Boom To Bust: Kabul’s Economic Bubble Bursts

Via The Wall Street Journal, a look at the struggles of the Afghan economy in light of the international troop drawdown:

One of few employees left works in the factory building where a company once churned out home décor items for foreigners living in Kabul.

Afghans voting in Saturday’s presidential election have more than a revitalized Taliban insurgency to worry about. The country’s bubble economy is bursting as the coalition’s mission winds down, aid shrinks and the foreigners leave.

Dealing with this downturn will be a major challenge for the country’s next leader, either former foreign minister Abdullah Abdullah or ex-World Bank official and finance minister Ashraf Ghani.

The crisis is already evident for Hassina Sherjan, who returned to Afghanistan after the Taliban’s downfall to help develop her homeland. A decade ago she launchedBoumi Co., a home décor firm that she hoped would employ hundreds of Afghans.

Now rows of sewing machines sit idle in Boumi’s large warehouse on the outskirts of Kabul. The company halted production last month and laid off all but a few of its workers. “When you don’t make money, you can’t pay salaries,” sighed Ms. Sherjan, who lived in Washington, D.C., before returning to Afghanistan.

Boumi’s tale is emblematic of Afghanistan’s plight, as the foreigners who used to be Ms. Sherjan’s main customers leave the country in droves amid intensifying attacks, and the U.S. combat mission ends this year.

Economic reform and growth were supposed to be a prime legacy of the U.S.-led effort at nation-building here. But the benefits accrued mostly to Afghan businesses geared toward meeting the temporary demand created by foreigners, rather than to those aimed at Afghan customers. Construction and logistics firms flourished, with the U.S. alone spending nearly $100 billion on reconstruction and development projects.

The waiter waits for customers in the empty Design Cafe in Kabul.

Many of the private companies that sprouted here since the U.S. invasion are, like Boumi, unable to survive without the influx of foreign money that had sustained them for the past decade—and they face a bleak future now that the spigot is closing.

“It’s an artificial economy,” said Khan Afzal Hadawal, the first deputy governor of the country’s central bank, Da Afghanistan Bank.

Wallowing in aid dollars, the country saw years of double-digit growth until 2012. But now, the economy has slowed down dramatically and overall investment has virtually halted, entrepreneurs and Afghan officials say.

Afghanistan’s GDP growth in 2013 fell to 3.6% from 14.4% the year before, according to the World Bank. This year, the bank predicts growth will slow further to 3.2%.

“There are about 5,000 construction companies. They invested a lot, they bought machinery and worked on capacity building. But now, there are no projects,” said Muhammad Qurban Haqjo, until recently head of Afghanistan Chamber of Commerce and Industries.

Mr. Haqjo said the international community pumped money into priority sectors such as construction, logistics and telecommunications, creating the first signs of a middle class. But the establishment of a genuine private sector that can create revenue for the government remains elusive, he added.

“That requires a strong government that has a political will to do that,” Mr. Haqjo said.


Even some of the country’s businesses that have been most successful in the domestic economy will have to wean themselves off aid money.

Take, for instance, Moby Group, the owner of Tolo, the country’s most popular television channel.

While around 85% of Moby Group’s income comes from commercial revenues, about 10% to 15% comes from commercials and public-service programs sponsored by donor-funded projects or by the Afghan government, which is itself bankrolled largely by the international community.

“We know there will be a change,” said Shafic Gawhari, Moby Group’s chief executive. “We have to rely on our commercial revenues.”

Mr. Gawhari said the drop in aid money would force a painful but necessary correction—one that many companies aren’t prepared for.

“The reduction in donor money and military assistance will help Afghanistan in the long term: People will really make their business based on reality,” he said. “But in the short term there will be a shock.”

The wait-and-see attitude on the part of many businesses has already hit government revenues.

Investment is at a halt. Not much is happening,” said Gul Maqsood Sabit, the Afghan government’s top revenue collector.

Hassina Sherjan, the owner a home décor firm in Kabul, stands in her empty factory building after laying off most of her employees.

Mr. Sabit said the uncertainty over presidential elections later this month and the looming withdrawal of foreign forces has prompted some investors to put off new projects.

“Our hope is that all this gets over with and at the end of this year, things start picking up again,” he said.

The U.S. government, which has bankrolled much of Afghanistan’s reconstruction, has tried to encourage contractors to diversify their businesses to adjust to the new reality. The U.S. Department of Commerce and U.S. Agency for International Development, for instance, brought U.S. companies to Kabul in late 2012 to promote franchising opportunities. Actual franchise deals have been slow to materialize, however.

Habib Gulzar Beverage Ltd., the local bottler for Coca-Cola Co. KO -0.12% , earns 40% of its revenues from sales to the coalition forces. As their numbers fall, sales of Diet Coke and Coke Zero have virtually stopped: Calorie-free products, popular with American soldiers, aren’t much of a hit with locals. Overall, the franchise’s sales fell 2.2% last year, with much steeper declines expected for 2014 and 2015.

Tariq Irshad, Habib Gulzar’s CFO, said the company had launched a line of fruit juices, more popular with Afghans, to make up for the disappearing coalition market.

“We keep on adding new products to our portfolio, keeping in mind the requirements of the general market so we can survive with that,” Mr. Irshad said.

A turning point for some businesses in the capital was the January attack on the Taverna du Liban, a restaurant frequented by international officials. The attack, which claimed the lives of 21 people, forced foreign organizations to dramatically curtail their movements and dealt a major blow the capital’s small but thriving restaurant scene.

“We could see within a week how the clientele had dropped to virtually nothing after that happened,” said Peter Jouvenal, a former journalist who is the co-founder of the Gandamack Lodge, a storied Kabul guesthouse and watering hole that is currently shut. “And it hasn’t recovered.”

Things looked much more optimistic back in 2004, when Ms. Sherjan started her home décor business, initially funded by the German development agency GIZ. As the international presence burgeoned in Kabul, her company employed around 60 people, most of them tailors. The company’s colorful place mats, embroidered cushions and curtains were sold largely to the expat community at a store in Kabul and crafts fairs in embassies and the luxury Serena Hotel in Kabul. Sometimes, Boumi had daily sales of as much as $5,000.

Her early challenges reflected Afghanistan’s overall low level of development. Boumi’s premises, rented from a government office, had no consistent power. The company had to buy power from a private broker, an option that was twice as expensive than power from the municipal grid.

And then there were the constant demands, large and small, from government employees. “We wasted so much time with the Ministry of Finance because we didn’t pay a bribe,” Ms. Sherjan recalled.

As security in the capital began to decline amid Taliban bombings and suicide attacks, those expats who hadn’t left Kabul were increasingly restricted to their compounds—and unable to shop. Following a deadly attack on the Serena in March, sales have shriveled to zero in a country where few locals can afford $7 place mats.

Ms. Sherjan says that after writing off a $300,000 investment, it is time to adapt or move on.

“I don’t want to make anything for expats anymore,” she said. “I think we have to find a way of doing it ourselves. We as Afghans have to find a way of making our own money.”

This entry was posted on Saturday, June 14th, 2014 at 5:54 am and is filed under Afghanistan.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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