The Impact of Accession to WTO on Afghanistan’s Economy (Improvements, Reforms and Challenges)

Reza Farzam & Mahdi Frough

Volume | 003 Bochum/Kabul |2017 www.afghaneconomicsociety.org

The Impact of Accession to WTO on Afghanistan’s Economy

(Improvements, Reforms and Challenges)

Reza Farzam & Mahdi Frough

Keyword List

World Trade Organisation, Tariff Rate, Infant Industries, Access to Market, Dispute Resolution,

Revenue Loss, Business Climate, MoCI

Abstract

In July 2016, Afghanistan officially became the 164th member of World Trade Organisation (WTO).

WTO accession negotiations and post-accession commitments not only facilitate access to the

world market, but also necessitate a series of reforms domestically. Literature suggests both pros

and cons of WTO impacts on member countries depending on the type of domestic reforms taking

place and the economic condition of the member country. This paper uses both quantitative and

qualitative analyses to provide an overview of the status-quo, and measure the impact of tariff

cuts on revenue loss as well as; the impact of WTO accession on domestic and foreign trade and

investment. It also aims to provide a projection of the revenue loss for 2018 and an analysis of

the structural transformations that have taken place. Lastly, it looks at the conflict resolution

mechanism of WTO and whether Afghanistan has been able to make use of this platform. The

finding of the paper shows that tariff cuts have led to a significant amount of revenue loss, in the

medium term there will be no significant increase in the export volume due to the weak domestic

production capacity, and, if the government continues to reduce tariff rates for more items, infant

industries will not be able to compete with imported products, and be forced to downsize or shut-

down. Although a number of laws and regulations have been enacted by government along with

establishment of the WTO directorate at the Ministry of Commerce and Industries (MoCI), their

functionality and implementation is still in doubt. Lastly, in the short to medium term Afghanistan

will not be able to make use of WTO dispute resolution platform for resolving its trade disputes

due to lack of skilled lawyers and sophisticated WTO dispute resolution procedures.

Description of Data

Analysing the impact of WTO accession on the economy of a member country requires both

qualitative and quantitative data analyses. Using the secondary data available on WTO website

and with the Ministry of Commerce & Industries of Afghanistan (MoCI), this paper provides an

overview of the negotiation process and commitments. The paper also borrows from other

previous research works to better understand the concept and provide a clear picture of the pros

and cons of the accession.

For quantitative analysis, data for customs revenue is taken from Automated Systems for

Customs Data (ASYCUDA) system of Afghanistan Customs & Revenue Department (ACRD). As

part of the commitments made to WTO, Afghanistan is obliged to reduce its current tariff rates to

the WTO bound rates. In October 2017, the Ministry of Finance (MoF) reduced tariff rates for 404

items out of the planned 657 items. Using the monthly customs revenue data of this 404 items

obtained for both pre and post-tariff reduction, the paper tries to measure the loss in revenue,

calculate the exact amount of loss in revenue and forecast the revenue loss in 2018. For analysing

the accession impact on the trade as well as; domestic and foreign investment, data is taken from

the Afghanistan Development Update (ADU), published by the World Bank (WB) and Afghanistan

Centre for Business Registration (ACBR), as well as the Afghanistan Chamber of Commerce &

Industries (ACCI) 2016 Business Monitoring Survey, which includes both Business Bottleneck

Survey and Business Tendency Survey.

In order to provide in-depth contextual insights for the analysis, an update on the use of WTO

dispute resolution platform and shed light on the institutional transformation taken place as a

result of negotiation process and commitments made to WTO, a number of Key Informant

Interviews (KII) were conducted with MoCI, ACCI, ACBR and customs and revenue department

of Ministry of Finance. Interviews have been conducted with the key person responsible for WTO

matters at the Ministries and other agencies.

However, as it has only been two years since the accession, most of the commitments have not

materialized yet and the difficulty with obtaining the required data have limited the scope of the

study in terms of choice of methodology and measuring the impact of accession on different

economic parameters and variables. The study recognizes that the findings of this study will be

subject to change once all the commitments are fully materialized and further studies may enrich

the findings of this paper.

Research Question/Theoretical contextualization

Introduction

Trade is an important part of the economy. Since ancient times, countries explored exchanging

goods for the benefits of everyone. Countries trade their surplus with the products they need

domestically. In 1948, 23 member countries signed an agreement on tariff rate concession and

that marked the birth of the General Agreement on Tariffs and Trade (GATT) (WTO, 1994). Over

years, rounds of negotiation, including the Uruguay Round from 1986 to 1994, led to the creation

of the World Trade Organisation (WTO) (WTO, 1994). GATT rules and regulations were mainly

around trade in goods, while WTO agreements also covered trade in services, inventions and

intellectual property rights (WTO, 2018).

The main aim of WTO is to remove the trade barriers and make trade practices predictable and

transparent. It is a platform where WTO members can negotiate and resolve their trade disputes,

a set of documents and agreements that provide the legal ground-rules for international trade

practices to make trade flow as free as possible, and lastly, WTO offers a neutral process under

agreed set of rules for dispute resolution (WTO, 2018). WTO accession requires certain domestic

reforms to make the trade practices on par with international best practices. Different papers have

reached different conclusions based on various case studies. This paper will provide an overview

of the status-quo and the impacts of WTO accession on Afghanistan’s economy in general, and

in particular on the business environment, level of investment, trade volume, revenue gain/loss,

and infant industries.

