PESHAWAR – A United Nations agency warning last week that Afghanistan’s banking sector was on the verge of collapse did not come as a surprise to those who had forecast an early financial meltdown in the face of receding foreign aid and assistance to the country.
Predicting a complete breakdown of the Afghan financial system over the coming few months, the United Nations Development Program (UNDP), in a report published last week, claimed that if the world did not come to the rescue, Afghan trade and humanitarian assistance would soon come to a grinding halt.
The UNDP report, analyzing the Afghan banking industry’s performance over the past nine months, concluded that the non-performing loans – a loan in which the borrower defaults in payments of the principal or interest for some time – rose to 57% in September from 27% at the beginning of the year.
Similarly, total bank deposits were expected to fall to 165 billion afghanis (US$1.8 billion) by the end of 2021, a 40% drop over last year.
“Afghanistan’s financial and bank payment systems are in disarray. A run on bank deposits must be resolved quickly to improve Afghanistan’s limited production capacity and prevent the banking system from collapsing,” the report said.
Ziaul Haq Sarhadi, the Vice-President of the Pakistan-Afghanistan Joint Chamber of Commerce and Industry (PAJCCI), told Asia Times that the state of the financial system in Afghanistan was alarming because people had withdrawn billions of dollars from the system, which had a debilitating impact on mutual trade between the two countries.
“During the last four months, no new Letter of Credit (LC) has been opened. The bilateral trade has been running on the already opened LCs. The advance payment made for the previous orders has kept the wheels turning, but when the cash in the pipeline evaporated, the traders start a barter mode of transaction,” he said.
“They would send goods in payment of goods because Afghan traders did not have dollars to pay for the import consignment,” Sarhadi added.
Traders struggling to survive
Sarhadi revealed that the Taliban had issued instructions that all business transactions would be made in the Afghan currency – the afghani – instead of goods for goods. “Afghani is fluctuating in the money market and has lost considerable value against other currencies, which is a source of perpetual loss for the Pakistani traders,” Sarhadi lamented.
He said the loss of a trade finance capacity for Afghanistan would completely halt bilateral trade between Afghanistan and Pakistan if the international community continued to neglect Afghanistan.
“This means that a major part of the food imports programs that are financed through the banking system would come to a halt because the UN and international NGOs need a vibrant banking channel to provide financial aid for the eradication of the humanitarian situation,” Sarhadi explained.
The World Food Program had already warned that more than half the country’s population could face hunger unless the international community takes urgent action to help restore the financial sector.
The signs of a financial meltdown appeared in early October when the Taliban bypassed the country’s financial system and planned to distribute some 66,000 tons of wheat to 44,000 laborers instead of cash payments in a public work program.
Thousands of tons of wheat pledged by India, Pakistan and Iran for humanitarian assistance have been taken by the Taliban to pay workers’ wages, as they faced a deepening cash flow problem and there was no money in the treasury to pay salaries and wages.
Some financial tycoons issued warnings of an impending banking catastrophe in September. Syed Moosa Kaleem Al-Falahi, the Chief Executive of the Islamic Bank of Afghanistan, told the BBC in mid-September that Afghanistan’s banking system was near collapse, adding that the country’s financial industry was in the grip of an “existential crisis.”
“Huge withdrawals are witnessing at the moment and most of the banks are not functioning, and not providing full services,” he told the BBC. Al-Falahi claimed that Afghanistan’s economy was already on shaky ground even before the Taliban took control in August.
A senior Afghan diplomat, pleading anonymity, told Asia Times that escalating financial woes in Afghanistan had resulted in pay cuts for diplomatic staff.
“Our salaries and perks have been drastically reduced over the last few months due to which most of the staff attached with the Afghan embassies and consulates worldwide have been shifted to unsecured and low-cost accommodation in inelegant localities to save expenses on the house rent,” he said.
The looming banking crisis, which carries the risk of paralyzing trade and humanitarian activities in the conflict-ridden country has reactivated diplomatic efforts to end the blockage on financial assistance and aid to Afghanistan.
Since the Taliban retook control of the country some three months ago, Pakistan’s military and civilian leadership have not missed an opportunity to press the world for aid and financial assistance to Afghanistan.
A few days ago, the Taliban rulers sent an open letter to the US Congress, urging lawmakers to release their assets seized by the US administration after the August takeover of Kabul.
Taliban Foreign Minister Amir Khan Muttaqi wrote that the Taliban were making this request to ensure that “doors for future relations are opened, assets of Afghanistan’s Central Bank are unfrozen and sanctions on Afghan banks are lifted.”
The US froze more than $9 billion belonging to the Afghan central bank soon after the Taliban captured Kabul on August 15 and imposed other economic sanctions on the new regime. The US’ Western allies also imposed similar sanctions on the Taliban government.
Muhammad Ishfaq, a senior banker who heads the foreign operations department in a private bank in Pakistan, told Asia Times that the banking system in Afghanistan was heavily reliant on physical shipments of US dollars and about 60% of banks in Afghanistan dealt in foreign currency accounts.
Struggling to find cash
He said 12 commercial banks were operating in Afghanistan – six private banks, one Islamic bank, three state-owned banks and two foreign bank branches.
“Two-third of the total bank deposits are secured by six private domestic banks. In absence of a sustained inflow of the US dollar, the banking companies have run out of cash to entertain their customers,” he added.
Ishfaq added that although the Taliban had reopened bank branches after weeks of closure after their takeover, banks were still struggling to find enough cash to service their customers as dollar inflows have stopped.
He said the UNDP had suggested a solution in introducing a deposit insurance scheme, credit guarantees and rescheduling of loans to ensure adequate liquidity for short and medium-term needs.
A collapse of the banking system in Afghanistan would give a boost to the Hawala network, or the informal money transfer system, in a country that is prone to terror financing.
In the words of Haroun Rahimi, an assistant professor of economics and commercial law at the American University of Afghanistan: “The hawaladars (one who deals with Hawala business) are not discriminating. If you are someone who needs to send money from the US for your family to host a wedding, you’re welcome. If you’re a terrorist looking to fund an attack in Kabul, you’re welcome.”