10.02.2021

Challenges Faced by Startups in Afghanistan

In a new series of policy briefs, our YLFees discuss current political challenges and recommendations

This policy brief explores the challenges that have affected the growth and development of startups in Afghanistan. Five specific challenges face Afghanistan: a vacuum of policies and laws, limited access to credit, lack of industrial energy, lack of skilled technicians and workers, and high cost of internet services.

Startup companies are economic entities that recently have found their place in the discussion on economic development. This term is very frequently overused as a synonym for all newly initiated enterprises. For instance, the Organization for Economic Cooperation and Development (OECD) defines startups as enterprises that are up to two years old (i.e., newly established enterprises), while the World Bank defines startups as early-stage firms that are business ventures or social enterprises with a financial sustainability model – even if they are too young to make money.

In today's global economy, startups are regarded as fundamental income sources and contribute significantly to GDP growth and employment. Furthermore, startups can build people's capacities.

Afghanistan's economy is recovering from decades of conflict. Despite improvements in life expectancy, incomes, and literacy since 2001, Afghanistan is still extremely poor, landlocked, and highly dependent on foreign aid. On the other hand, the country faces a rapid increase in poverty and hardship due to the impact of Coronavirus. World Bank analysis suggests that Afghanistan's poverty rate may increase from 55 percent in 2017 to 72 percent in 2020 due to declining incomes and rising prices for food and other vital household goods.

Startups can play a significant role in the economic growth and development of Afghanistan. They create more jobs, which means more employment, and more jobs means an improved economy. Startups can also contribute to economic dynamism by spurring innovation and injecting competition. New entrepreneurs can bring new ideas to the table, much needed to stir innovation and generate competition. Therefore, the government must take measured and robust steps in addressing the significant challenges faced by startups.

In Afghanistan, startups face obstacles both from state and non-state actors such as legal barriers, lack of sufficient and timely supply of funds, lack of trained & educated labor, and lack of infrastructure.

Complex legislation, lack of capital, shortage of electricity, a low-skilled labor force, and unaffordable internet are the main challenges that startups face in Afghanistan.

Rule of Law

The mostoutstanding legal elements hindering startups' growth include the complicated and time-consuming tax clearance process, aggressive tax regime, outdated rules and regulations of the registration department, lack of law enforcement, loopholes in the law, and lack of laws. For instance, it takes startups weeks or almost a month to pay their taxes and clear their tax forms.

Simultaneously, excessive and different types of taxes such as monthly payroll and rent taxes, quarterly income taxes, and the annual tax are another heavy burden to be endured by these newly established ventures. Similarly, 54, 8% of entrepreneurs in a survey by Afghanistan Monitoring and Research (AMR) have said that a 4% tax on revenue (rather than profit) for most companies had highly damaging effects and hurt their startups' progress.

On the other hand, it is tough for startups to register a name that matches both their vision and their companies in the licensed agency because, due to the dated laws, most of the time, the official in the licensing department rejects company names based on a conflict with current rules, culture, religion and other values in the country.

Furthermore, corruption and the patronage culture of government officials connected to unlicensed businesses in the black market has made competition difficult for the startup community across the country. Manufacturers in the market that act without licenses do not pay taxes and use child labor noticeably reduce the cost of goods and prices in the market. This makes competition tough.

Access to Finance

Startups can get stuck at an intermediate stage of advancement because of a lack of finance for growth. A survey conducted in 2017 by Afghanistan Monitoring and Research (AMR) shows that out of 13 banking institutions operating in Kabul, only eight offered commercial lending services. Half of these— four out of eight— required the loan to be paid in full after one year with interest.Besides, the COVID- 19 pandemic, weak economic conditions, and lack of confidence led to a reduction of credit to the private sector in 2020. As a result, accessing credit sources under severe conditions such as high-interest rates, providing property as collateral to banks, and short repayment periods put small businesses into another dilemma.

Access to Energy

Electricity flow in the country is sporadic and unpredictable. Power might be available only a few hours during the day. Sometimes, due to unexpected incidents in the spring and winter seasons, the flow of energy is disrupted for weeks and months. As a result, the unavailability of secure energy supplies caused many factories and, in particular, startups to close their operations because the shortage of electricity forces these new firms to invest additional capital in purchasing a generator. Since these businesses are suffering from a lack of financial means and cannot afford to make more investments, they prefer to dismantle their firms.

Labor

Unemployment is high in Afghanistan. Around 24 percent of the labor force is unemployed, with the highest rate for young females at 47 percent. Also, extensive underemployment averaging 18 percent of the workforce for males and 41 percent for females. Only 13 percent of the working population of Afghanistan can be considered to have decent employment.