In April 2003, for the first time, Afghanistan submitted its membership application to WTO. It took

13 years before WTO reached an agreement after several rounds of working party meetings.

Finally, in November 2015, the working party concluded the negotiations and on July 29, 2016,

after the Afghanistan parliament ratified the membership, Afghanistan became the 164th member

of WTO (WTO, 2018). The membership entails certain commitments related to domestic reforms,

reduction in tariff rates, trade negotiations, cutting agricultural subsidies and opening the

economy. Obviously, not all the commitments have materialized in the past one and a half years

which impacts assessments of WTO accession, but this paper will provide the status quo of these

commitments and also shed light on the positive-negative impacts of the commitments which

have been implemented. The paper also tries to quantify and analyse the future possible

implications of WTO accession.

Overview of Afghanistan’s commitment to WTO

Accession to WTO means facilitation of Afghanistan access to the world market along with

legislation-based domestic reforms in trade practices. WTO related domestic reforms often results

in improvement in the domestic standards, attraction of foreign investments, creation of more jobs

and improvements in the economic welfare of the people. Below are the main commitments

Afghanistan has made to WTO as part of its membership. These commitments are both

highlighted in the working party report of Afghanistan and overview of Afghanistan commitments

(WTO, 2018).

- Afghanistan will no longer apply other duties and charges, except for the 0.2% Red

Crescent Tax, which will be eliminated within 15 years from the date of accession.

- The 3% and 2% fixed tax applied on imports will be eliminated prior to 1 January 2021.

- The Business Receipts Tax (BRT) applied on imports will be replaced with the Value

Added Tax (VAT) no later than prior to 1 January 2021.

- Afghanistan will improve trade and investment climate by eliminating tariff restrictions or

other non-tariff measures on imports and will not introduce them again.

- Afghanistan will eliminate its import prohibition on gypsum, cotton seeds, anhydride, table

salt, powdered salt, and plasters.

- In conformity with the relevant WTO Agreements, for protection of domestic production

and advancing national interests, Afghanistan will apply commercial policy measures as

per its legislation.

- Afghanistan will eliminate all duties, taxes, fees and charges applied to exports which are

not in conformity with Article VIII of the GATT 1994. The 2% fixed tax on exports will be

eliminated prior to 1 January 2021 Domestic Reforms, legislation, institutions.

- Afghanistan will not introduce or maintain prohibited subsidies.

- Afghanistan will bind agricultural export subsidies at zero.

- Full implementation of the Technical Barrier to Trade (TBT) Agreement will start from 1

January 2018.

- Full implementation of the Sanitary and Phytosanitary (SPS) Agreement will start from 1

January 2020.

- Any free zones or special economic areas established in Afghanistan will be administered

in compliance with WTO provisions.

- Within one year from accession, Afghanistan will start the negotiations on joining the

Agreement on Government Procurement.

- Full implementation of the Trade-Related Intellectual Property Rights (TRIPS) Agreement

will start no later than 1 January 2019.

- Afghanistan will eliminate the requirement of giving priority to domestic suppliers by mining

and hydrocarbon operators post 1 January 2021.

- Afghanistan will implement the transparency provisions detailed in the WTO Agreements

which obliges Afghanistan to notify on changes and new rules and regulations and publish

them.

- To ensure transparency, all laws and regulations regarding the application and level of

fees and charges imposed by Afghanistan in connection with importation and exportation

will be published by the MoCI in a single location or website.

- Afghanistan will provide reports to WTO Members on developments in its privatisation

programme, as long as the programme is in existence.

- Afghanistan will no longer apply anti-dumping, countervailing or safeguard unless it is in

conformity with appropriate laws and provisions of the relevant WTO Agreements.

Overview of Afghanistan Economy

Afghanistan economy traditionally has been an agrarian economy. A major part of the production

is wheat, and more generally cereals, produced for domestic consumption (CSO, 2017). Some

diversification has been achieved with the production of other crops and vegetables, including

raisins, almonds and dried fruits that generate income from exports. Industry is still largely at its

infant stage, based on resilient small-scale handicraft activities, notably rug weaving, and modest

exploitation of mineral resources. Services are largely underdeveloped, a main example coming

from the financial sector where most of the services are provided by informal dealers, the

‘Hawalas’ (CSO, 2017). However, recently service sector has picked up and constitutes the

largest share of GDP. Another significant part of the informal economy comes from smuggling

goods into neighboring countries. But its main component is the drug economy, from poppy

culture to opium and heroin trafficking.

In the past decade, the economic growth was mainly driven by foreign aid. After drawdown of

foreign troops, foreign aid and security expenditure fell down and the economy experienced an

all-time low growth rate of 1.1 percent in 2015 (World Bank, 2015). Since 2015, economic growth

has increased modestly and in 2016 the growth rate was 2.2 percent. This has been projected to

edge up to 2.6 and to 3.2 percent in 2017 and 2018 respectively (World Bank, 2017).

