash spent on day-to-day operations is called Revenue expenditures. E.g. Raw materials, Plant & machinery, Energy costs, Wages and salaries, Marketing costs, Office administration, etc.
2. Capital Expenditures: Cash spent on investment in the business. E.g. Plant and machinery, Fixtures and fittings, Distribution equipment, Factory buildings, IT systems, etc.

To make division among the Revenue and Capital expenditures on timely bases we can have the following brief conclusion:

Capital Expenditure = Long-Term Revenue Expenditure = Short- term & Medium Term

The main distinction is that capital expenditure is on non-current assets which have an “economic life” in the business– they are intended to be kept, rather than sold or turned into products.

Ralph Wagner states that; "An attractive investment area must have favorable characteristics that should last five years or longer."

Many reasons for capital expenditure are:

- To add extra production capacity
- To replace worn-out, broken or obsolete machinery and equipment
- To support the introduction of new products and production processes
- To implement improved IT system
- To comply with changing legislation & regulations

1.2. Definitions of Investment

An investment is made when money is tied up in an asset with the purpose of generating future earnings or savings over multiple periods. Because of this time involved (often several years), the company needs to consider the potential interest which alternative investments could earn or the interest that will have to be paid on a loan.

There are many different definitions of what ‘investment’ and ‘investing’ actually means. The simplest ways of describing it can be as mentioned as following:

1. "The four most dangerous words in investing are: 'this time it's different.'" - Sir John Templeton
2. "An investment in knowledge pays the best interest." - Benjamin Franklin
3. Investment is using your money to try and make more money. This can happen in many different ways.
4. Investing is purchase of assets with the goal of increasing future income, focuses on wealth accumulation and usually appropriate for long-term goals.
5. Investment is a sacrifice made now to obtain a return later. It is the current consumption that is sacrificed.
6. Investment involves employment of funds with the aim of achieving additional income or growth in values.
7. A commitment of funds made in the expectation of some positive rate of return.
8. A sacrifice of current money or other resources for future benefits can be defined as Investment.
9. Islam has also defined Investment in the following key definitions:

- “Islamic Investment is an investment in financial services and investment products that adhere to Islamic principles”. Or
- “A joint pool in which the investors contribute their money for the purpose of its investment to earn permissible (halal) profits in strict conformity with the Islamic law”.

Different Definitions from Different Perspectives:

Investment can also be defined from various perspectives, which can be described and defined from the General, Finance, Business and Economics’ Perspectives. It can be different from different angles.

This can be briefly explained with the help of the figure shown in the next page:

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Investment from various perspectives

Source: Islamic Investment, UNIVERSITI TEKNOLOGI MARA, Indonesia, 2017

Investment can be a different term for everyone, it may be scary & awkward, it can be interesting & simple but some of the greatest investors has defined investment in simple words as:

-"I don't want a lot of good investments; I want a few outstanding ones."- Philip Fisher
-"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks."- Benjamin Graham
-"In investing, what is comfortable is rarely profitable." - Robert Arnott
-"I would not pre-pay. I would invest instead and let the investments cover it."-Dave Ramsey
-"Financial peace isn't the acquisition of stuff. It's learning to live on less than you make, so you can give money back and have money to invest. You can't win until you do this." - Dave Ramsey
-"Invest in yourself. Your career is the engine of your wealth." - Paul Clitheroe

1.3. Investment Types

Investment can be classified into different and various categories, generally there are three different categorization which can be discussed as below:

1) Real Investment & Financial investment:

Some transactions involve the exchange of real property (house, land etc.) for a financial consideration with no liability on the part of the supplier of property to provide return to the investor on the property whereas, financial investments involve the issue of a piece of paper in exchange for money evidencing the liability of the issuer (recipient of money) to provide return to the investor. The former are called the real investments and the latter are called the financial investments. Real investment is also called Physical investment; it involves investment in land, building, gold and silver. Whereas financial investment, which is also, called Securities investment involves investment in bond, shares, debentures, etc.

