Afghanistan is encountering a cash crisis that has crippled the country’s frail economy, only a few weeks after the US troops left,
Border restrictions, tightening supply of money, and increasing isolation from the international community are leading to unpaid workers, banks limiting withdrawals, and local companies shutting down. As wireless carriers find paying the suppliers challenging, Afghanistan faces the threat of being cut off from the rest of the world. The most alarming part is the worsening food shortages and the rising prices of essential goods which may lead to a larger humanitarian and economic crisis.
Afghanistan’s economy has been relying mainly on international aid and U.S. dollars during the 20-year occupation of the country. The US dollars have been circulating alongside the afghani currency to pay for imported goods and services and even for making bigger transactions such as purchasing property etc.
A board member of Afghanistan’s central bank Shah Mehrabi who now resides in the US said, “Dollarization is still prevalent in Afghanistan, and our economy depends on it,”.
The US and a number of other countries have not yet recognized the Taliban as the legitimate authority in Afghanistan, owing to apprehensions about their involvement in terrorism and human-rights abuses. The country lost access to over $9 billion in the central bank reserves following the freezing of assets by the Biden administration in mid-August, and other countries following suit. The Funds from the World Bank (WB) and the International Monetary Fund (IMF) have also been put on hold.
Taliban have resorted to capital controls, which include barring Afghan citizens from moving dollars outside of the country and restricting bank withdrawals to $200 per week. Former chief executive officer of Bank-e-Millie Afghan Ahmad Khesrow Zia who currently works as an economics professor at a private university in Kabul said, “The liquidity crisis is worsening, and many banks aren’t able to pay depositors,”. Bank-e-Millie Afghan is the country’s oldest bank.
According to the World Bank and Afghanistan’s chamber of commerce, small and medium-sized enterprises (SME) flourished after the ousting of the Taliban in 2001 and contributed $20 billion to Afghanistan’s economy. Now they face extreme challenges. A senior member of Afghanistan’s chamber of commerce Khanjan Alokozay said, “If these companies collapse, the whole nation’s economy collapses,”.
Jawed Mehri, an owner of a rug factory in the northern city of Mazar-e-Sharif, says he had to put a halt to operations due to a lack of cash. The withdrawal limits “may help banks to run for some time,” he says. “But it will kill our business and probably everyone else’s along the way.”
United Nations Development Programme issued a report last month that shows that if things remain this way, gross domestic product (GDP) could fall to 13.2% in the fiscal year that ends June 2022. This will result in the country’s population of 38 million being pushed into poverty compared to the 72% in 2020.
UNDP’s resident representative in Afghanistan Abdallah Al Dardari said, “This is really a drastic situation,” He added this “is not where things are going. This is where things are now.”
The report emphasizes that declining output, increasing prices, and import constraints are contributing to alarming rates of food insecurity in the country. Based on the data from the Kabul Retailers Association prices of some staples have risen by 30% since the takeover by the Taliban.
The World Health Organization (WHO) has warned that Afghanistan’s healthcare system is staggering due to cuts in donor funding.
The Taliban have not downplayed the severity of the situation. A Taliban spokesman Bilal Karimi told Bloomberg News on Sept. 29 “If the public funds remain frozen or aid remains halted, the country could experience a worst-case economic crisis, forcing local companies that provide jobs to collapse,”.
Karimi added that the new rulers have been unable to pay government salaries since assuming control. “Our financial team at the Finance Ministry is working day and night,” He added that lower-level employees might get wages “in the near future,” but higher-paid employees, who receive salaries in dollars will most probably see a “significant reduction” in pay.
Karimi reported on Monday that a solution to the cash crunch is in the works, but “some technical issues remain,”. He did not provide more details.
Earlier the Taliban had said that revenue collected from customs duties was sufficient to cover public-sector salaries. However, it is unclear how much can the funds from other sources be stretched without resorting to activities that had supported the Taliban during the US occupation such as extortion and kidnapping for ransom and trafficking of illegal drugs, etc.
As per the UN report from June, poppy-based drugs and methamphetamines were the “Taliban’s largest single source of income,”. When the Taliban took control in August, spokesman Zabihullah Mujahid vowed that the new regime was not going to turn the country into a narco-state. He said, “We are assuring our countrymen and women and the international community, we will not have any narcotics produced,”.
Motivated by the need to avert a mass exodus of Afghan refugees, international organizations and governments have started providing assistance to the country. The UN announced emergency pledges worth $1.2 billion on Saturday. The US has approved sanction exemptions for humanitarian organizations. China has criticized the freezing of funds by the US and agreed to provide give $31 million in emergency aid.
However, these efforts will only be able to help the country so much as external aid has accounted for almost 75% of public spending in the last few years in Afghanistan.