Lack of confidence from the business community and private sector still appears to be the main

bottleneck ahead of economic growth. Across the country security conditions continues to

deteriorate and it holds back private sector from investing. In the past two years, domestic

revenue collection has improved significantly due to reforms in the customs and new tax

measures by the Ministry of Finance (Byrd & Payenda, 2017). But still domestic revenue is not

enough to finance the operating expenditure of the government. Since the commitments of

Warsaw and Brussels conferences will end by 2019-20, a fiscal cliff can be expected in terms of

financing both the development and operating expenditures of the government.

Inflation remains vulnerable to the neighbouring countries price shocks due to huge imports.

Exchange rate continues to depreciate and is expected to depreciate even more post-2020 as

the foreign aid will drop significantly. Unemployment remains a major obstacle given that each

year 400,000 new entrants are adding up to the workforce (World Bank, 2017).

Overview of Trade Performance in Afghanistan

Given the current development scenario and projections in the face of drops down in foreign aid,

the Afghan government must look to alternative avenues for boosting and sustaining economic

growth. Alongside development of extractive industries, making Afghanistan a cross-road for

transits between Central Asia and South Asia, and promotion of trade-driven growth scenario

through production of labour intensive goods are other plausible development roadmaps for

Afghanistan. However, huge trade deficit in the past two decades has limited the horizon of hope

for a trade-driven growth scenario. In 1395 Afghanistan exported a total amount of USD 596.5

million and imported USD 6.5 billion worth goods and services (CSO, 2017). Given that

Afghanistan economy is an agrarian economy and most of the exports are agricultural based

goods, no significant increase in exports can be expected in the near future. World Bank in a

report on trade as a vehicle of growth in Afghanistan identifies limited production capacity and

high concentration of exports and imports in terms of the number of products and destination

countries as the main barriers for trade enhancement (World Bank, 2017).

Research Questions

Afghanistan remains a landlocked, war-torn, and aid-dependent economy that suffers from

political infighting and a deteriorating security situation. However, advancement on trade reforms

is a stepping-stone for improving the lives of the Afghan people both politically and economically.

A vibrant and freer trade environment can help Afghan businesses bounce back and integrate

into the global economy. With such a spirit, the Afghan government joined WTO to access the

global market. Below are some of the main arguments in favour and against WTO accession.

Positive Impacts of accession to WTO

- Dispute resolution: WTO offers a platform to resolve the trade and transit-related

disputes;

- Access to Lower input costs by local businesses and infant industries;

- Equal Treatment and Free Market: With accession to WTO, Afghan traders can access

the world market with lower tariff rates and better terms of trade.

Negative Impacts of accession to WTO

- A Threat to Infant Industries: Industrialization in Afghanistan is at its initial stages. Infant

industries can’t compete with the giant neighbouring industries. To support infant

industries, Afghanistan should apply protectionism policy through implying high tariff rates

and providing subsidies. But due to WTO membership, Afghanistan must reduce its tariff

rates and can’t provide subsidies also. Thus, infant industries could suffer in competition

with foreign industries and might be forced to shut-down or downsize which will increase

unemployment.

- The Loss in Revenue: Afghanistan has a weak base for domestic revenue collection.

The budget of the country is mostly dependent on foreign aid (domestic revenue can’t

even finance the operating expenditure). Due to joining WTO, the country can’t apply high

tariff rates on imports and might have to even reduce tariff rates for some goods, which

will cause revenue loss.

- End of Subsidies for Agriculture: WTO obliges Afghanistan to decrease agricultural and

industrial subsidies, which could lead to negative impacts on exports and farmers

production due to tough price competition from foreign competitors.

Objective of the Study

This study is meant to do a post-accession analysis. Specifically, the study tries to shed light on:

- The reforms that have taken place after accession to WTO;

- The loss in revenue collection from particular revenue lines due to reduced tariff rates;

- Descriptive analysis of the gain and loss in imports and exports volume;

- Challenges faced by infant industries and traders as result of reduced tariff rates;

- Institutional and legal transformations prior and post-accession of WTO.

Field research design/ Methods of data gathering/ Methodology

Analytical framework

The paper mostly uses secondary data for analysis and both qualitative and quantitative methods

are used to answer the underlined questions. The following explains step by step methodology of

the paper:

- A thorough literature review of the topic: Literature review includes the study of past

research works and documents available on WTO website, and documents available with

the Ministry of Commerce and Industries (MoCI) of Afghanistan. Literature review provides

details on the current economic and trade practices of Afghanistan and the steps taken

for improvements in the business and trade environment, as well, an overview of the

commitments made to WTO and the macro-fiscal policy measures taken with regards to

accession to WTO.

- Data collection and data cleaning: Monthly data for custom revenue of 404 items have

been collected from customs and revenue department of MoF. Government has reduced

tariff rates for these 404 items due to WTO commitments1. Total import and export data

has been taken from Central Statistics Organisation (CSO) (CSO, 2017), and domestic

revenue data has been taken from Revenue Trend Analysis System (RTAS)2. Also for the

better understanding of the investment and trade climate data has been taken from 2016

ACCI Business Monitoring Report.

- Descriptive Analysis: For data cleaning and descriptive analysis, STATA has been used.

