Strong Sales But Low Investments Spell Trouble For Afghan Carpet Producers

KABUL, October 2, 2010 – Sales are good in Kabul, where both large numbers of foreigners and newly prosperous Afghans create a steady business for carpet dealers.

In Najeb Zarab market, where wholesale and retail carpet shops fill the inner courtyard of a large building, the famous red-and-black weavings so characteristic of northern Afghanistan reign supreme.

NATO and U.S. soldiers come looking for souvenirs and buy a six-square-meter Khal Mohammadi design for $ 2,000 or two of them for $ 3,000.

And Afghan shoppers come for rugs to fill their reception rooms or give as gifts. During the recent Eid holidays, the shop owners say, business was particularly brisk.

But if the fast turnover suggests good times for Afghan rug merchants, that is only half the story.

Many will tell you that the sales only hide a very worrisome business trend. And that is the flight of capital investment from their industry. Without new investment, they fear, the country's still just revived carpet sector will shrink despite the strong market demand.

Subhan Gul is CEO of Hali Weavers, a young company that has exhibited its products at international trade shows such as Domotex in Hannover and won awards for its design innovations.

A visitor might expect him to be upbeat about his success, and he is. But he also surprises guests with the extent of his concern about the future.

In previous decades, Subhan says, when he and many other Afghan weavers were based in refugee camps in Pakistan, there was virtually no domestic Afghan market for rugs. But unlike today there was plenty of investment money.

In those days, wealthy Afghans who fled the country to escape its wars needed somewhere to put their money to work. And in Pakistan they often put it into the refugee carpet industry since they lacked the contacts needed to invest it in other sectors of the Pakistani economy.

The returns for the investors were good because, at that time, the global economy was strong. Afghan weavers in Pakistan enjoyed notable successes, including launching the now famous chobi design which swept the export market with bold Indo-Persian designs and natural dyes.

The chobi, which appeared some 10 years ago, still remains one of the best selling carpet designs in the world today.

But as Afghan refugees have returned in large numbers to Afghanistan over the past decade, the investment possibilities for those with money have broadened considerably.

Subhan says that these days faster returns can be made by investing in virtually any kind of business that imports consumer goods. The number of shops – from kiosks to a shopping mall complete with escalators – that now fill Kabul's streets offers a measure of how much investment has gone that way.

The impact of the capital flight out of the carpet industry is compounded by a number of other factors, particularly the difficulty of getting bank loans as an alternative. The interest rate for commercial bank loans in Afghanistan today runs 13 to 14 percent. That is compared to just 2.5 to 3 percent in Pakistan, but loan shopping across the border requires the borrower to first be a Pakistani citizen.

Some of the other factors complicating the Afghan producer's finances are the high tax of 15 percent which the Kabul government levies on sales (and which is collected annually when companies renew their licenses); the lack of any government rebates on exports; and a crushing level of bureaucracy which means producers spend some 15 days processing their export documentation for each consignment.

Here is a detail of the weaving on the border of one of Afghanistan's popular red-and-black rugs, a Konduz-Waziri woven in Konduz province.

Afghan carpet producers say they will need new investment if they are ever to complete the process of rebuilding their industry at home. Afghanistan has yet to establish high-quality cutting and finishing facilities comparable to those in Pakistan and much of that downstream work continues to be done at high cost across the border.

New investment is also needed to build up Afghanistan's dye industry and develop its wool sector further. Most of the wool used in Afghan weaving today comes from New Zealand, despite the country having its own famous Ghazni wool which is highly prized by foreign customers.

And, perhaps most of all, investment is needed for that all important activity of any industry: advertising. Without it, and publicity about the uniqueness of the weavers' work, Afghanistan will almost certainly lose ground to powerhouses like China and India which are ready and able to duplicate the Afghans' most successful designs.

For now, the Afghan weavers, many of whom are ethnic Turkmen like Subhan, rely upon the timeless appeal of their traditional red-and-black rugs -- the famous "red rugs" of Central Asia. One of them, a Konduz-Waziri is shown here.

They also are counting upon their ability to keep innovating with the best-selling chobi pattern. Some of the current innovations include add-ons such as silk and gold thread or embossed motifs, and trying different washing techniques such as 'golden wash' to add depth of color and tone.

But if tradition and innovation seem to be enough to keep sales booming for now, they are not enough to make anyone complacent about the future. Instead, without the missing third ingredient – new capital – they may be only enough to stand still in an industry where standing still means losing ground.

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