Distinctions b/w Real and Financial Investment

Some of the key distinctions between Real and Financial investment can be as following:

- Uncertainty: uncertainty is there in financial investment. As real investment involves exchange of real property, once the transfer of property takes place the risk of uncertainty is minimum.
- Liquidity: Liquidity refers to the convertibility of an asset in to money quickly, conveniently, and at little exchange cost. Marketability (or liquidity) is the feasibility of converting of the asset into cash quickly and without significantly affecting its price. Most of financial assets are easy to buy or to sell in the financial markets. Real assets are less- liquid than financial assets largely because of absence of organized markets and trading system. The same will be provided by stock exchanges for financial investments.
- The planned holding period: The holding period of financial assets can be much shorter than the holding period of most physical assets. Holding period is the time between signing a purchasing order for asset and selling the asset. Investors acquiring physical asset usually plan to hold it for a long period, financial assets can be held, even for some months or even a year. Holding period for investing in financial assets vary very widely and depends on the investor’s goals and investment strategy.

2) Marketable Investment & Non-Marketable Investment:

Marketable investment is the investment/financial instruments that can be easily bought and sold on a stock exchange within a short period of time. Such type of investments are highly liquid and are easily transferable. E.g. Commercial Paper, Bills of Exchange, Treasury Bills, Certificates of Deposits, Mutual Funds, Future derivatives, Equity Shares, etc. Marketable securities are those that can be traded between investors. (Gareth D. Myles, May 2003).

Non-Marketable investment is the investment in which A security that may not be bought or sold easily. Generally, a non-negotiable security may be redeemed by the issuer, but this is often subject to some limitations. They are also called non-negotiable securities and non- tradeable securities. E.g. Bank Drafts, Savings bonds, CD’s, Provident Fund, etc.

3) Transferable Investment & Non-Transferable Investment

The above mentioned second class of Investment can explain this as Marketable securities are transferable Investments and non-Marketable securities are non-transferable Investment.

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Investment Classification and Types

Source: Islamic Investment, UNIVERSITI TEKNOLOGI MARA, Indonesia, 2017

1.4. Investment Options

Investing might seem complex, but taking a little time to learn about it can really pay off. It is one of the best ways to meet your financial goals. As you put together your portfolio, you will need to do a little digging into the different types of investments. We analyze different investment options.

“Investment analysis is the study of financial securities for the purpose of successful investing.” (Gareth D. Myles, May 2003).

Most people have heard of stocks and bonds, but there are a ton of different ways to invest your money—mutual funds, CDs, real estate...the list is seemingly endless. (Kristin Wong, 2015)

You will probably come across a handful of terms associated with your investments. We have listed a few of them below. These terms generally refer to the actual stuff you are invested in, but, of course, they have specific definitions, too. They include:

- Assets: An owned resource expected to increase in value.
- Holdings: The specific assets in your investment portfolio.
- Portfolio: Your "portfolio" refers to all of your investments, as a group. Diversifying your portfolio means investing in a variety of assets.
- Asset classes: A group of assets with similar characteristics. Generally, stocks, bonds and cash.

Investment options are the ways that can help the investors and those who are interested to invest in various tools but due to some fear and risk association, they are unable to make a strong and successful decision regarding it. Some of the options available globally and at international level, to invest in and get great rate of return can be mentioned here briefly.

1.4.1 Cash Investment

Cash investments are relatively safe because you’re promised a fixed interest rate. However, interest rates tend to be low, so they are not always the best option – particularly if you’re saving for retirement. (Neto Invpedi, 2016).

What are cash investments?

A cash investment is a short-term obligation, usually fewer than 90 days that provides a return in the form of interest payments. Cash investments generally offer a low return compared to other investments. They are also associated with very low levels of risk Investors that are looking for a safe investment and looking to preserve their capital will opt for secure investment vehicles, such as cash investments. Money market accounts (MMAs) and certificates of deposit (CDs) are examples of cash investments.

Money Market Securities: These securities have ultra-short-term maturities (from a few days to 1 year) and are considered nearly risk-free. Their share prices are intended to be completely stable, although the interest rates they pay will fluctuate (and the stability of the share price is not guaranteed). Money markets are also extremely liquid. You can invest in them through a mutual fund.

