Afghanistan Aftermath Wallows Banking-Economic Drift

Nearly two months after the Taliban took control of Afghanistan amidst the chaotic withdrawal of the United States-led forces the overlapping humanitarian crisis and economic collapse invite muddled historical comparisons.  While the United Nations last month announced USD 1.2 billion in emergency pledges and the EU and US have granted sanctions exemptions for humanitarian organizations, output and basic survival needs are in free fall.

International officials are discussing cash drops bypassing the Taliban through banks or direct transfer to help the poor buy food.  The UN World Food Program has warned that some 14 million Afghans face hunger from the combination of drought and economic collapse, and the agency has distributed some cash through a local bank. In addition to the USD 9.4 billion in international reserves frozen by the US, the IMF did not release more than USD 400 million in SDRs due to the regime’s lack of international recognition, and the EU suspended planned distribution of USD 1.4 billion in aid through 2025. 

Prior to the takeover foreign aid covered 75% of the annual budget and accounted for 42% of GDP, according to the World Bank.  The United Nations Development Program warned that in a “worst case” scenario GDP could contract more than 13% in the fiscal year that ends June 2022 and that the poverty rate could double from the latest estimate 45% of the population. .

The central bank reportedly ran down its USD cash reserves before the Taliban took control to prevent a run on the currency. Dollars accounted for about two-thirds of deposits in the banking system and about half of all loans, according to a former member of the central bank board.   Afghanis are not printed in the country and there is no contract to have more created overseas after a German printer withdrew. The regime could attempt to introduce a parallel currency as Iraq tried in the aftermath of the first Gulf war. The Iraqi central bank printed “Saddam dinars” which were introduced at par with the official currency but quickly became worthless.

The lack of cash in the system has heightened fears about a looming energy crisis as winter approaches.  The Washington-based Caspian Policy Center estimates that 70% of the power supply is from neighboring countries, while the Wall Street Journal reported that the capital’s supply is almost 100% from abroad.  The state power company has USD 90 million in unpaid bills to central Asian suppliers. Half the supply comes from Tajikistan which is threatening to cut it off.  The national power utility has asked the United Nations to settle unpaid bills to its neighbor to the north, Uzbekistan, Iran, and others. However, even if current obligations are covered, the company will continue to run out of money. Government workers have not been paid since July so cannot meet utility bills, and the central bank limits cash withdrawals.  Telecom providers similarly cannot access USD to pay suppliers. If services are cut due to non-payment, the rural population will be further marginalized.

Some argue that since Afghanistan is estimated to have more than USD 1 trillion in unextracted minerals like lithium that China will become the Taliban’s economic lifeline. Just weeks after the regime took control of the country Beijing provided USD 31 million in emergency aid.  Major support is unlikely after Chinese firms failed to start a copper mine development project agreed with the Afghan government in 2009 due to red tape. In addition, China’s economic slowdown, focus on “common prosperity” at home, and reduction in new Belt and Road commitments in recent years will derail initial enthusiasm. China will remain focused on security for its short 47-mile border with the country. The possibility of wealthy Qatar, which has acted as an intermediary already, rescuing the regime is also remote as recognition and support of the Taliban would likely result in sanctions from the West and threaten its LNG and oil exports. The US, EU and UN agencies will continue to provide humanitarian assistance, but it will be stopgap until economic restart direction is clearer in policy and practical terms. Alongside its terrorism and women’s treatment stances, the Taliban reprise will also be evaluated through comparison with neighbors’ frontier market strides the past two decades.