Quantitative Analysis

- ARIMA Model: To understand if tariff-cut for 404 items have led to a significant revenue

loss for customs revenue, the Auto-Regressive Integrated Moving Average (ARIMA)

mixed model is used. ARIMA model has been also used to forecast the revenue loss in

2018 due to tariff reduction for 404 items.

Technical Note on ARIMA Model

For forecasting the revenue collection and determining the magnitude of revenue loss, ARIMA

(0,1,1) is used. The specifications of the model have been chosen on the basis of lowest Akaike

Information Criterion (AIC) and the Bayesian Information Criterion (BIC), which measures the

1 Frough, Mahdi & Revenue & Customs Department. (2017) Customs Revenue Data 2 The data on domestic revenue has been accessed on 08-01-2018 from Revenue Trend Analysis System which is not available publicly.

goods fit of the model. Below are the mathematical representations of the model used for

forecasting the monthly customs revenue.

ARIMA(𝑝, 𝑑, 𝑞) = (0,1,1)

𝑥𝑡 = 𝑋𝑡 − 𝑋𝑡−1 -- 1

𝑥(𝑡) = 𝐵(1) ∗ 𝐸(𝑡−1) + 𝐸(𝑡) -- 2

In total 657 items were identified having higher tariff rates than WTO bound rates. Finally, in

October 2017 (Mezan – 1396), tariff rates were reduced for the 404 items. After cleaning the

data and authors calculations, it was found that out of these 404 items, only 184 of them are

imported to Afghanistan. This calculation is based on the data for the period of January 2016

(Jadi 1395) to November 2017 (Aqrab 1396). Some of the items are only imported in one specific

month of the year. The same period is considered for this study which contains 23 data points.

The reduction in tariff rates took place in the month of October 2017 (Mezan 1396), which means

that 21 data points are prior to the impact with higher tariff rates and two data points are after

tariff reductions.

Qualitative Analysis

Key Informant Interview (KII): 10 KII have been conducted with the key persons at MoCI, MoF

and ACCI. Interviews were conducted to better understand the context and discuss the impact

of accession to WTO on infant industries and volume of trade and investment, also highlight the

institutional and legal changes taken place and WTO dispute resolution mechanism and how

MoCI has made use of the platform.

Tool Interviewee Quantity

KII MoCI 4

KII ACCI 3

KII Ministry of Finance 3

Analysis and Results

After formally joining WTO on July 29, 2016, Afghanistan created the opportunity to access the

world market with better terms of trade. In particular its WTO membership has created a number

of significant benefits, such as finding a forum for trade and transit disputes resolution, and an

opportunity for Afghanistan to become a transit route between Central and South Asian countries,

also gain access to the world market for its exports, and enjoy the reduced level of trade barriers.

After rigorous study, the paper provides a thorough analysis of each of these components to see

how Afghanistan has benefited from its WTO membership.

WTO Accession Impact on Trade and Fiscal Responses

Reducing trade barriers are essential for accession to WTO and integrating into the world

economy. High tariff rates are considered to be the biggest trade barrier. Afghanistan, due to

accession commitments, has reduced tariff rates for 404 items in October 20173. This will have

two major implications for Afghanistan. Initially, Afghanistan will lose customs revenue, and in the

medium term, the import volume might pick-up to compensate for the revenue loss. Some

countries have combined tariff reduction with other fiscal policy measures to account for the

revenue loss. These policy measures could be increase in consumption taxes or enhancing tax

base to account for revenue loss. But in the case of Afghanistan, no such fiscal policy measure

has been taken. The magnitude of tariff cut impact on revenue loss also depends on the

magnitude of reduction in applied duties, the elasticity of import volumes to the duty rates and the

relative importance of customs revenue in overall domestic revenue.

In this section, the paper explores if there has been a significant loss in customs revenue due to

tariff cut. Additionally, the paper calculates the magnitude of revenue loss and provides revenue

loss projections for 2018.

Role of Customs Revenue in Overall Domestic Revenue

A significant portion of Afghanistan national budget is financed by foreign aid. By 2021, the foreign

aid will reduce significantly and Afghanistan will have no option but to look for alternative avenues

to finance the budget. An increase in domestic revenue is one important option. In the past three

years, Afghanistan domestic revenue has surpassed the targets set by International Monetary

Fund (IMF) and achieved a new milestone. In 2017 (1396 fiscal year), Afghanistan has collected

a total amount of 169.1 billion Afs showing 10.1 percent increase over 2016 total revenue of 153.4

billion Afs4. Until 2016, customs duty and fees revenue was the second highest source of revenue

after tax revenue. Currently, it is the third largest source of domestic revenue after tax and none-

tax revenues. In 2017, customs duty and fees revenue constitutes 18.8 percent of the total

domestic revenue. The figure below describes the historical composition of Afghanistan domestic

revenue. Social contribution and the sales of none-current asset have been taken out of the chart

due to its minimal contribution to overall domestic revenue.