Certificate of Deposit (CD): A CD functions like a bond in that it makes periodic interest payments to investors and funds are held for a predetermined period of time. But unlike bonds that can be sold prior to the maturity date, funds in a CD are locked in if held with a bank. Withdrawing the money will incur a penalty; however, this is not the case for CDs held with a brokerage that permits selling on the secondary markets prior to maturity. Certificates of deposit (CDs) are promissory notes issued by banks. As such, they're insured up to a certain amount by the Insurance Corporations and considered completely safe if held until maturity. Like bonds, CDs have a specified interest rate and maturity date (usually 5 years or less).

CDs are deposit obligations issued by commercial banks to raise funds for their business activities. Investors lock in the market interest rate at the time of purchase, and the rate is usually fixed for the term of the CD.

Cash investments include savings accounts and term deposits with a bank, credit union or building society. You can also invest cash through a managed fund which pools together money from individuals for investments, managed by a fund manager.

Savings Account: Some people consider a savings account as an investment alternative for cash. The Insurance Corporation insures money held in the account; however, the interest rate on these accounts is minimal. Term deposits can range from three months to five years.

Savings accounts and term deposits typically guarantee a set level of interest each year. Most basic savings accounts allow you to withdraw your money whenever you want it. A term deposit offers a higher interest rate but you may have to forgo your interest or get lower interest if you withdraw your money before the term finishes. Cash investments are considered low-risk, but usually offer a low interest rate.

If you have a long-term goal, such as saving towards your retirement, there’s a risk that your money won’t grow as fast as the cost of living. This is known as inflation risk. If inflation increases more than the returns on your investment, your money will have less buying power when you need it.

Investors who need a temporary place to keep their cash while researching other investment products usually undertake cash investments. Investors benefit from the low-risk yield and high liquidity of cash investments. Although interest rates are low and a favorable interest rate can only be locked in temporarily, an investor can have access to his or her money within a short period of time. Cash investment is actually the path to safety & security because it can lower the overall risk of your portfolio and give you a place to hold money while you wait to invest it. Cash investments are a place to keep money safe from market risk.

Cash investments are very short-term investments. Nevertheless, making money is not the goal of these investments. They're meant to protect money you already have.

1.4.2 Bond investments

A bond is an IOU issued by a corporation or government so it can finance certain projects and activities. When you buy a bond, you are giving a loan to the issuer for a certain amount of time.

A bond is a loan an investor makes to an organization in exchange for interest payments over a specified term plus repayment of principal at the bond’s maturity date. (Lutfullah, 2015)

In exchange, the issuer pays you a set interest rate (the coupon rate) at regular intervals until the bond matures. When the bond matures, the issuer repays the full face value (or par value) of the bond. In general, the higher the bond interest rate, the higher the risk. Bonds generally offer more stable returns and lower risks than investments such as property or shares. Nevertheless, some bonds are riskier than others are. Make sure you understand these risks:

1. Default risk: The possibility that the issuer will not be able to make interest or principal payments when they are due.
2. Prepayment risk: The possibility that the bond will be paid off earlier than expected, in which case you lose out on any remaining interest payments.
3. Interest rate risk: The possibility that interest rates will be different than expected. If rates decline, you risk prepayment if the firm exercises a call feature. If rates go up, you risk holding a bond with below-market rates (meaning you could be earning more somewhere else).

Companies and governments issue bonds and then pay interest to their buyers. You can buy bonds to get income and to temper the risk of stock investments.

Bonds are generally Debt securities where you lend money to an issuer (e.g., a corporation or government) in exchange for interest payments and the future repayment of the bond’s face value. When you buy a bond, you’re lending money to a bond issuer - usually a government, council or company - for a set period of time (the term). The term is fixed by the issuer and can range between one and 30 years. They’re often known as ‘fixed interest’ investments. The bond’s interest rate, also known as a coupon, is fixed at the time of issue. Interest is paid over the bond’s lifespan. At the maturity date, you’ll also be paid the face value of the bond. Bond is a way to get income & stability. (Prof. AP Faule, 2013).

