Afghanistan’s economy has been highly dependent on billions of dollars from international assistance. Its real GDP has been in decline since 2012 and its inflation rate – average consumer price index – has risen beyond normal.
Afghanistan imports over $6 billion (US) worth of goods, mainly from the neighboring countries of Pakistan, Iran and China, and it exports under $1 billion.
Afghanistan’s exports are mainly low-income-producing agricultural products, especially nuts shipped in bulk and fresh fruits. In short, Afghanistan is importing six times more goods than it is exporting, causing a trade deficit that is suffocating its national wealth and domestic resources.
Afghanistan sits on top of mineral deposits worth $1–$3 trillion, yet it is one of the least developed countries in the world. Over 54 percent of Afghanistan's population lives below the official poverty line, meaning they earn less than $1.90 a day or less than $700 a year. Unemployment is not reliably tracked, but estimates range from 12 to 24 percent.
Poverty and unemployment drive men to join militant groups, engage in crime and smuggle.
To create jobs, decrease poverty, as well as dry up the recruiting pool for militants, Afghanistan needs to empower small and medium-sized businesses. As an essential first step, there must be credit lines and capital liquidity for financing Afghanistan’s businesses, plus a bond system to support government financing.
Greasing the rusty machinery of Afghanistan’s current financial system will be challenging but not impossible. This requires serious planning, resources, and trust-building among the Afghan business community, government and people.
Ultimately, Afghanistan must be able to manage its financial needs from open local and global markets and be able to generate enough wealth to pay its principal loans and service its debts. A functioning financial system will end Afghanistan’s dependence on foreign assistance, which has created a GDP growth bubble that will evaporate as soon as the assistance dries up. In other words, foreign aid is not sustainable.
Below, I put forward the steps necessary for establishing Afghanistan’s debt structure. Implementing this would require major political decisions by President Ashraf Ghani as well as the Afghanistan Ministry of Finance, Da Afghanistan Bank (Afghanistan’s Central Bank) as well as Parliament.
To make these steps more understandable, I will start by explaining and defining key financial terms.
A security, in a financial context, is a certificate or other financial instrument that has monetary value and can be traded. Securities are generally classified as either equity securities, such as stocks, and debt securities, such as bonds and debentures.
A bond is a contract between an issuer and an investor. The investor lends money to the issuer and the issuer (debtor) promises to repay the debt services. Debt services represent the total of all interest payments over the bond’s life and the final repayment of the loan value – that is, the principal at maturity.
For an issuer, raising capital through debt is referred to as leverage since the issuer is borrowing against its net worth. When a corporation has more debt than equity outstanding, it’s considered a leveraged issuer.
Credit risk is recognition that an issuer (debtor) may default and may not be able to meet its obligation to pay interest and principal to the bondholders.
Afghanistan’s Ministry of Finance needs to take responsibility for setting up the infrastructure for establishing a debt structure and making it compatible with Afghanistan's needs. Laws, regulations, a security commission, an organization for self-regulation, a clearing house, and an electronic trading system to ‘buy’ and ‘sell’ are the major pieces for establishing a functioning debt structure. A hard copy (printed) debt instrument is also recommended at the initial phase to show product tangibility. An auction floor must be set up as a marketplace where ‘buying’ and ‘selling’ takes place.
Debt instruments are typically issued as short term, i.e. a week to three months old; midterm, six months to two years old; and long term, five to 30 years old.
When a central government or its political divisions issue debt, there is no need for registration because issuers have the backing of the government of the Islamic Republic of Afghanistan. However, if a corporation or foreign issuers want to raise capital on the Afghanistan market, an entity – often called a “security commission” – must be established to register the issuers and verify the legality of the debt instruments.
The debt instruments and interest rates are key tools for creating liquidity in the market, managing inflation and providing credit. Moreover, debt is the best way for Afghanistan’s government to secure credit for its budget shortcomings from the open market – independent of the foreign aid – as well as for financing its revenue-generating development projects.
To account for the natural rate of inflation, debt instruments may be issued with the features of “inflation protection.”
The debt market plays a significant role in maintaining the liquidity of the real estate industry by structuring mortgage-backed securities into the secondary market.
As the name implies, ‘mortgage backed securities’ are debt instruments that are secured by pooling home mortgages. Both government and private investment banks are able to issue mortgage-backed securities.
A strong central government is key in leading and managing such fiscal and monetary policies effectively.
In addition, the economically strong provinces – namely Kabul, Herat, Balkh, Nangarhar and Kandahar – can play key roles by issuing debt instruments for their general obligatory and revenue-generating projects.
These major economic hub provinces can raise capital through revenue bonds for projects like housing, health care, utilities, transportation, lease, rental and education.
Underwriting of debt instruments at any level requires investment bankers with the right skill set and certification. Public and private higher education institutions in Afghanistan should develop educational programs to prepare and certify investment bankers, broker dealers, financial advisors, and agents in trading, processing and managing of both debt and equity securities.
Corporations around the world are raising capital through issuing stocks and bonds. Afghanistan’s corporations should raise capital from opening Afghanistan’s market. Common tools for raising capital are secure bonds, mortgage bonds, equipment trust certificates, collateral trust bonds, asset-back securities, and unsecured bonds.
The types of issuers and currency denomination, as well as geography of issue, are other very important aspects of the bond world. Here are three common types: (1) Eurodollar bond, (2) Yankee bond and (3) Eurobond.
The Eurodollar bond is a dollar-denominated instrument that’s made for use outside of the United States. These bonds pay their principal and interest in US dollars, but are issued outside of the United States. The issuers of the Eurodollar bonds include foreign corporations, foreign governments and international agencies, such as the World Bank.
The Yankee Bond is also denominated in U.S. dollars. Yankee bonds allow foreign entities to borrow money in the U.S. marketplace. These bonds are registered with the Security Exchange Commission (SEC) of the United States and sold primarily in the U.S. markets.
The Eurobond is sold in one country, but denominated in the currency of another. The issuer, currency and primary market may be different. For example, a Russian manufacturer could sell bonds that are denominated in Swiss francs in London. This type of bond, which is referred to as a ‘foreign pay bond’, can be greatly affected by interest rate movements in the country in which it is denominated.
Money Market debt instruments also contribute to liquidity in functioning markets. Commercial paper, bankers’ acceptances, negotiable certificates of deposits (CD), federal funds, money market funds, and repurchase agreements (Repos) are the common ones.
In conclusion, I wish Afghanistan’s political leaders, financial apparatuses, and business communities would play leading roles in pursuing a well-regulated open market financial system, with the ultimate goal toward the end of ensuring economic growth, job creation and public welfare.
Farshid Hakimyar was born and raised in Afghanistan. He has worked with governments, not- for-profits, research groups and policy institutions over the last 15 years in both Afghanistan and the United States. He is CEO of Snow Leopard Traders LLC, which he founded in 2016. He is a registered representative with an investment firm in Washington, D.C.
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