Ever since the Taliban’s military takeover of Kabul, the Afghan economy has gone from bad to worse and could now be headed for a total collapse if international agency predictions are to be believed.
According to the International Monetary Fund (IMF), the Afghan economy could shrink by 30% or more year on year in the coming months as the country teeters towards what the UN warns could be a catastrophic famine situation.
The economic distress can be traced largely, though not wholly, to the sudden withdrawal of mostly Western foreign aid in the wake of the US and NATO troop withdrawal and Taliban takeover in August.
According to the World Bank, foreign grants previously amounted to US$8.5 billion and comprised almost 45% of Afghanistan’s GDP. That foreign aid funded 75% of Afghanistan’s public expenditures and paid for almost 50% of its budget.
When the Taliban seized power, existing US sanctions, including the influential Haqqani network that now controls the all-powerful interior ministry, were automatically extended to the wider Taliban regime, effectively shutting the door on most foreign aid and assistance.
The IMF, World Bank, EU, US and other foreign funding agencies have stopped aid, or refused to restart it, because they do not want their funds to fall into the hands of a regime that has thus far taken few if any practical steps to eliminate transnational jihadi networks in its midst.
Just as significantly, the US has refused to unfreeze Afghanistan’s almost US$9.5 billion held in US banks and financial institutions.
Responding to an open letter recently written by the Taliban to the US Congress urging them to release the assets, Washington not only refused the request but also blamed Kabul for misconstruing facts about Afghanistan’s dire economic situation, namely that Afghanistan’s worsening economic situation was not caused by US sanctions.
While the sanctions have no doubt pinched, the Taliban’s economic predicament has been compounded by the fact its takeover has caused a large part of the local economy to disappear.
Before its seizure of power, the militant group was able to tax various economic activities in rural Afghanistan, including through an agriculture tax on opium production and legal and illegal border trade in areas it controlled.
According to an August 2021 report of the ODI global think tank, the Taliban actively acted as a state within a state before its takeover. They not only collected revenue but also provided limited services, such as security, to the population of areas under its control.
The ODI report estimates the Taliban was able to collect US$54.3 million in Nimroz province alone.
Ever since the Taliban’s takeover, as a recent report by the Afghan Analyst Network highlighted, most of this taxation has reduced to a trickle because of slower economic activity and cross-border trade in Nimroz and other areas, causing almost 43% of Afghanistan’s GDP to disappear.
The liquidation of both the formal and informal economy has led to a rapid increase in the number of otherwise middle-class Afghan households facing hunger and poverty, according to Shelley Thakral, the UN World Food Program’s spokesperson for Afghanistan, said.
While the Taliban was able to collect hefty fees across most of rural Afghanistan under its control to fund jihad, the disappearance of these revenues has compounded the country’s economic plight just as foreign aid has dried up.
A recent UN report, meanwhile, says Afghanistan’s banking system, too, is on the brink of a collapse. While the stoppage of foreign assistance is a major contributor to the financial distress, a shrinking local economy is impacting Afghans’ ability to pay back loans to banks.
A foreign bailout isn’t likely on the cards. The head of the UNDP in Afghanistan said that’s because there is still no way to prevent any financial support for the banking sector from falling instead into the Taliban’s hands.
Amid a rapidly deteriorating economic situation, non-performing loans have doubled to 57% in the total system since September 2020, indication of how rapidly Afghan entrepreneurs and businesspeople are going bankrupt.
Economic crisis and financial insecurity are causing an increasing number of Afghan farmers, who have additionally been impacted by droughts, to abandon their traditional cultivation of pomegranate and turn towards poppy cultivation, the plant used in opium and heroin production.
A recent New York Times report noted that while the Taliban took often harsh steps to eliminate poppy cultivation when they first came to power in 1996, this time the economic situation is different.
In areas hit by drought, the Taliban have given a green pass to cultivators to grow poppy, a crop that will not only allow farmers to earn money, but also enable the Taliban to tax and collect revenue.
The Taliban’s turn to what they once considered an “un-Islamic” business reveals the group’s rising economic and financial desperation, critics say.
Despite foreign sanctions and the lack of foreign assistance, the Taliban regime continues to take steps that are alienating potential Western donors and partners. Those include recent bans imposed on secondary education for girls and on women appearing in TV dramas.
While these steps towards the imposition of what the Taliban considers sharia law are keeping foreign money away from Kabul, the Taliban’s persistent demands for aid and assistance underscores the group’s lack of any coherent economic plan, apart from poppy cultivation.
While the UN has advocated extending a helping hand to the Taliban, the severity of the economic collapse triggered by its takeover is unlikely to pass even if some international actors, pressed by the seriousness of the crisis, decide to switch course and provide new aid.
As long as the Taliban is not internationally recognized as the country’s legitimate government, a recognition it will not receive even from China and Russia until it proves it is serious about uprooting transnational terror groups, the aid and assistance it needs to survive economically will not likely be forthcoming.