Buying a bond means an investor is lending money to a corporation or government obligating them to pay the investor a certain amount of interest at specific intervals. The principal amount of the loan is paid back to the investor when the bond matures. You can only buy or sell bonds through a share broker, or an online dealing service. Some points to know about bonds are as following:

- Bondholders have no corporate ownership privileges as stockholders do.
- When interest rates rise, the price of existing bonds decreases, and when interest rates drop, the price of these bonds increases.

Bond terms to know: The language of bonds can be a little confusing, and the terms that are important to know will depend on whether you're buying bonds when they're issued and holding them to maturity, or buying and selling them on the secondary market.

- Coupon: This is the interest rate paid by the bond. In most cases, it will not change after the bond is issued.
- Yield: This is a measure of interest that takes into account the bond's fluctuating changes in value. There are different ways to measure yield, but the simplest is the coupon of the bond divided by the current price.
- Face value: This is the amount the bond is worth when it's issued, also known as "par" value. Most bonds have a face value of $1,000.
- Price: This is the amount the bond would currently cost on the secondary market. Several factors play into a bond's current price, but one of the biggest is how favorable its coupon is compared with other similar bonds.

Table 1- Types of Bonds1

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1.4.3 Stock investments

Stock is a type of investment that gives you partial ownership of a publicly traded company.

WARREN BUFFET defines Stock and Stock investments in the following words:

- "Shares are not mere pieces of paper. They represent part ownership of a business. So, when contemplating an investment, think like a prospective owner."
- "If, when making a stock investment, you're not considering holding it at least ten years, don't waste more than ten minutes considering it."
- "All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies."

By buying a stock, an investor buys ownership in a company and has a claim on part of the corporation's assets and earnings. If the corporation goes under, preferred stock owners receive dividends before common stock owners. Some Facts regarding stock are as follows:

- The foundation of most portfolios, stocks have historically outperformed other investments over the long term.
- It has said to be a bull market when the economy and stock prices are up, while a bear market is when they are down.

David Dreman tells a fact about Stock Investment in the words: "If you have good stocks and you really know them, you'll make money if you're patient over three years or more."

In other words of Stanley DuckenMiller about Stock Investment: “Part of my advantage is that my strength is economic forecasting, but that only works in free markets, when markets are smarter than people. That is how I started. I watched the stock market, how equities reacted to changes in levels of economic activity, and I could understand how price signals worked and how to forecast them.”

Stocks, also known as company shares, are probably the most famous investment vehicle in India. When you buy a company’s stock, you buy ownership in that company that allows you to participate in the company’s growth. Companies that are publicly listed on stock exchanges and can be bought by any investor offer stocks. Stocks are ideal long-term investments. But investing in stocks should not be equated to trading in the stock market, which is a speculative activity. A stock is a type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings.

BOGLE ABOUT STOCK: "If you have trouble imagining a 20% loss in the stock market, you shouldn't be in stocks." In addition "[It's] 100% economics in the stock market and 0% emotions."

There are two main types of stock: common and preferred. Common stock usually entitles the owner to vote at shareholders' meetings and to receive dividends. Preferred stock generally does not have voting rights, but has a higher claim on assets and earnings than the common shares. For example, owners of preferred stock receive dividends before common shareholders and have priority in the event that a company goes bankrupt and is liquidated.

You can own pieces of companies through stocks, giving your portfolio the chance to gain value over time.

Stocks represents an opportunity for growth: When you buy a stock, you own a piece of the company that issues it. There are several ways of classifying companies and their stocks. (Joshua Kennon, April 2018)

There are two main ways to make money with stocks:

1. Dividends. When publicly owned companies are profitable, they can choose to distribute some of those earnings to shareholders by paying a dividend. You can either take the dividends in cash or reinvest them to purchase more shares in the company. Many retired investors focus on stocks that generate regular dividend income to replace income they no longer receive from their jobs. Stocks that pay a higher than average dividend are sometimes referred as "income stocks."
2. Capital gains. Stocks are bought and sold constantly throughout each trading day, and their prices change all the time. When a stock price goes higher than what you paid to buy it, you can sell your shares at a profit. These profits are known as capital gains. In contrast, if you sell your stock for a lower price than you paid to buy it, you have incurred a capital loss.

