Without money, Afghanistan faces an economic disaster

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DUBAI, United Arab Emirates – As the Taliban tighten its grip on Afghanistan, the country faces an economic cataclysm as world powers and international financial institutions decide to withhold or freeze billions of dollars in assets and aid from a government led by a pariah movement.

The militant group’s blitz in the Afghan capital, Kabul, leaves it at the helm of a war-ridden state heavily dependent on foreign dollars which, over the past two decades, have covered three-quarters of government spending. Part of this may be at risk as the Taliban are subject to a multitude of sanctions from the United States, the European Union and the United Nations.

Without this money – Kabul received $ 4.2 billion in development assistance in 2019 – the government is practically bankrupt. The Taliban face enormous pressure to show Afghans and the world that beyond respecting the principles of Islam, they can pay civil servants, buy fuel, pick up trash, run hospitals and develop a country more modernized and transformed since the first reign of the group. between 1996 and 2001.

The Taliban’s return to power – its sneaker-clad, camouflaged fighters roam the capital – has plunged the group into the realities of governance. Sporadic protests against him have erupted across the country by a population that has become accustomed to smartphones, civil liberties, education and other freedoms linked to years of US occupation.

The group is cracking down on resistance while trying to show the international community, including China and other regional investors, that despite its militant roots and Islamist fundamentalism, it can lead a nation. The image has become increasingly prominent: Taliban spokespersons have contacted foreign journalists in Kabul, suggesting the group is not what it was 20 years ago, when women were banned from work and forced to wear the burqa.

Not far from where these spokespersons gather, there is another image, of thousands of Afghans running a chaotic string of dangers, including Taliban fighters wielding batons, to get to the airport. and escape the country.

But the most immediate problem is that Afghanistan, one of the poorest countries in the world, is a cash economy, with just 10 percent of the adult population holding a bank account, according to a 2018 Bank report. global. The local currency, the Afghani, is fed by regular bulk shipments of US dollars from abroad every few weeks to the Afghan central bank.

These funds come from some $ 9 billion to $ 10 billion in foreign exchange and gold reserves as well as liquid assets such as US Treasuries, according to Ajmal Ahmady, the country’s former central bank chief, who has turned escaped the country last Sunday.

The last shipment of those funds was due to arrive that day, when the Taliban took over the capital, meaning the country is actually short of dollars. Even before the Taliban entered Kabul, the central bank had placed limits on withdrawals.

Since then, financial institutions and exchange offices have remained closed. But when they open, it could lead to a rush on the banks as people rush for money, said Anwar-ul-Haq Ahady, former finance minister and central governor, which will have “a very negative impact on trade and a disastrous impact on the economy. “

“The main reason for the exchange rate stability was that we received a constant and quite large amount of money,” he said. “It is imperative that the stakeholders in Afghanistan recognize the situation.

The Taliban, Ahmady said, can only access 0.1% to 0.2% of Afghanistan’s total international reserves. A late 2020 auditor’s report also indicates that there are approximately $ 159,600 worth of gold bars and silver coins held in the vault inside Arg, the Afghan presidential palace, that the Taliban took over last Sunday.

Without the backing of the Afghan currency, said Graeme Smith, a consultant researcher with the Overseas Development Institute, the coming weeks could see a crater in the value of the afghani against the dollar as well as a sharp rise in prices. food.

Afghans have little recourse to access other sources of dollars. Western Union, an important lifeline for Afghans to obtain money from abroad, has announced that it is suspending its services until further notice. MoneyGram, another service, has made no such announcement but appears to have ceased working in Afghanistan as well. Last year, remittances to Afghanistan totaled some $ 788.9 million, or nearly 4% of the country’s gross domestic product.

Instability, not to mention an economy recalibrating to a new existence without billions of dollars from NGOs, embassies and contractors, has deflated the pace of Kabul; the markets are still open, but many high-end stores are closed.

In addition to the stranded foreign exchange reserves, world powers have limited access to the huge amounts of aid normally given to the Afghan state. The International Monetary Fund was instructed on Monday to grant Kabul about $ 460 million in Special Drawing Rights, or SDRs, a reserve asset that the government can exchange for hard currencies, including US dollars. But pressure from US lawmakers prompted the IMF to put the plan on hold.

“As is always the case, the IMF is guided by the views of the international community,” an IMF spokesperson said in a statement Thursday. “There is currently a lack of clarity within the international community regarding the recognition of a government in Afghanistan, as a result of which the country cannot access SDRs or other IMF resources.”

Governments hope to use financial aid as a pressure point for the Taliban to make concessions.

“Say the Taliban come in and behave properly. It is possible that the United States will completely or gradually remove the sanctions, ”said Brian O’Toole, former head of the US Treasury’s Office for Foreign Assets Control, known as OFAC.

Otherwise, the United States would find it difficult to ensure that the sanctions did not affect the humanitarian aid the country desperately needs.

“Normal humanitarian exemptions usually come with a caveat that they don’t apply if you’re dealing with a terrorist group, which makes sense,” he said. “But it doesn’t make sense here because the government is a terrorist group. Because so much is rushed by our withdrawal, [Treasury officials] must work harder than they normally would to facilitate and encourage humanitarian transactions.

But Smith thinks he’s a non-starter.

“It will be a tool for negotiations in the short term,” he said. “But this idea that the Taliban will become the kind of government we want them to become because of financial pressure ignores the large amount of informal money flowing through the war zone.”

Although much of the focus has been on drug trafficking linked to the country’s opium production, the Taliban’s real source of income has been the taxation of legal goods, from fuel to cigarettes to cars and minerals, all passing through Afghanistan to its neighbors, said David Mansfield, an Afghan analyst consultant for the Overseas Development Institute who has researched the informal economy.

This is especially true in the provinces, he said, where any development assistance from Kabul has long been overshadowed by unofficial economic activity: in the southwestern province of Nimruz on the border with Iran. , for example, the Taliban collected $ 225 million a year in taxes on about $ 2.2 billion in trade.

Trade flows like these were enough for the Taliban as an insurgency, but there are also indications that the group could run the state more cheaply than the government it replaced.

On the one hand, he wouldn’t have to spend $ 5-6 billion on security personnel, and – at least before his takeover – he turned out to be less venal in the areas he controlled than he did. Corrupt state of President Ashraf Ghani, who fled the country.

“The people in the government would shake you at gunpoint, while the Taliban had a more centralized customs system,” Smith said.

Much also depends on neighboring countries, especially China, which has already forged ties with the group and wants trade to continue, although it fears the recent Taliban victory could spur extremism in the region. Last month, Taliban co-founder Abdul Ghani Baradar visited Tianjin, a port city near Beijing, and met with Chinese Foreign Minister Wang Yi. He said China had “always been a reliable friend of the Afghan people”.

But it’s also a question of what kind of state the Taliban want, Mansfield said.

“If they find the kind of conditions that are being asked of them completely unpleasant, they can move into a minimalist position, as was the case in the 1990s, with five or six guys – a small militia – sitting in the room. district headquarters, without health and education services. – an emphasis on security only, ”he said.

“If this is the case, we will likely see an exodus of refugees, an economic crisis and hyperinflation. “

Until then, Ahmady said, the banks would be unable to deliver dollars to customers, a situation he said had nothing to do with the central back or its staff, but the result of the sanctions policy.

“The Taliban and their supporters should have predicted this outcome. The Taliban have won militarily – but must now rule, ”he tweeted.

“It is not easy.”

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