3 Frough, Mahdi & MoCI, MoF. (2017) Understanding the WTO Affairs 4 Domestic revenue data has been taken from Revenue Trend Analysis System (RTAS)

Fig 1: Afghanistan Domestic Revenue Composition

Source: RTAS System of Customs and Revenue Department, Ministry of Finance

Given that customs revenue constitutes a significant portion of the domestic revenue, a major

loss in the customs revenue will have a huge negative impact on fiscal sustainability of the

government. As part of accession commitments, Afghanistan has reduced tariff rates for 404

items, out of which Afghanistan has imported only 184 items in the years 2016 (1395) and 2017

(1396). This paper uses Autoregressive Integrated Moving Average (ARIMA) model to find if there

has been significant amount of revenue loss due to tariff cuts. Using ARIMA model, the paper

also forecasts revenue collection in 2018 to determine the exact amount of revenue loss in 2018.

Before doing the forecasting using ARIMA model, it is important to determine the specifications

of the model and make sure the data is stationary.

Stationarity: The data used for forecasting consists of two years monthly customs revenue data

for 184 products. To determine the stationarity of the data, Augmented Dickey-Fuller test is used.

In the table below it can be seen that, the first difference of the data is stationary and the paper

shall use the first difference of customs revenue for forecasting.

Table 1: Checking Stationarity of the Data

Original Variable First Difference of the Variable

With zero lag With 1 lag With zero lag With 1 lag

Test stat -2.200 -2.064 -5.233 -3.415

P–value 0.2062 0.2590 0.0000** 0.0105**

Conclusion Variable is not

Stationary

Variable is not

Stationary

Differenced variable

is Stationary

Differenced variable

is Stationary

0,00

20.000,00

40.000,00

60.000,00

80.000,00

100.000,00

120.000,00

140.000,00

160.000,00

180.000,00

1385 1386 1387 1388 1389 1390 1391 1392 1393 1394 1395 1396

Achsentitel

Afghanistan Domestic Revenue Composition

Miscellaneous Revenue

None-Tax Revenue

Custom Duty & Fees

Tax Revenue

Total

Two other important specification of ARIMA model are about selecting the orders of

autoregressive (AR) and moving average (MA) components. After taking the first difference, the

data looks like white noise. AR and MA are two kinds of the deviations that can be seen in the

white noise process.

Several models were run with different orders of AR and MA, and on the basis of the lowest

Akaike Information Criterion (AIC) and the Bayesian Information Criterion (BIC) which measures

the goods fit of the model, the ARIMA (0,1,1) was chosen as the best fit. This model basically tells

that the first difference value of the variable is related to the residual up to one previous period.

In the table below we can see the outcome of the ARIMA model with different orders.

Table 2: Result of ARIMA model with different orders of AR, MA

These values were obtained using STATA. In the table one * indicates that the value is significant

at 10 percent confidence level and ** indicates that the value is significant at 5 percent confidence

level. From the above table, it is clear that two scenarios ARIMA (0,1,1) and ARIMA (2,1,2)5 are

two best fits for forecasting.

The following table shows that MA first order is significant at 5 percent confidence level.

Table 3: ARIMA (0,1,1) Regression Result

Sample: 2016m2 – 2017m9 Number of obs = 20

Wald Chi2(1) = 6.69

Log likelihood = -81.69716 Prob > chi2 = 0.0097

D.customduty Coef. Std. Err. z p>|z| [95% Conf. Interval]

Customduty_cons 1.73 0.40007 4.32 0.000 0.9487 2.5170

Ma_L1. -1.0 0.38666 -2.59 0.010 -1.7578 -0.2421

5 Although ARIMA (2,1,3) has a lower AIC & BIC compare to ARIMA (2,1,2), but since the difference is not much, preference goes with lower orders of AR and MA.

ARIMA

(1,0,1)

ARIMA

(1,0,0)

ARIMA

(2,1,3)

ARIMA

(2,1,2)

ARIMA

(2,1,1)

ARIMA

(1,1,1)

ARIMA

(0,1,1)

ARIMA

(1,1,0)

ARIMA

(2,1,0)

Const. 73.58 73.84 1.57** 1.60** 1.67 1.67** 1.73** 1.26 1.34

L1. AR .61 .49** -1.39** .92* .19 .19 -.37* -.41

L2. AR -.40 -.41 -.01 -.13

L1. MA -.15 0 -1.97** -.99 -.99 -1.00**

L2. MA .36** .90

L3. MA .60

AIC 180.2 178.4 169.6 169.8 172.7 170.7 167.3 173.1 174.7

BIC 184.4 181.5 174.6 174.8 177.7 174.7 169.3 176.1 178.7

Based on the specified model, below is the forecasted graphs for months of October and

December (Mezan & Qaws) along with the actual revenue collected in the same months.

Fig 2: ARIMA (0,1,1) Model Forecasting

From the above graph, it can be clearly seen that, in the months of October and November when

the tariff rates got reduced there is a huge gap between the forecasted value and actual custom

duty collection by customs. Based on the static model forecasting, the exact amount of loss in

revenue turns out to be 100 million Afs in just two months in 2017.

Forecasting the Revenue Loss in 2018

To determine the total revenue loss in 2018 due to tariff cut for 404 items, two different

scenarios are used to forecast the revenue collection in 2018.

1. If tariff cuts were not applied, what would have been the total revenue collection in 2018

from these 404 items? The base for this scenario is the historical monthly revenue

collection up to October 2017.

2. In the second scenario, the base for forecasting also includes the months of October and

November when the tariff rates were reduced.