John Neff about buying and selling stocks: "Successful stocks don't tell you when to sell. When you feel like bragging, it's probably time to sell."

1.4.4 Other Alternative Investment Options

Your portfolio will probably be mostly made up of stock and bond investments, and potentially some cash. But there are other types of assets you might want, depending on your goal and how sophisticated your investment strategy is, some of them are as following:

"Hybrid" securities: Some investments have characteristics of both stocks and bonds. They're more complex, so they may not be right for everyone.

Preferred stocks: Like bonds, preferred stocks (also called preferred securities) have a face value and pay income at specified intervals. They're also susceptible to interest rate risk (though less so than regular bonds).

However, as with common stocks, preferred stocks are traded on exchanges like the New York Stock Exchange. The values of preferred stocks will fluctuate with the market, although not to the same extent as common stocks.

Preferred stock owners have no ownership or voting rights. If a company issuing a preferred stock is in financial trouble, the holders of the preferred stocks will be paid after bondholders but before common stockholders. Thus, their risk is somewhere in between common stocks and bonds.

Exchange-traded notes: Exchange-traded notes (ETNs) also have characteristics of both stocks and bonds.

Like stocks, they're unsecured (meaning they're not backed by collateral). In addition, holders of ETNs will be paid behind bondholders and preferred stock holders. ETNs are traded on stock exchanges and their values are based on the performance of a specified market index.

Like bonds, however, ETNs have a maturity date (although they don't pay interest), at which time the holder will be paid the current principal amount.

Convertible bonds: Convertible bonds (also called convertible securities) are corporate bonds that can be converted into stocks if the buyer chooses. Because of this added flexibility, convertible bonds generally offer lower interest rates than similar nonconvertible corporate bonds. The risk and potential return for convertible bonds is somewhere between common stocks and regular bonds.

Commodities: A commodity is a good that is basically interchangeable with the same good from another producer. For example, wheat, oil, beef, and coffee are commodities.

While it's possible to invest directly in commodities (say, by buying 10,000 pounds of sugar), most commodities are traded through "futures contracts"—a promise to buy or sell a certain amount of the commodity at a specified price on a certain date.

Buying gold, silver, platinum, or other precious metals sometimes touted as a way to hedge the risks of more traditional investments. However, prices of these metals can be extremely unpredictable and volatile.

Real estate: The world is full of people who are convinced that real estate is the only investment that makes sense. Whether you subscribe to that philosophy or not, there are more ways than ever to add real estate to your portfolio. (Phil, 2016)

Yes, you can buy a home for yourself, or properties to rent. But you also can purchase a security called a real estate investment trust (REIT), which combines the benefits of stocks with the tangible property of land, shopping malls, apartment buildings, or almost anything else you can imagine.

Master limited partnerships (MLPs): MLPs exist mostly in the energy industry. Direct investments in MLPs could provide more favorable tax treatment than you would get by investing in an energy fund or by buying a specific energy company's stock. However, MLPs typically come with very high costs and added tax complexity.

Investing in Mutual Funds: One of the most popular ways to own stocks and/or bonds is through mutual funds. In fact, most people are statistically less likely to own individual investments than they are shares of companies through mutual funds held in their 401(k) or Roth IRA.

Mutual funds offer many benefits to investors, particularly to beginners who are just mastering investing basics. They are pretty easy to understand and allow you to diversify your investments over more companies. However, mutual funds also have a few serious drawbacks: they charge fees, which can eat into your profits, and they may boost your tax bill, even in a year when you do not sell shares.

Investing in Derivatives: Derivatives are securities whose value derives from the value of an underlying security or a basket of securities. They are also known as contingent claims, since their values are contingent on the performance of the underlying assets. (Gareth D. Myles, May 2003).

CHAPTER 2

AFGHANISTAN INVESTMENT OPTIONS

This chapter is the main and important part of all because it will introduce the main research topic, which is the status of investment in Afghanistan, and what are the main reasons for investing in Afghanistan. It is basically the literature review of the research topic.

