WASHINGTON – As the Taliban seize power in Afghanistan for the first time in 20 years, Afghans face not only a humanitarian crisis, but also an economic crisis that threatens to dramatically worsen an already dire situation. But just how bad things can go, and what potential leverage the economic situation gives the United States and its allies over the Taliban, is far from certain.
Asked about the future of the Afghan economy, Alex Zerden, who was the top US Treasury Department official in Afghanistan in 2018 and 2019, said: “I don’t think there is a definitive answer, and anyone who doesn’t know the problem has arisen very well, because there are a lot of different ways it can shake. “
Even before the Taliban took control, the economic situation in Afghanistan was precarious at best. In March, the World Bank described it as “shaped by fragility and aid dependency”, with 75% of public spending funded not by government revenue generation, but by grants from international institutions. and individual countries like the United States.
Donors Suspend Aid
After the Taliban captured Kabul on Sunday, these donors began announcing that they would turn off the financial taps, at least in the short term. The United States has announced that it will freeze billions of dollars in emergency reserves that the Afghan central bank is keeping on deposit at the Federal Reserve Bank of New York. The International Monetary Fund said a tranche of funding worth $ 450 million, which was due to be delivered to the Afghan government next week, would be suspended, and Germany announced that $ 300 million in aid scheduled would not be delivered.
President Joe Biden pledged that humanitarian aid would continue to flow into the country despite the Taliban takeover, saying: “We will continue to support the Afghan people. We will lead with our diplomacy, international influence and humanitarian aid.
However, the complete withdrawal of US and allied troops from the country makes it unclear whether and how international aid organizations, the main intermediaries of foreign aid spending, will be able to operate in the country in the future.
Governing “is not easy”
Ajmal Ahmady, who served as governor of Afghanistan’s central bank from 2019 until he fled the country last weekend, used his Twitter account to explain the country’s dire economic situation. Not only did the bank lose access to its reserves, he said, but shipments of physical U.S. currency, which the country’s banking system relied on to satisfy customers’ desire for a way to save money. exchange more stable than the Afghani issued by the government, have now been cut.
A dollar shortage is likely to plunge the relative value of afghani, pushing up the prices of goods and services that may themselves become scarce as international aid and trade flows are disrupted.
“(The) Taliban won militarily – but must now rule,” Ahmady wrote. “It is not easy.”
The economy that the Taliban captured has changed dramatically from the one they presided over from 1996 to the end of 2001. Despite its many problems, the Afghan economy is much larger and more urbanized than it ever was. was twenty years ago.
In 2002, the first full year after the ousting of the Taliban, Afghanistan’s official gross domestic product was only $ 4 trillion. By 2020, according to World Bank figures, the country’s GDP had almost quintupled to $ 19.8 billion. In big cities, infrastructure projects have brought modern technology, like smartphones, to ordinary Afghans.
But this enlarged economy was driven, for the most part, by foreign aid and a massive trade deficit exacerbated by the fact that 44% of the country’s workforce was engaged in low-yield agriculture and 60% of households depended on agriculture for at least some of their income.
Leverage on the Taliban
The United States still views the Taliban as a terrorist organization and they remain on a sanctions list maintained by the Office of Foreign Assets Control. Under current US policy, this makes it virtually impossible for a Taliban-controlled financial institution to have a meaningful stake in global financial markets.
The Biden administration appears to believe this may be leverage the United States can use to influence the actions of the group now that it is in power.
“I think they’re going through some sort of existential crisis. … Do they want to be recognized by the international community as being a legitimate government? Biden said Thursday in an exclusive interview with ABC News. “I’m not sure they do.”
He continued, “But they also care if they have food to eat, if they have an income… that they can make money and run an economy.”
Hunger in Afghanistan
Afghans are already suffering from widespread hunger, exacerbated by a severe drought that has devastated wheat production. The United Nations World Food Program estimates that one in three Afghans is currently at risk of severe or acute hunger. Half of Afghan children under five already suffer from acute malnutrition, UN says
UN officials said the Taliban assured them they would be allowed to continue delivering food aid to the country.
End of game not obvious
Even given the financial challenges they face, said Zerden, the former treasury official, it is not clear how much the Taliban is under the influence of foreign governments.
For example, he said, Western governments might overestimate the amount of money the Taliban actually needs to make Afghanistan work. The group, for all of its human rights abuses, has traditionally been far less corrupt than the government it toppled, meaning less money it collects will end up being siphoned off from the personal accounts of government officials. .
And the Taliban are not without the ability to increase their income internally. Zerden, who now runs Capitol Peak Strategies in Washington, said the Taliban ruled a shadow government for two decades, effectively taxing large swathes of the country by taking a share of the money from opium sales, exploitation illegal mining and smuggling and using these funds to supply services to those under their control and to finance and deliver military operations.
Now, with official control of all border crossings, the group is able to start collecting customs duties on exports and imports.
Economy versus ideology
These trade routes are vitally important to the group’s future, said Graeme Smith, a consultant researcher for the Overseas Development Institute who has spent years studying Afghanistan. As long as regional powers such as Pakistan, China and Iran continue to trade with Afghanistan, they will provide a stable and lucrative source of income.
Additionally, Smith said he was deeply skeptical of predictions that the Taliban would be swayed by promises of increased inclusion in the modern economy if it meant abandoning their core ideology.
“I unofficially hear from people in Washington that there is a lot of hope in the ability to curb the behavior of the Taliban by applying financial leverage,” he said.
While this leverage is important, he said, “These expectations are completely out of whack. We believe we have more power than we have.”