WASHINGTON – As the Taliban attempt the precarious shift from insurgent movement to a functioning government, Afghanistan faces the heightened risk of financial collapse after being propped up over the past two decades by foreign aid that now makes up nearly half of its legal economy.
The fate of the Afghan economy will be determined by decisions that the Biden administration and other countries must make about whether or not to recognize the Taliban as a legitimate government. Meanwhile, the United States and the international community are already cutting off the flow of funds, leaving Afghanistan in a stranglehold on sanctions designed to cut off the Taliban from the global financial system. Analysts say the impending shock threatens to exacerbate a humanitarian crisis in a country that has endured years of war.
Signs of tension were evident this week as the value of the Afghan currency, the Afghani, fell to record lows and the most recent central bank governor, Ajmal Ahmady, said: warned that inflation would likely push food prices up. The United States, which has deposited about $1 trillion in Afghanistan over the past two decades, has begun to block the Taliban’s access to Afghanistan’s $9.4 billion international reserves. And the International Monetary Fund suspended plans to distribute more than $400 million in emergency reserves to the country.
“In the short term, the potential is catastrophic,” said Justin Sandefur, senior fellow at the Center for Global Development. “You’re looking at the possibility of a currency collapse and a financial crisis that could really hurt normal people.”
Afghanistan’s economy faced serious challenges and international support began to dwindle even before the Taliban takeover.
Last year’s withdrawal of US troops and government contractors contributing to Afghanistan’s tax base sapped revenues as the country, like much of the world, faced the coronavirus pandemic. The Congressional Research Service noted this year that 90 percent of the Afghan population lived on less than $2 a day and warned that the loss of US support would weaken one of the world’s smallest economies.
At the end of 2020, foreign donors gathered in Geneva pledged $12 billion in aid to Afghanistan over the next four years, a 20 percent drop from the previous four years. Some of the aid organizations based new terms for the money on progress in human rights and progress in peace talks between the government and the Taliban.
Food insecurity concerns are mounting and an impending drought is expected to make matters worse.
“The withdrawal of US troops or cuts in international subsidies to the Afghan security forces would have a range of unpredictable consequences for security, political cohesion and the economy,” the World Bank wrote in its Afghanistan Development Update, published in April. “Fiscal space remains tight in the context of weaker revenue performance and dwindling international subsidies.”
Although Afghanistan’s budget deficit is relatively low as a proportion of its economy, the World Bank warned that the country was at “high risk of external and global debt” due to its reliance on foreign subsidies and low exports.
The World Bank, which has provided more than $5.3 billion for development and emergency reconstruction projects in Afghanistan since 2002, this week evacuated members of its staff and their families from the country to Islamabad, Pakistan. A spokesman for the World Bank had no comment on the future of her work in the country.
Paul Cadario, a former World Bank official, suggested that a key issue was whether the Taliban would be able to carry out the infrastructure projects that foreign development groups had funded, as well as maintain public services to support a functioning economy. to create. However, he said it remains uncertain whether the Taliban will continue work on public health and education projects, and the status of basic institutions such as the tax authorities remains in limbo.
“Presumably, some of what the government does will be paid for by the Taliban with money from other sources of income, such as opium,” said Mr. Cadario, a fellow at the University of Toronto’s Munk School of Global Affairs and Public Policy.
A United Nations report in June underlined the Taliban’s lack of economic credibility, describing how their funding comes from criminal activities such as drug trafficking, poppy production, extortion, kidnapping for ransom and mineral exploitation. It estimated that the group’s revenue from those practices was somewhere between $300 million and $1.6 billion per year.
Alex Zerden, the Treasury Department’s financial attaché at the US Embassy in Kabul from 2018 to 2019, said the United States must quickly decide how to untangle its financial ties with Afghanistan.
Congress has appropriated $3 billion to the Afghanistan Security Forces Fund for 2021, and the Biden administration has asked for more money for next year. The Taliban are also likely to push for access to the country’s reserves held in the United States.
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“I think this will become a looming issue between the United States, international partners and the Taliban government over the future of these funds,” Mr Zerden said.
Any move to release the money is likely to meet fierce political opposition from Republicans. A group of Republican lawmakers this week urged Treasury Secretary Janet L. Yellen to prevent the International Monetary Fund from giving the Taliban access to emergency currency reserves. Separately, House Republicans wrote to the Special Inspector General for Afghanistan Reconstruction, asking whether continued aid to Afghanistan is legal and in the interest of the United States.
Biden administration officials have said they are closely monitoring the actions of the Taliban and that it is premature to say whether the United States will recognize the new administration as legitimate.
The most powerful leverage the United States and the rest of the world has against the Taliban is sanctions, which have been used aggressively to starve the group of funding and limit its leaders’ ability to travel. A 2020 agreement between the Trump administration and the Taliban called for a review of US sanctions against the Taliban with a view to lifting them, but the group’s overthrow of the Afghan government makes this less likely.
“Afghanistan is now emerging in the international community in a sea of sanctions linked to the Taliban dating back to 9/11,” said Juan C. Zarate, the Treasury’s first-ever Assistant Secretary for Terrorism Financing and Financial Crimes. . “Sanctions will be a defining barrier to both legitimacy and commercial activity with the Taliban and Afghan entities and the economy.”
The Ministry of Finance had no comment on whether it had begun reviewing sanctions against the Taliban. While sanctions have been accused of inflicting pain on civilians in places like Venezuela and Iran, the United States often makes exceptions, through general permits, to allow certain types of transactions on humanitarian grounds.
Any sanctions imposed on Afghanistan will be more painful than those imposed by the United States on Iran, which has a much more advanced economy and has managed to circumvent restrictions and continue to export hundreds of thousands of barrels of oil a day.
The United Nations Security Council has also imposed sanctions on the Taliban, making it even more complicated to roll them back, even if countries like China and Russia want to do business with Afghanistan. Aid groups and non-governmental organizations will struggle to operate in Afghanistan as long as the sanctions are in place.
Mr Zarate said sanctions against the Taliban will probably only be lifted if the group changes its behavior, but that the history of human rights violations and reliance on illegal funding makes that unlikely.
“I imagine the undergrowth will get worse rather than better,” Mr Zarate said, suggesting calls will be made in the United States for more sanctions. “There won’t be much sympathy.”