PESHAWAR – Afghanistan’s finances are running dry as multilateral and Western donors withhold funds in punitive response to the Taliban’s military seizure of power.
Unless China, Russia or other foreign donors come to the financial rescue, the Taliban could soon preside over a full-blown financial meltdown at a time many areas of the war-torn nation are teetering towards famine.
The Taliban’s money problems stem from the US Treasury Department’s freeze order on an estimated US$9.5 billion of Afghan central bank reserves held in US financial institutions including the New York Federal Reserve Bank.
It’s not clear when those funds will be available as long as the Taliban remains on a US terrorism-related sanctions list. Now exiled former Da Afghan Bank governor Ajmal Ahmady has said that the Taliban regime now has access to only 0.1-0.2% of the country’s total international reserves.
At the same time, the International Monetary Fund (IMF) has blocked Afghanistan’s access to Special Drawing Rights (SDR) funds worth $460 million. Afghanistan’s central bank is also known to hold around $700 million at the Switzerland-based Bank of International Settlements.
Before the Taliban’s takeover, around 75% of spending was financed through international aid grants, according to the World Bank.
The cash crunch is fast depreciating the Afghan currency, which in turn is quickly passing through to inflation including food prices.
Foreign remittances, which usually account for 4% of Afghanistan’s aid-dependent economy and come mainly from Istanbul, London and Doha, have been hampered by the closure of cash transfer services provided by MoneyGram and Western Union.
The more widely used hawala system for transferring money, widely used in rural areas, has also reportedly been crippled due to the lack of hard currency. The United Nations World Food Program has warned that only 5% of Afghan households now have enough food on any given day.
Meanwhile, banks are on the verge of collapse. Reuters reported in mid-September that Afghan banks were running out of dollars and many would likely have to close to customers if the Taliban didn’t provide liquidity soon. They had already limited withdrawals to $200 per day as Afghans rushed to withdraw their savings.
The cash-starved economy, where 90% of the population lived on less than $2 per day before the nation’s scarce resources were frozen overseas, could contract by as much as 20% this year, according to Fitch Ratings.
The United Nations raised $1 billion in pledges for humanitarian aid to Afghanistan this month, but that assistance aims to be delivered via non-governmental organizations (NGOs) so as to bypass the Taliban administration, which may or may not be viable.
Afghanistan’s meltdown is having certain contagion effects in neighboring Pakistan, where the flow of dollars across the border is according to some analysts starting to put pressure on the Pakistani currency, the rupee.
Pakistan stocks plunged and the rupee slipped to a record low of 170.48 to the US greenback today (September 30) as the US Senate opened a probe into Pakistan’s role in the Taliban’s takeover, which some suspect could eventually lead to the imposition of US sanctions against Islamabad.
Pakistan’s Federal Board of Revenue (FBR) is bidding to mollify the market panic. On September 24, the FBR said it was stringently enforcing money movement regulations, including at airports, to prevent money smuggling across the Pakistan-Afghanistan border.
In a press release, FBR said: “Pakistan Customs has made it mandatory for all passengers flying out of [the] country to undergo thorough personal scrutiny and 100% declaration of currency through an automated process to ward off this nefarious and illegal activity.”
Farrukh Saleem, an Islamabad-based Pakistani political scientist, economist and financial analyst, estimates at least $7 to $10 million is now being smuggled daily from Pakistan to Afghanistan, which he notes is not enough of an outflow to put pressure on the currency.
But those outflows may be one of several factors putting new pressure on Pakistan’s currency. The State Bank of Pakistan (SBP) on September 24 provided short-term loans worth $11.5 billion for seven days to commercial banks to inject more liquidity into currency markets and help support the rupee.
That move followed its earlier unsuccessful injection of some $1.2 billion into the markets from July to September to prop the rupee.
Capital controls could be next. SBP has recently issued new regulations requiring banks to report all foreign currency transactions of $500,000 and above.
The government also plans to discourage the import of luxury items by imposing new duties on automobiles, cosmetics, master baths, varnishes, stationary, textiles, sweeteners and non-essential food items to bring down the national import bill.
Major Afghan exporters and dealers revealed to Asia Times that Afghanistan has run out of foreign currency and that government reserves on hand are not enough to pay import bills, defense expenditures and administration costs, including civil servants’ salaries.
That, in turn, is impacting the supply of medicines, energy supplies and, most crucially, essential food commodities. Trade with Pakistan, which normally amounts to around $1.5 billion per year, has come to a standstill since the Taliban’s takeover in August.
Pakistani trade magnate Shahid Hussain told Asia Times that Pakistan’s exports to Afghanistan have ground to a halt precisely due to a lack of liquidity.
“Although Afghanistan has still enough foreign currency in banks and with the Afghan moneychangers and big dealers, the suspension of regular fund transfers from the US for recurring expenses has made a chaotic situation in Afghanistan,” he said.
Shahid, one of the country’s top cement exporters with offices both in Peshawar and Kabul, claimed that Afghanistan is now relying almost solely on internally generated revenues to stay afloat.
“The instability has drastically reduced the government’s ability to generate enough revenue. Their revenue collection is much less than what the previous Afghan government collection was,” he added.
“Secondly, the Taliban are aware of the mistrust of the Afghan business community. They do not have confidence in the new government in Kabul and if the Taliban allowed normal banking transactions, the big businesses would withdraw their dollars and remit them abroad,” Shahid claimed.