Afghanistan readies pre-withdrawal tax breaks

Kabul, Dec 16 : Afghanistan is planning major tax breaks and incentives to lure investors ahead of U.S.-led forces' withdrawal at the end of 2014, part of an effort to stem accelerating capital flight, the country's finance minister said.

A proposal drafted by the finance ministry and endorsed by President Hamid Karzai would grant a 10-year tax break and provide free land to companies that invest in Afghanistan over the next two years, Finance Minister Omar Zakhilwal told The Wall Street Journal.

Concerns about the possibility of civil war once the foreign forces leave, coupled with diminishing Western aid, have undermined confidence in the country's economy. Several billion dollars in cash were smuggled to Dubai from Afghan airports this year alone, according to coalition estimates. Many projects have been put on hold as investors wait to see whether the Afghan government will be able to stave off a Taliban takeover on its own, and whether presidential elections, slated for April 2014, would provide a legitimate successor to Mr. Karzai.

Adding to these jitters is the uncertainty over the outcome of negotiations between the U.S. and Kabul over an enduring U.S. military presence here after 2014.

"We are aware that Afghans are taking money away from Afghanistan because of concerns about 2014," Mr. Zakhilwal said. "When we see half-finished buildings and we ask why, they say, well, we're waiting until 2014."

The incentives plan, which would have to be approved by the full cabinet and the government, is expected to be unveiled. Mr. Zakhilwal didn't specify the size of the tax breaks.

"The reason it will be two years is because if you make it long-term, they will just wait until 2014. And we say, if you wait until 2014, you won't have this," Mr. Zakhilwal said in the interview.

He said the package would spur exporters and agricultural enterprises and also stimulate the construction sector, which has been particularly hard hit by the confidence crisis. The proposal calls for simplifying the process of issuing building permits, which he said currently takes "forever." The new plan would require municipalities to issue them within 21 days.

"The construction sector is not only good for job creation but also good for confidence," he said. "When there is a lot of construction work going on, it gives confidence to people."

Amid the political uncertainty, the country's real-estate market has been particularly hard hit. Rents and property prices in Kabul's toniest neighborhoods have fallen by more than one-third since the year began, real-estate agents say, as foreign contractors and aid groups go home. In some areas, every second building sports a "For Rent" sign.

"People are afraid that a civil war will erupt once the foreigners leave, and everyone who can is taking their money out of the country," said Ghulam Mohammad, co-owner of a property agency in central Kabul. "Business is slow."

Rahimullah Hamid, executive director of the Kabul Chamber of Commerce and Industries, said the government incentives are badly needed. "We try to convince people that things will change in a good way," he said. "But most of the public, after they see the news, have heavy concerns about 2014."

Mr. Zakhilwal said he expected the U.S. military drawdown's economic effect will be limited.

This year, the Afghan economy is growing at about 10%, with the forecast for 2013 at between 10% and 11%, Mr. Zakhilwal said. Once the U.S. military drawdown occurs, however, the growth rate will slip to between 5% and 6%, he estimated, assuming international spending on development won't be significantly affected.

Mr. Zakhilwal added that the drawdown's impact won't be as severe as many fear because a large percentage of the money spent on military contracts—perhaps as much as 80% or 90%—currently doesn't stay in Afghanistan, going instead to large overseas companies.

Still, over the past decade, many Afghan businesses sprang up to provide goods and services to U.S. and coalition forces. Afghan construction firms help build roads and bases, and Afghan logistics companies deliver fuel and supplies for international projects.

As the military-funded contracting boom winds down, the U.S. government is hoping that some of those firms will diversify to focus on local business opportunities. This week, the U.S. Department of Commerce and U.S. Agency for International Development brought four U.S. companies to Kabul to promote franchising opportunities for Afghan businesses.

The companies—electronics retailer RadioShack, RSH +2.08% industrial and construction equipment supplier Hertz Equipment Rental, educational tutoring firm Tutor Doctor and printing services firm AlphaGraphics—held matchmaking sessions with Afghan businesspeople looking to invest in new opportunities.

"I quickly divide [Afghan] companies into three categories," said Walter Koenig, senior commercial officer at the U.S. Embassy in Kabul. "There are the companies that are going to cut and run when it's done. There are the companies that hope things never change And there are those who are looking for the future, and are looking for a new way to respond to the new reality and be successful."

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