DUBAI, United Arab Emirates – As the Taliban consolidates their hold in Afghanistan, the country faces economic disaster as world powers and international financial institutions withhold or freeze billions of dollars in assets and aid from a pariah-led government.
The militant group’s attack on the Afghan capital, Kabul, leaves them responsible for a war-torn state that is heavily reliant on external dollars that have covered three quarters of government spending over the past two decades. Some of this could be at risk as the Taliban faces a variety of US, European Union and United Nations sanctions.
Without that money – Kabul received $ 4.2 billion in development aid in 2019 – the government is as good as bankrupt. The Taliban are under tremendous pressure to show Afghans and the world that, apart from the principles of Islam, they can pay civil servants, buy fuel, pick up garbage, run hospitals and develop a country that has modernized since the group’s first rule and was transformed between 1996 and 2001.
The return of the Taliban to power – their fighters in sneakers and camouflage clothing roam the capital – has plunged the group into the reality of government. Sporadic protests against it have broken out across the country by a population accustomed to the smartphones, civil liberties, education, and other freedoms that came with years of American occupation.
The group suppresses resistance while trying to show the international community, including China and other regional investors, that despite its militant roots and Islamic fundamentalism, it can lead a nation. Image is becoming increasingly important: Taliban spokesmen turn to foreign journalists in Kabul, suggesting that the group is no longer what it was 20 years ago when women were banned from working and forced to wear burqas.
Not far from where these speakers gather is another picture, that of thousands of Afghans running a chaotic battle against danger, including stick-wielding Taliban fighters, to get to the airport and flee the country.
The more immediate problem, however, is that Afghanistan, one of the poorest countries in the world, is a cash economy where only 10 percent of the adult population have a bank account, according to a 2018 World Bank report. The national currency, Afghani, is backed by regular bulk deliveries of US dollars from abroad to the Afghan central bank every few weeks.
According to Ajmal Ahmady, former head of the country’s central bank, who fled the country last Sunday, these funds come from roughly $ 9-10 billion in foreign exchange and gold reserves, as well as cash and cash equivalents such as US government bonds.
The last shipment of these funds was due to arrive on the day the Taliban captured the capital, which means the country has effectively starved to death on dollars. Even before the Taliban broke through Kabul, the central bank had set withdrawal limits.
Since then, financial institutions and currency exchange operations have remained closed. But if they open it could create a run on banks as people rush for cash, said Anwar-ul-Haq Ahady, former finance minister and central governor, who will “have a very negative impact on exchanges and catastrophic effects” the economy.”
“The main reason for the currency’s stability was that we received a constant, fairly large amount of money,” he said. “It is imperative for the stakeholders in Afghanistan to recognize the situation.”
The Taliban, Ahmady said, can only access 0.1 to 0.2 percent of Afghanistan’s total international reserves. An auditor’s report from late 2020 also indicates that there are gold bars and silver coins valued at around $ 159,600 in the vault in Arg, the Afghan presidential palace that the Taliban took over last Sunday.
Without the support of the Afghan currency, Graeme Smith, a consulting researcher at the Overseas Development Institute, said cratering in the value of the Afghan currency against the dollar could occur in the coming weeks along with a sharp rise in food prices.
Afghans have little access to other sources of money. Western Union, an important lifeline for Afghans to get money from abroad, has announced that it will suspend the service until further notice. MoneyGram, another service, didn’t make such an announcement, but it doesn’t seem to be working in Afghanistan either. Last year, remittances to Afghanistan totaled around $ 788.9 million, nearly 4 percent of the country’s gross domestic product.
The instability, not to mention an economy calibrating itself to a new existence without the billions of NGOs, embassies and contractors, has drained Kabul’s rhythm; Markets are still open, but many high-end stores are closed.
Apart from the blocked currency reserves, the world powers have only limited access to the huge sums of aid that are normally given to the Afghan state. The International Monetary Fund was set on Monday to grant Kabul around $ 460 million in Special Drawing Rights, or SDRs, a reserve that the government can convert into hard currencies, including the US dollar. But pressure from US lawmakers pushed the IMF to put the plan on hold.
“As always, the IMF is guided by the views of the international community,” an IMF spokesman said in a statement on Thursday. “There is currently uncertainty in the international community about the recognition of a government in Afghanistan, which means that the country has no access to SDR or other IMF resources.”
The governments hope to use financial aid to pressure the Taliban to make concessions.
“Let’s say the Taliban come in and behave properly. It is possible that the US could lift the sanctions altogether or gradually, ”said Brian O’Toole, a former Treasury Department official responsible for control of foreign assets known as OFAC.
If not, however, the US would have a hard time ensuring that the sanctions did not interfere with the humanitarian aid the country desperately needs.
“Normal humanitarian exemptions usually include a caveat that they don’t apply when you’re dealing with a terrorist group, which makes sense,” he said. “But that doesn’t make sense here because the government is a terrorist group. Because so much of this stuff is pulled out through us [Treasury officials] have to work harder than they normally would to facilitate and encourage humanitarian transactions. “
But Smith believes this is a non-runner.
“It will be a tool for negotiation in the short term,” he said. “But this notion that the Taliban will become the kind of government we want because of financial pressure, ignores the huge amount of informal money that sloshes around in the war zone.”
Although much of the focus has been on drug trafficking related to the country’s opium production, the Taliban’s true source of income has been taxing legal goods, from fuels to cigarettes to cars and minerals, all of which travel through Afghanistan to its neighbors. said David Mansfield, an Afghanistan analyst who advises the Overseas Development Institute and has researched the informal economy.
This is especially true in the provinces in which the development aid flowing from Kabul has long been overshadowed by the literal economic activity: In the southwestern province of Nimruz on the border with Iran, for example, the Taliban collect 225 million US dollars in taxes every year of around $ 2.2 billion in retail.
Trade inflows like this have been enough for the Taliban as insurgents, but there are also indications that the group could run the state cheaper than the government it replaced.
For one thing, it would not have to spend 5 to 6 billion US dollars on security personnel and – at least before its takeover – proved to be less for sale in the areas under its control than the corrupt state of the fled President Ashraf Ghani the land.
“Government people would shake you at gunpoint while the Taliban had a more centralized customs system,” said Smith.
Much also depends on neighboring countries, especially China, which has already forged ties with the group and wants to continue trading, despite fears that the recent Taliban victory will fuel extremism across the region. Last month, Taliban co-founder Abdul Ghani Baradar traveled to Tianjin, a port city near Beijing, and met with Chinese Foreign Minister Wang Yi. China has “always been a reliable friend of the Afghan people”.
But it is also about which state the Taliban want, said Mansfield.
“If the terms they demand are completely inedible, they may head for a minimalist position like it was in the 1990s with five or six boys – a small militia – sitting around the district headquarters with no health and safety services Educational offer – a focus only on safety, ”he said.
“If that is the case, we will likely see a refugee exodus, an economic crisis and hyperinflation.”
In the meantime, Ahmady said, the banks could not deliver dollars to customers, a situation he said had nothing to do with the central back or its staff but was a result of the sanctions policy.
“The Taliban and their supporters should have foreseen this outcome. The Taliban won militarily – but now they have to rule, ”he tweeted.
“It is not easy.”