Afghanistan's Struggling Private Sector: Challenges and Resilience

The Afghanistan Private Sector Rapid Survey by the World Bank reveals the severe challenges faced by businesses under the Interim Taliban Administration. The report highlights reduced international aid, economic contraction, high poverty, and restrictions on women's economic activities as key issues. Despite some stabilization, the outlook remains uncertain. This article delves into the detailed findings of the survey, exploring the operational struggles, constraints, and coping strategies of Afghan businesses.

Since the Taliban took control of Afghanistan in August 2021, the country’s private sector has faced monumental challenges. The Afghanistan Private Sector Rapid Survey (PSRS), conducted by the World Bank, sheds light on the current state of Afghan businesses, revealing a landscape marred by economic contraction, high poverty, and a myriad of operational constraints.

Recovery Amid Persistent Challenges

In 2023, about 57 percent of Afghan firms reported being fully operational, a significant improvement from the mere 28 percent in 2022. However, this recovery is fragile. Over one-third of these businesses are still operating below capacity, and 8 percent of women-owned firms are either temporarily or permanently closed. The survey highlights that the Afghan economy, which shrank by 25 percent in 2021-2022, has stabilized to some extent but remains far from robust. The projected growth of 1.4 percent in 2023 offers a glimmer of hope, yet the overall outlook remains uncertain.

Primary Business Constraints

Afghan businesses are grappling with several critical constraints. Limited functionality of the banking sector, lack of liquidity, and difficulties in accessing loans top the list. Additionally, there is a growing concern about future economic uncertainty and restrictions on women’s economic activities. Low consumer demand is another significant issue, affecting 80 percent of small and medium firms and 69 percent of large firms.

Employment Woes

Employment levels have not bounced back to their pre-crisis state. The employment gap widened slightly from -55 percent in 2022 to -58 percent in 2023, and unemployment has nearly doubled since August 2021. This situation is further complicated by the fact that 50 percent of surveyed firms now report having no female employees, up from previous years. The gender disparity in employment highlights the broader socio-economic challenges facing the country.

Banking and Financial Access

Confidence in the banking sector remains low despite some improvements. Only 27 percent of firms with bank accounts reported depositing money since August 2021. The majority of businesses prefer cash and the informal Hawala system for transactions due to the banking system's limitations. There is also a significant surge in demand for loans, with over two-thirds of firms needing financial support within the next six months to cover operational expenses. Women-owned businesses, in particular, express a higher need for loans compared to their male counterparts.

Trade and Input Challenges

Accessing both domestic and imported inputs remains a formidable challenge for Afghan businesses. Increased costs, border closures, and payment difficulties have compounded the problem. There is also a notable shift in import sources, with Pakistan and China becoming the primary suppliers.

Increased Cost of Doing Business

The cost of doing business in Afghanistan has risen due to heightened tax collection and regulatory obligations. This increase is more pronounced for small and medium-sized firms, which report greater difficulties in navigating these costs compared to larger enterprises.

Security and Corruption

Security perceptions vary among businesses. While 44 percent of firms report improvements in security, women-owned and small firms are more likely to report a deterioration. On a positive note, corruption appears to have declined, with 92 percent of firms reporting no unofficial payments or bribes.

Coping Strategies

Afghan businesses are adopting various coping strategies to survive. These include increased use of the Hawala system, reducing trade volume, and scaling back investments. Women-owned businesses are more likely to close temporarily due to business challenges, highlighting their vulnerability in the current economic climate.

The Afghanistan Private Sector Rapid Survey paints a picture of a private sector in survival mode. While there are signs of recovery and resilience, significant challenges remain. Addressing these issues requires a comprehensive approach that includes improving banking services, increasing access to finance, and creating a more supportive environment for women-owned businesses. As Afghanistan continues to navigate this period of uncertainty, the resilience and adaptability of its private sector will be crucial in shaping its economic future.