Afghanistan’s Industrial Shift: From Import Substitution to Competitive Value Addition
Afghanistan is experiencing a modest but noticeable revival of industrial activity. New investments in pharmaceuticals, cement, steel, food processing and other manufacturing industries are expanding domestic production. In 2025, ten factories worth more than $62 million were added to Herat’s industrial park, including pharmaceutical, food, dairy, carpet and flour plants. In August 2026, a $30 million pharmaceutical factory was inaugurated in Herat, while new cement projects are being launched across the country. The second Jabal Saraj cement plant, for example, is planned with a capacity of 5,000 tonnes per day.
This expansion is economically important, but the central question is not simply how much Afghanistan can manufacture. It is what Afghanistan can produce competitively.
The latest evidence shows a structurally weak trade position. The World Bank estimates that Afghanistan’s current-account deficit widened to 36.1 percent of GDP in 2025, reflecting persistent dependence on imports. In May 2026, the trade deficit was still about $887 million. Imports remain much larger than exports, while Afghanistan’s export base is narrow and highly exposed to regional transport disruptions.
Afghanistan is already revealing where its strongest comparative advantages lie. Export performance is dominated by agricultural and resource-linked products. UN reporting indicates that dried fruits, nuts and saffron accounted for around 82 percent of exports in 2025. The World Bank’s April 2026 data similarly show food exports at $68.7 million, representing 72 percent of total exports, while textile exports reached $14.5 million.
The implication is straightforward: Afghanistan should move up the value chain rather than simply increase the volume of raw exports. Raisins, dried fruits, nuts, saffron, medicinal plants, cotton, wool and other agricultural products should increasingly be cleaned, graded, processed, packaged and branded domestically. Recent disruptions to grape exports demonstrate the importance of this strategy: when border closures prevented fresh grapes from reaching Pakistan in 2026, producers were forced to process more grapes into raisins, although at much lower prices.
The second major opportunity is labor-intensive light manufacturing. Afghanistan has a large labor force, relatively low labor costs and established capabilities in carpets, textiles, garments and handicrafts. Textile and apparel production can therefore become an important export industry, particularly for markets in Central Asia, China, India and the Gulf. This does not mean competing with China in mass manufacturing; it means specializing in smaller-scale, flexible and higher-value products where Afghan labor, wool, cotton, traditional designs and geographical proximity create an advantage.
Pharmaceutical manufacturing is another promising area, particularly for import substitution. Afghanistan has already developed a domestic pharmaceutical base: the Ministry of Public Health reported in June 2026 that 22 pharmaceutical and health-product factories were operating, while domestic production reportedly supplied more than 40 percent of the market. The priority should be essential medicines and standardized generic products where domestic production is economically viable, rather than attempting to establish a costly research-intensive pharmaceutical industry immediately.
Construction materials also have a strong economic rationale. Cement, bricks, tiles, glass, basic steel products and other materials can substitute for imports because they are bulky, costly to transport and closely linked to domestic construction demand. Expanding cement production therefore makes more sense as an import-substitution strategy than as an immediate export strategy. Afghanistan should first satisfy competitive domestic demand and only export surplus production to nearby markets where transport costs allow it. The same principle applies to steel: recycling and basic processing may be commercially sensible, whereas large-scale integrated steelmaking should be approached cautiously because of its high energy, capital and infrastructure requirements.
Mineral resources offer a much larger long-term opportunity, but Afghanistan should avoid repeating the traditional model of exporting minerals in minimally processed form. The objective should be selective downstream processing—for example, marble and stone cutting and finishing, mineral beneficiation and eventually processing of economically viable metallic ores—rather than immediately pursuing every possible large-scale mining and smelting project. UNDP identifies substantial untapped potential in Afghanistan’s metals and extractive sectors, but also stresses the country’s infrastructure, finance, energy and logistics constraints.
The comparative-advantage test also shows what Afghanistan should not prioritize. It should not attempt to manufacture everything behind high tariff walls. Highly capital-intensive automobiles, advanced electronics, sophisticated machinery and other technology-intensive products require scale, reliable electricity, deep financial markets, specialized skills and large supplier networks that Afghanistan currently lacks. Likewise, coal should not be treated as the foundation of an export-led industrial strategy: the World Bank reported that coal exports collapsed when access to the Pakistani market was disrupted, demonstrating the vulnerability of an undiversified commodity export model.
The most pragmatic industrial strategy is therefore a three-layer model: first, produce more of what Afghanistan already imports competitively—particularly food products, medicines and construction materials; second, add value to products in which Afghanistan has natural or established advantages—especially agricultural commodities, textiles, carpets and selected minerals; and third, gradually develop more sophisticated industries as electricity, logistics, skills, finance and market access improve.
This requires more than opening factories. The World Bank’s 2025 Enterprise Survey found that access to finance remains the leading obstacle for Afghan firms; banks finance only 0.28 percent of firms’ investment, while 44 percent of firms identify electricity as a major or very severe constraint. UNDP similarly identifies finance, energy, transport costs, customs, skills and regulatory uncertainty as major barriers.
Afghanistan’s industrial objective should therefore not be self-sufficiency in everything. It should be competitive self-reliance: import what the country cannot efficiently produce, produce domestically what can be made competitively, and export increasingly processed goods that generate more value, employment and foreign exchange. That is the industrial path most consistent with comparative advantage—and with the longer-term goal of narrowing Afghanistan’s structural trade deficit.