Beside this we would got to know about the initial investment done in Afghanistan and to know about main sources of getting the investment information, and what are the main blockades and preventing factors in the investment of Afghanistan etc.

2.1. Introduction

Before going to the topic of investment in Afghanistan, we will have a simple look on to what is the goal of investment. In simple terms, the goal of investing is to use money in a way that turns it into more money. This is done through the creation of manufacturing companies, commerce, corporate shares, and more.

As it is known to you that Afghanistan has witnessed misery and wars over the past three decades, due to this insecurity and bad situations, the investment and Capital has been shifted and transferred outside Afghanistan and other countries.

Currently, when Afghanistan is going through a prosperous growth, it is facing the shortage of sufficient and long-term investments that could bring social and economic prosperity.

Although the economy of our country has been more dependent on trade since the distant past, and Afghanistan has played a major role as a commercial highway, the Silk Road is one of the main trade routes in the region, but investments have also been relatively play a significant role in the country's economic growth.

To get know about Afghanistan, let’s have a quick look to the profile of Afghanistan The profile of Afghanistan is a description of the country as seen through the eyes of investors. The scope of this profile is limited to investment centric data of the country. (AISA, 2016)

The Islamic Republic of Afghanistan is a landlocked country situated between South Asia and Central Asia. Afghanistan has four seasons (winter, summer, fall, and spring), mountains, water, and forests.

Table 2 - Brief Profile of Afghanistan

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Source: investment in Afghanistan, AISA

PEST ANALYSIS OF AFGHANISTAN

Political: Afghanistan follows a Unitary Presidential form of government, where the head of government is also the head of the state and leads an executive branch that is separate from the legislative branch. Legislation in the country is conducted through people’s representatives in the upper house (Meshrano Jirga) and lower house (Wolesi Jirga).

As political stability in Afghanistan is relatively recent, it is in the process of deepening it further rather than ushering drastic political change in the near future. During the last decade, freedom of press and rule of law (especially in the urban areas) have improved significantly, and the current government is taking concrete steps to reduce bureaucratic overreach and corruption in the country.

In addition, in the past year, regulations have been passed to protect the public from what is viewed as unethical business acts. Furthermore, the principle of a free market has been incorporated in Chapter 1, Article 10 of Afghanistan’s new constitution, which states, “The State encourages and protects private capital investments and enterprises based on the market economy and guarantees their protection in accordance with the provisions of law”. In keeping with this, the government has developed rules and laws for banking, customs, investment, environment, insurance, labor, minerals etc. as well as precise policies for taxation and trade.

In Afghanistan, Chamber of commerce, associations, unions and political parties play an active role in all decisions made by the government.

Economic: The economy of Afghanistan has improved significantly since 2002. This has been mainly due to infusion of billions of dollars in investments, international aid and remittances from Afghan expatriates. Increased Foreign Direct Investment (FDI) and improved domestic production has resulted in robust economic growth; inflation has been low and public finance management has made healthy progress.

Afghanistan, currently in an economic recovery stage, is in transition from a centrally planned and heavily regulated economy towards an open and free economy based on the market system. The economy has been through a structural change over the last decade after the political shift in 2001 occurred due to international intervention. The new constitution acknowledges ‘market economy’ as the economic system and guarantees promotion and protection of private investment (Article 10 of the Constitution). The economy has since been liberalized and the government has increasingly focused on private sector-led growth.

Social: Afghanistan’s social environment has seen considerable improvement in the past decade in terms of efforts towards meeting the demands for a high standard of living and improving social status of people across the various classes of its people.