Furthermore, it is estimated that the labor market will have to accommodate an annual flow of 400,000 to 500,000 new labor market entrants over the coming 5 to 10 years. However, the human capital stock in Afghanistan is extremely low.  Decades of conflict have had a long-lasting impact on the human capital stock of the country. Despite significant improvements in school enrollment rates and educational achievement by younger (urban) cohorts, the education gap remains substantial by international standards, even when considering the country's level of development. Therefore, the lack of a highly skilled labor force is another big obstacle that has slowed the growth and progress of startups in the country.  

Internet 

It's hard to underrate the importance of internet access for any entrepreneur interested in launching a business in Afghanistan. Nowadays, the ability to conduct online marketing, communicate effectively using email, Zoom, and Skype, pursue online courses, and pick up new skills from YouTube tutorials are the norm for Afghan entrepreneurs rather than the exception. The affordability and reliability of internet services are becoming increasingly pressing issues.

The Afghan government's policies towards the telecom companies and internet service providers (ISPs) have a highly damaging impact on societal development in general and the business community in particular. The flat 10% tax on all telecom purchases has hit the industry hard. With very little profit, the telecom companies have a lower incentive to expand and upgrade services. At the same time, consumers and businesses pay much higher amounts for the internet than in other countries. For instance, one MB [megabyte] of dedicated internet costs over $100 per month in Afghanistan, while it's less than a dollar in Japan.

Conclusion

The findings suggest that startups are facing numerous challenges in many aspects. Relevant authorities in government agencies and the banking sector could address some of these obstacles through lawmaking and providing credits to startups with commercial loans with lower interest rates and a more extended repayment period in the short-term. However, other hindrances like the lack of highly skilled laborers, sustainable energy, and affordable internet services take time and could be addressed in the long term.

Recommendations:

  • The entrepreneurs should explain to the government the importance of rewriting and amending the law related to licensing registration and taxation. This will accelerate the license registration process and simplify the taxation process for startups.
  • The government can support bank credits to the startups by better coordinating with existing commercial banking institutions, expanding credit guarantees, and facilitating alternative financing methods by establishing adequate legal frameworks.
  • The government should pay necessary attention to the provinces where startups are operating. Lowering power prices would enable them to compensate for the shortage of electricity by buying a generator.
  • A curriculum development or adaptation enables the universities to provide a high-skilled labor force to meet skills for a proven labor market demand from private sector employers.
  • The government should revise the 10% tax placed on telecommunications companies. Reducing this tax would enable the telecommunications companies to provide affordable internet to the people and business sector.

 

References:

David Fox, "Afghanistan's Startup Ecosystem Report," AMR GROUP, 17-31, 2017, https://www.amr.af/wp-content/uploads/2018/02/Aghaez.-Startup-Ecosystem-Report.pdf .

Khadim Hussain Karimi, "Startup Weekend 2020 in Afghanistan: A superior idea went to international competition," Etilaatroz Daily Newspaper, May 30, 2020, https://www.etilaatroz.com/99689/startup-weekend-2020-in-afghanistan-a-superior-idea-went-to-international-competition/ SOURCE NOT FOUND

Hartwig Schafer, "End Poverty Day: A critical time to support Afghanistan's poorest," End Poverty in South Asia, October 19, 2020, blogs.worldbank.org/endpovertyinsouthasia/end-poverty-day-critical-time-support-afghanistans-poorest.

Joanna Szarek and Jakub Piecuch, "The importance of startups for construction of innovative economies," International Entrepreneurship Vol. 4, no. 2, January 2018, 69-78. https://www.researchgate.net/publication/329661558_The_importance_of_startups_for_construction_of_innovative_economies

Qais Mohammadi, Zamani Mohammad, and Mohammad Rafiq Mokhles, "Challenges Faced by Startups and Small and Medium Enterprises: A Case Study of Kabul Province," Kardan Journal of Economics and Management SciencesVol. 2, no. 4, 2019, 44-53. https://www.researchgate.net/publication/343361691_Challenges_Faced_by_Startups_and_Small_and_Medium_Enterprises_A_Case_Study_of_Kabul_Province

Sarajuddin Isar, "Taxation, the prerequisite of state-building, an overview of the tax system in Afghanistan" Afghanistan Research and Evaluation Unit, January 2020, 3-4. https://www.researchgate.net/publication/339662347_Taxation_the_prerequisite_of_state-building_an_overview_of_tax_system_in_Afghanistan_Contents

 "Afghanistan Development Update, July 2020: Surviving the Storm," World Bank, 2020, https://openknowledge.worldbank.org/handle/10986/34092

Nazeer Mohammad Rasouli is a member of the 2020/21 Young Leaders Forum.

This article has also been published in Dari by Afghanistan Today. The views expressed in this publication are those of the author and not necessarily those of Friedrich-Ebert-Stiftung.

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Afghanistan

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