Editor in Chief: Moh. Reza Huwaida Friday, January 18th, 2019

Afghan Industries Struggling in Face of Cheap Imports


Afghan Industries Struggling  in Face of Cheap Imports

Industrial parks once used to be a model of what the future for Afghanistan and its economy would hold. The government of Mohammad Daud Khan in 1970s had drawn up ambitious plans for the development of manufacturing industries throughout Afghanistan and the role of industrial parks was central to these plans. Gradually, industrial estates sprang up in many provinces and Afghanistan's industrial base, although still nascent in those days, accelerated production wherever raw material was available.

The years of upheaval that followed decimated the progress and destroyed what were once the industries, factories and the host of processing centers. In 2005 and after,the government and international community encouraged the growth of a private sector, the groundwork was laid for revival of Afghanistan's factories and industries. Herat Province,in western Afghanistan,has been well-poised to make use of its unique location sharing borders with Iran and being relatively calm in comparison to other provinces and areas which continue to reel under war and insecurity.

A sprawling industrial park was built close to the city of Herat in 2005. Initially, the response of the private sector entrepreneurs and Afghan investors was very promising. In the very first months, close to 300 factories and industrial units were set up by Afghan investors. These units took up manufacturing a wide array of industrial and consumer goods from cars and automobile parts and accessories to food and beverage for consumers to be marketed throughout Afghanistan.

The factories were able to sell their products across Afghanistan generating employment for the masses of unemployed youth and contributing to development of the region and prosperity of the city of Herat. However, now and after more than 5 years after the industrial park started operations, almost half the initial 300 units have been forced toclose down. The loss of this huge number of factories and industrial units have resulted into laying off of thousands of workers and bankruptcy of hundreds of investors who cannot get back in full the initial investment they had made in these closed factories.

In many cases, farmers and other producers who used to supply these factories with the raw material have now lost a major part of their buyers and forced to sell their produce at much lower price in local markets. Many more factories are teetering on the brink of collapse and have had to scale back their production levels and lay off workers. The reason of course is the influx of foreign-made products most of which comes from the neighboring Iran. The industrial units that have closed down have been unable to compete with the barrage of cheap, mostly low-quality Iranian goods that have flooded markets in Kabul and elsewhere throughout the country.

The current import duty set by the government of Afghanistan and imposed on imported merchandise stands at 3% to 5% while on the other hand, the duty imposed on local manufacturers is as high as 30%. The relatively low import duty imposed on imported goods and raw material have had the result of flooding markets throughout Afghanistan with foreign-made goods while local producers struggle to survive in the face of rising costs and tough competition. In the city of Heratand surrounding districts, many packaged food products made in and imported from neighboring Iran cost 20% to 30% less than the same product that is locally made by Afghan manufacturers.

The low import tariffs policy maintained by the government of Afghanistan are in line with the free market, laissez faire requirements. The International Monetary Fund (IMF)stringently requires the government of Afghanistan to keep import tariffs low in line with the wider market-oriented reforms and "structural adjustment" programsthat it is imposing on the government of President Karzai. IMF is an international financial institution with a primary responsibility of helping member countries tide over their financial problems by providing loans and lines of credit.IMF is also a fierce advocate of market reforms in developing countries such as Afghanistan often demanding sweeping structural reforms towards a full-fledged market economy. In our country Afghanistan and after 2001, IMF has been a partner to the government of Afghanistan and has played a major part in Afghanistan's drive towards a market-driven economy.

However, the low import tariffs are not the only culprit that is responsible for pushing nascent Afghan industries into bankruptcy. A number of other factors can also be discerned that are equally to blame for the problem. Illegal price-dumping tactics used by Iranian manufacturers are also to a great extent responsible for loss of market share by Afghan manufacturers. Iranian producers often flood the Afghan markets with artificially very lowprices on back of their stronger financial capacity to absorb losses in first months of entering the Afghan market. After local Afghan producers are pushed to bankruptcy and close down their factories, the Iranian producers start to raise prices back to the original levels with no or little Afghan competitors in the market.

This unfair price-dumping tactics are illegal and liable to judicial prosecution under the rules of the World Trade Organization (WTO) had Afghanistan and Iran were members of this world trade watchdog body. Afghanistan is not yet a member of WTO and hence it cannot take its trade and commerce disputes and complaints to WTO. Another factor that is also largely responsible for the lack of competitiveness of Afghan producers is their poor market research practices. Any large or medium-scale industrial unit or factory should be started only after extensive market research, market data collection and analysis and identifying the potential markets and sub-markets.

The owners and investors of many of these units started operations without proper research of the market and working out detailed contingency plans for future and in case import from outside emerge as a threat. This is in turn due to lack of professional expertise in studying the market and developing a professional business plan that can cover the full range of potential threats that might arise in future. In any case, Afghan private sector and investors need much greater support from the government. Providing better access to basic infrastructure such as power and energy, reducing government bureaucracy, red tape and corruption and facing up to hostile neighbors by way of imposing retaliatory and punitive import tariffs if they continue the unfair trade practices.

The author is the permanent writer of the Daily Outlook Afghanistan. He can be reached at outlook afghanistan@gmail.com

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