Fig 3: Forecasting Revenue Collection in 20186

Clearly, it can be seen that as a result of reduction in the tariff rates, customs revenue will fall

significantly. Based on the model prediction the total difference in the revenue collection between

both the scenarios turns out to be Afs 455.3 million in 2018 (1397 fiscal year). Another plausible

implication of tariff cuts could be an increase in the volume of imports and exports in the medium

term, which will partially compensate the loss in revenue. Obviously, this will need further study

in the future after passage of significant amount of time. However, an increase in exports requires

increased capacity of domestic production and foreign and private investments.

Fig 4: Afghanistan Export and Import Volumes

Taking a look at the total export and Import

volume, in the past three years the import

volume has fallen and exports are more or

less steady. The total volume of exports

remain way below imports level and in the

medium to long run, there is no expectation

of gauging the gap.

6 While forecasting values for 2018, for forecasting based on the customs revenue data up to Nov. 2017, ARIMA (1,1,1) was the best fit. For data up to Sep. 2017, same as before ARIMA (0,1,1) was used.

-

100.000,00

200.000,00

300.000,00

400.000,00

500.000,00

600.000,00

700.000,00

-

1.000.000,00

2.000.000,00

3.000.000,00

4.000.000,00

5.000.000,00

6.000.000,00

7.000.000,00

8.000.000,00

9.000.000,00

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Afghanistan Export and Import

Import Export

Impact of accession to WTO on foreign investment and infant industries

Accession to WTO apart from other potential benefits, also improves the prospects for attracting

foreign direct investment (FDI) and improves the doing business indicators through reduced trade

barriers, enactment of new legislations and increased support for private sector. Afghanistan

remains an unfavourable destination for foreign investors mainly due to infrastructural and

security issues. However, in the past few years, the level of FDI and private investment have

decreased significantly.

Taking new firm registration as the proxy variable for private investment, the Afghanistan Centre

for Business Registration (ACBR) data shows that, in the past 5 years annually, the number of

new firm registration has dropped from approximately 8000 new firms registration to 3500 (Negah,

Alishiryan & Parwanfar, 2017).

Fig 5: Level of FDI Fig 6: ACBR Business Registration

Source: World Bank Data Source: Afghanistan Development Update

– April 2017 by World Bank

Although the number of new firm registration might not capture all the information related to

private investment but surely is a good proxy for investment when there is lack of comprehensive

data. The level of FDI also remains significantly low as the percentage of GDP, in 2016 it was

only 0.51 percent (World Bank, 2016). Given that accession to WTO will improve the investment

environment in the medium term, it is too early to derive any conclusion. However, deteriorating

security condition, harsh environment for doing business and limited domestic production capacity

will undermine the impact of accession to WTO on surge in investment and export volume. ACCI

in its 2016 Business Monitoring Survey finds that security condition has worsened for most of the

businesses and 59.2 percent of the respondents of the survey, state security risks have worsened

for their business operations (Fig. 9).

0

20000000

40000000

60000000

80000000

100000000

120000000

140000000

160000000

180000000

2012 2013 2014 2015 2016

Level of FDI

Fig 7: Security Risks for Business

ACCI survey also highlighted infrastructure

problems as the main barrier for business

operations. In 2016, 71.7 percent of the

respondents stated infrastructural problems

affected their business operations and power

shortage has been stated as the biggest issue

for all the sectors (Negah, Alishiryan &

Parwanfar, 2017). Complexity of tax system

and participation in public tenders due to

unclear and arbitrary procedures were also the

biggest challenges for businesses in 2016

(Negah, Alishiryan & Parwanfar, 2017). Availability of qualified labour and business registration

are the least impediment for business owners as per ACCI survey (Fig. 10).

Fig 8: Afghanistan Business Climate Condition

Source: Afghanistan Business Monitoring Survey – 2016 by ACCI

Given the harsh environment for the private sector, further reduction in tariff rates due to

accession of WTO, will hamper the private sector and force them to downsize or shut down. In

turn Afghanistan will lose more in terms of production capacity and export capacity, leading to

increased trade deficit.

71,7

63,6 62,2

52,8 51,147

28,3 26,1

52,8

68,2

60

35,9

43,5

11 11,7

35

5146

42,236

11,1

23,6

Infrastructure Tax System Public TenderProcedure

Tariff System Access toLand

Access toFinance

BusinessRegistration/

Extension

QualifiedLabor

Afghanistan Business Climate,Percentage of Respondents Stated the Following as a Problem for their

Businesses

2016 2015 2014

Structural Reforms and Institutional Transformations

The structural reforms, enacting new laws and updating old laws, as well as, use of technology

and upgrading systems at customs fall at heart of Afghanistan’s accession to WTO commitments.

These reforms will allow Afghanistan to remove trade barriers and integrate with the world trade

community. Afghanistan to reap the benefits and opportunities provided through accession to

WTO, has established a directorate at MoCI with the following structure7.

The directorate at MoCI is responsible

to oversee the affairs related to WTO.

These responsibilities specifically

include ensuring the implementation of

all the commitments made to WTO and

devising appropriate policies for

reaping the full benefit of accession to

WTO.