Afghanistan’s society can be divided into urban and rural populations. Of the total 28.6 million estimated population, 20.1 million (71.5%) lives in rural areas while 6.5 million (23.13%) stay in urban areas. In addition, 1.5 million (5.33%) are living as nomads. The urban population’s education level, income level, values, beliefs, and customs vary from those living in the rural areas of the country. The unique aspect of Afghanistan is its many different ethnic groups with varying social mores such as Pashtuns, Tajiks, Uzbeks, Hazaras and a number of other minor ethnic groups. Technological Environment: Afghanistan has experienced unprecedented development in Information and Communication Technology (ICT) during the last decade. In 2001, the number of operational telephones in the country was as low as 20,000, and international connectivity was nonexistent. In contrast, mobile subscriptions have increased from 145,000 in 2003 to 24,888,202 in 2015, covering nearly 90 per cent of the population. In addition, the cost of a call has decreased from USD 30 cents/ min in 2003 to USD 5 cent/ min in 2015. Private ICT companies are now offering money transfers, online banking, e-commerce, market information and other innovative services. Moreover, e- governance and TV digitalization are other areas where Afghanistan has experienced some development. However, Unlike ICT, where private initial investment has been more than USD 2 billion, the other technological developments have not been as steady.

Afghanistan is open for technology transfer and is taking steps towards making technological environment conducive for investments especially in the areas of automation, research and development.

2.2. Ini1tial Investment in Afghanistan

Abbildung in dieser Leseprobe nicht enthalten

Source: Registered Investment in Afghanistan Investment Support Agency (AISA), 2016, Your_Guide_on_Investing_in_Afghanistan1372016113045288553325325.pdf

Figure 1-Afghanistan Imports by Country

Abbildung in dieser Leseprobe nicht enthalten

Source: Central Statistics Organization, 2014, Afghanistan

Table 3- Import Items of Afghanistan

Abbildung in dieser Leseprobe nicht enthalten

Source: Afghanistan Investment support Agency (AISA), 2016

Figure 2 - Afghanistan Exports by Country

Abbildung in dieser Leseprobe nicht enthalten

Source: Central Statistics Organization, 2014, Afghanistan

Table 4- Afghanistan Export Items

Abbildung in dieser Leseprobe nicht enthalten

Source: Central Statistics Organization, Afghanistan

2.3. Reasons to invest in Afghanistan

Why invest in Afghanistan?

Emerging from twenty five years of conflict, Afghanistan, a landlocked and one of the poorest countries of the world, had performed better than the strong performers among the comparator countries in terms of broad macroeconomic indicators. Moreover, Afghanistan’s economy is edging towards recovery.

From its supportive regulatory framework for its estimated multi-trillion dollar mineral and hydrocarbon sectors to the country’s new transport and energy-related investments, Afghanistan is fast becoming a highly business-friendly environment – regionally ranked 2nd in the World Bank’s Doing Business Index’s categories on establishing a business, taxes; 3rd on resolving insolvency; and 4th on contract enforcement – where investors can expect significant returns on investment. (Investment Climate Report, 2017)

The main reasons to invest in Afghanistan can be mentioned as followings:

