The Impact of Accession to WTO on Afghanistan’s Economy ...€¦ · overview of the negotiation...
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The Impact of Accession to WTO on Afghanistan’s Economy (Improvements, Reforms and Challenges)
Reza Farzam
Volume | 003 Bochum/Kabul |2017 www.afghaneconomicsociety.org
The Impact of Accession to WTO on Afghanistan’s Economy
(Improvements, Reforms and Challenges)
Reza Farzam
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
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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].
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at: https://openknowledge.worldbank.org/handle/10986/28928 License: CC BY 3.0 IGO
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spot-in-a-weak-economy/].
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http://cso.gov.af/en/page/economy-statistics/6323/annual-trade].
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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
فیس الکترونیکی و پول اوراق
بهادر
System will calculate
200 Afs for each form, and additional charges for additional paper used