Afghanistan customs and revenue

department now uses Automated

Systems for Custom Data (ASYCUDA)

for recording trade and custom transactions. The system has helped Afghanistan to increase its

domestic revenue and reduce corruption at the customs. Also, as part of the negotiation package

Afghanistan has committed to join the Information Technology Agreement (ITA) upon accession,

which obliges the member countries to eliminate all the duties for IT products included in ITA

agreement (WTO, 2018). In the financial sector, Afghanistan has committed that there will be no

market access limitation on commercial presence of specialized banks and internationally reputed

banks in terms of accepting deposits and other repayable funds from public (WTO, 2018).

However, Afghanistan will have the right to impose limits on the amount of money that can be

transferred.

As part of the accession negotiations, Afghanistan has also finalized a list of new laws with the

technical support of Afghanistan Trade & Revenue (ATAR) project – funded by the United States

Agency for International Development (USAID). A complete list of these new laws are attached

in the annex-1(Chemonics International, 2014). These laws are believed to attract foreign and

domestic investment and improve the business climate. However, doubts remain over the

implementation and enforcement of these new regulations. Even after the establishment of WTO

directorate at MoCI, documents related to WTO accession, updated information related to WTO

7 Farzam, Reza & MoCI. (2018) Structural Reforms and Institutional Changes

WTO Director

Head of Information and Awareness

Head of Trade Dispute Resolution

Head of Access to Markets

WTO Affairs Secretariate

affairs are not available on MoCI website. Therefore, doubts also cast on the performance of WTO

directorate at MoCI.

Dispute Settlement

In a multi-trade environment when both the countries are member of WTO, often situation arises,

where one member country believes another member country is violating a commitment or

agreement made to WTO, in this situation dispute arises. For this purpose, WTO has established

a body and a set of procedure to settle members trade related disputes. Below is the conventional

procedure for settling the disputes.

Time Stages

60 days Consultation, Mediation, etc

45 days Panel set-up and panellists appointed

6 months Final panel report to parties

3 weeks Final panel report to the WTO members

60 days Dispute settlement body adopts the report (if no appeal)

(Without Appeal)

60-90 days Appeals report

30 days Dispute settlement body adopts appeals report

Source: WTO website

Under the WTO rules and regulations countries easily can access the world market with lower

tariff rates and reduced barriers. WTO dispute resolution body ensures member countries

commitments enforcement and adherence to its rules and procedures. Afghanistan under the

WTO directorate at MoCI has established a small department to work on dispute settlement

issues. However, during the interviews with MoCI staff, it was found that, Afghanistan has never

used this platform for dispute settlement and will not be able to make use of it in the medium term.

This is because, MoCI lacks professional lawyers and WTO dispute settlement procedures are

complex8.

8 Farzam, Reza & MoCI. (2018) Understanding the Dispute Resolution Efforts by MoCI through WTO

Discussion & Conclusion

The main purpose of this paper was to find Afghanistan’s accession to WTO impacts on the

economy. In particular, the paper assessed the tariff cuts impact on customs revenue loss and its

implications for infant industries. In addition, the paper determines Afghanistan’s potential for

using WTO trade resolution platform and evaluates the structural and institutional reforms taken

place due to WTO accession negotiations and post-accession commitments.

The paper uses both primary and secondary data for analysis. Data analysis entails desk study

of all the available previous research works and both qualitative and quantitative analyses of

primary and secondary data collected through interviews and from Afghanistan Customs and

Revenue Department. For descriptive analysis, ACCI Business Monitoring Survey and WB

Afghanistan Development Update reports were used. Additionally, as part of the quantitative

analysis, ARIMA model was used for forecasting the revenue loss.

The paper finds that Afghanistan has lost a significant amount of revenue due to tariff cut for the

404 items. The difference in forecasting revenue collections based on the previous and reduced

tariff rates shows that, Afghanistan will lose a total amount of Afs 455.3 million in 2018. Should

Afghanistan implement abolition of customs fixed taxes and business receipt taxes, without

considering appropriate fiscal policy measures, the loss in revenue could increase to billions of

Afs. The paper also suggests that in the medium term there won’t be a significant increase in

exports. This is because of the weak production capacity at home and unfavourable business and

trade environment. Hence, exports will not be able to compensate for the loss in revenue due to

tariff cuts.

Furthermore, MoCI has created the WTO directorate to oversee the implementation of

Afghanistan’s commitments to WTO. In addition, MoCI with the technical support of Afghanistan

Trade and Revenue project has enacted 27 new laws and regulations for the smooth operation

of trade and businesses. However, the functionality of the directorate and implementation of these

laws are still a matter of doubt. Although, within the structure of WTO directorate at MoCI, there

is a department which oversees the issues related to trade dispute resolutions, but to date, given

the huge trade problems with Pakistan, MoCI has not attempted to make use of WTO dispute

resolution platform. It is also expected that in the medium term due to lack of qualified lawyers

and sophisticated dispute resolution procedures of WTO, MoCI will not be able to make use of

the dispute resolution platform of WTO.

References

World Trade Organisation. (1994). WTO | Final Act Embodying the Results of the Uruguay

Round of Multilateral Trade Negotiations, 1867 U.N.T.S. 14, 33 I.L.M. 1143 (1994) [hereinafter

Final Act].