- Investment Environment: The latest reform efforts and donor support advantaged development goals, and stabilized the macroeconomic sector, lowered inflation rates, and liberalized investment laws and regulations among others. Afghanistan is a close partner of the international community, European Union and World Trade Organization member, with support from the world’s strongest economies.
- Central Location: The heart of Asia and a gateway to Middle-Eastern, Central, South and East Asian markets. Afghanistan’s central location in Eurasia makes it a hub for goods and services. Afghanistan is especially benefiting from its bi-lateral and multi-lateral Trade Agreements and our latest economic milestone by becoming the newest member of the World Trade Organization.
- Open Market: Afghanistan is an open market and warmly welcomes foreign investors. The thousands foreign demonstrate that enterprises that have established businesses in Afghanistan and now employ over a million people. The Afghan market is open to entrepreneurial investment in practically all areas. There are hardly any state-controlled industries. Afghanistan is receiving increasing attention from private equity firms and hedge funds due to its highly attractive companies and favorable investment conditions.
- Government Commitment: The Government of the Islamic Republic of Afghanistan is highly support private investment in Afghanistan through its strong commitment for Investment Climate Reforms. Afghanistan has the most pro-investment government policy with excellent support from AISA (currently work under MOCI, past Independent).
- Qualified Personnel: A nation with Young and rapidly growing educated population. Afghanistan offers an exceptionally well-qualified, motivated and conscientious workforce. For example, USAID has helped Afghanistan become a more responsible and integrated member of the region and the world. Great strides have been made in health and education, bringing more Afghans back into economic and civic life. Institutions that can accountably respond to people’s needs and aspirations are being restored. Investments in infrastructure and human capital are making the country less vulnerable to insurgents and illicit business and more attractive for private-sector enterprise.
- Ownership and Profit: Afghanistan grants 100% foreign ownership. Furthermore, foreigners can lease real estate, for periods up to 90 years for arable land or even longer for non-arable land. Afghanistan government provides Low overheads and high profit margins.
- Developed Infrastructure: Afghanistan has a closely knit of network of roads, railways, trade, and airports. That guarantees smooth connections. The Airports serve as international hubs. Communication infrastructure is well developed throughout the country.
- Legal Security: Afghanistan has adopted liberal Investment Laws. Transparent and reasonable. The advantages are internationally recognized. Institutions that can accountably respond to people’s needs and aspirations are being established, such us the Dispute Resolution Center or Business Integrity Initiative (BIN).
- Rising Industry: While a low-cost manufacturing industry has been already established in Afghanistan, currently big players like China and India are stepping forward into the more sophisticated industries. Many of these highly specialized firms that shows interest in the Afghan market, are world market leaders in their field, so-called “hidden champions”. Abundantly available local raw material and cheap labor & Sky-high local demand for products and services, and huge neighboring economies.
- Afghanistan TrademarkAbbildung in dieser Leseprobe nicht enthalten: Agricultural products with the “Made in Afghanistan” seal still stand for the highest quality worldwide, and the Extracting Industry will be another sector that will brand the country. This has played no small part in maintaining Afghanistan’s position as world champion exporter for many years. The country’s fruit and nut exports were at $ 113 million per year in 2007 and grew to more than $ 800 million per year in 2017. Afghanistan is known for producing some of the finest fruits and vegetables, especially pomegranates, apricots, grapes, melons, and mulberries. Minerals and petroleum will soon follow as Afghanistan’s “so-called” export frontrunner.
- A virgin and unexplored marketplace: unmatchable advantages for First Movers: Afghanistan can now be called developing country in the world because of having limitless investment opportunities in diverse sectors & Afghanistan is among the rich countries in the world, for that it is called The King of minerals and mining reserves.
- Cheap Labor Power: Afghanistan is having cheap labor power, that’s the main reason for big super national countries, and international brands to in invest in Afghanistan, this reason can be the priority for investors.

2.4. Investment Information

For the information of foreign and private investors, the key sources of information regarding investment, its rules, current security conditions, sectors for investment, etc. (Enamullah, 2017)

They could be named as following:

1. Chamber of Commerce and Industry of Afghanistan
2. Afghanistan Investment Support Agency (AISA)
3. Chamber of Commerce Afghan – American
4. Afghanistan Reconstruction and Development Services
5. Pace Dividend Trust / Index of Investments in Afghanistan
6. Union of construction companies in Afghanistan Grants gap
7. Infrastructure reconstruction program in Afghanistan
8. USAID / Afghanistan Procurement Opportunities
9. Akbar Employment Agency/ Jobs.af
10. Advisory Board on Afghanistan's Development (Future)

2.5. Key Sectors for Investment

Afghanistan has been a rich country where in every sector investment can be done with high profitability and great returns. Investment can be done through various sources but the type of investment which needs more investment can be defined later but beside this in Afghanistan the following forms of investment can take place. Investment is generally of two types which are:

[...]


1 Author’s own work only to create the table, but information being taken from different internet sources.

Excerpt out of 111 pages

Details

Title
How Can Afghanistan Attract More Foreign Investment?
Subtitle
Analysis of the Investment Options in Afghanistan
College
Himachal Pradesh University
Course
MBA
Grade
75
Author
Year
2018
Pages
111
Catalog Number
V458122
ISBN (eBook)
9783668964204
ISBN (Book)
9783668964211
Language
English
Tags
Investment, Investment options, Afghanistan Investment Climate, FDI in Afghanistan, Investment Opportunities
Quote paper
Zabihullah Zahir (Author), 2018, How Can Afghanistan Attract More Foreign Investment?, Munich, GRIN Verlag, https://www.grin.com/document/458122

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