World Trade Organization. (2018). WTO | What is the WTO?. [online] Available at:

https://www.wto.org/english/thewto_e/whatis_e/tif_e/fact1_e.htm].

World Trade Organisation. (2018). WTO | Afghanistan Accession [online] Available at:

https://www.wto.org/english/thewto_e/acc_e/a1_afghanistan_e.htm].

World Trade Organisation. (2018). WTO | Overview of Afghanistan’s Commitment. Available at:

https://www.wto.org/english/news_e/news15_e/afgancommitmentsmc10_e.pdf].

Central Statistics Organisation. (2017). CSO | Gross Domestic Product by Economic Activity in

Current Price 2002 – 2017 [online] Available at: http://cso.gov.af/en/page/ict/11328/888].

World Bank. (2017). WB | Afghanistan Development Update, November 2017. [online] Available

at: https://openknowledge.worldbank.org/handle/10986/28928 License: CC BY 3.0 IGO

Byrd, Bill & Payenda, M Khalid. (2017). Afghanistan Analysts Network | Afghan Government

Revenue Continues to Grow: A Bright Spot in a Weak Economy. [online] Available at:

https://www.afghanistan-analysts.org/afghan-government-revenue-continues-to-grow-a-bright-

spot-in-a-weak-economy/].

Rocha, Nadia. (2017). World Bank | Trade as a Vehicle for Growth in Afghanistan: Challenges

and Opportunities. [online] Available at:

http://www.worldbank.org/en/country/afghanistan/publication/trade-as-a-vehicle-for-growth-in-

afghanistan]

Central Statistics Organisation. (2017). CSO | Annual Trade. [online] Available at:

http://cso.gov.af/en/page/economy-statistics/6323/annual-trade].

Negah, Younus, Alishiryan, Neamat Ullah & Parwanfar, Masood. (2017) ACCI | Business

Monitor 2016. [online] Available at:

http://www.acci.org.af/media/Business%20Climate%20Monitor%202016%20English%20version

.pdf].

The World Bank Data. (2016). WB | Foreign Direct Investment, Net Inflows (% of GDP), [online]

Available at https://data.worldbank.org/indicator/BX.KLT.DINV.WD.GD.ZS?locations=AF].

Chemonics International. (2014). USAID | Afghanistan Trade and Revenue (ATAR) Project,

Quarterly Report for November-December 2013. Contract No. ID-OAA-I-12-00035 and Order

No. AID-306-TO-13-00009].

Annex – 1

The following list of laws and new regulation has been obtained from USAID report on Afghanistan

Trade and Revenue Project (ATAR) and confirmed by MoCI officials.

1. Amendments to the 2005 Customs Law

2. Procedure on Customs Valuation (including interpretative notes and software and interest

charge valuation)

3. Law on Standards and Technical Regulations

4. Law on Plant Projection and Quarantine

5. Law on Animal Health and Veterinary Public Health

6. Law on Food Safety

7. Procedure on Customs Control of Intellectual Property Rights (Intellectual Property Border

Enforcement

8. Amendments to the Law on Supporting the Rights of Investors and Discoverers of 31 April

2009 (Patents Law)

9. Amendments to the Law on Trademarks of 1 September 2009

10. Amendments to the Law on Supporting the Rights of Authors, Composers, Artists, and

Researchers of 26 July 2008 (Copyright Law)

11. Law on Geographical Indications

12. Law on Industrial Designs

13. Draft Amendments to the Commercial Code

14. Law on Protection of Trade and Industry Secrets (undisclosed information)

15. Law on Topography of Integrated Circuits

16. Law on Consumer Protection (provisions on Unfair Competition)

17. Law on Plant Variety Protection

18. Amendments to the Law on Publication and Enforcement of Legislation of 1988

19. Amendments to the Regulation on Drafting Procedure and Processing of Legal Acts

20. Law on Foreign Trade in Goods

21. Procedure on Imports and Export Licensing

22. Procedure on Customs Storage Fees

23. Regulations of production and importation of medicines and medical equipment of 24

February 2007 (concerning fees)

24. Income Tax Law (concerning unequal treatment of import tax)

25. Law on Safeguards Measures for Domestic Protection

26. Value Added Tax

27. Law on Minerals

Annex – 2

Details of Revenue Collection Means at Customs

Codes Type of tax collected

Percentage Basis for taxation انواع مالیه

041 Tariff rate محصول گمرکی Based on HS code system calculates

Cost of product + freight

042 Fixed Tax ثابت مالیه 2% For licenced businesses 2% from cost of product + freight + tariff amount For un-licenced businesses it will be 3%

043 Red Cross Tax

tax is calculated from % 2 %2 سره میاشتthe tariff amount collected

044 Reserve Reserve Reserve Reserve

045 Other Custom Taxes

سایر عوارض گمرکی

As per the guidelines

Generally 1 afs is charged for each litter of oil gets imported in some custom offices

046 Fines جریمه As per the guidelines

047 Tax on Profit (BRT)

+ As per guidelines 4% from custom value مالیه انتفاعیtariff amount

049 Electronic Paper Fees

الکترونیکی فیس و پول اوراق

بهادر

System will calculate

200 Afs for each form, and additional charges for additional paper used