Author: Don Obrien

Afghanistan faces an economic crisis, as well as a humanitarian one

Afghanistan updates

The writer is the former head of Afghanistan’s central bank

In 1980, during the middle of the night, my family departed Afghanistan with no belongings. Forty-one years later, I left in almost exactly the same manner. History rhymes everywhere, but especially so in Afghanistan.

Now we must deal with the fallout. The Taliban were able quickly to take control of the country. Now they must show if they can govern. There are reports that the Taliban Economic Commission has begun to meet, but have only made peripheral decisions such as banning scrap metal exports. Only on Monday was a new central bank governor appointed.

Both the Taliban and the international community must quickly make plans to deal with this grave situation. Afghanistan was already facing the triple threat of Covid-19, conflict and drought. Even before recent events, the World Food Programme had announced that up to 14m Afghans were food insecure. Now, the country must also deal with an economic shock. With the freezing of $9bn of foreign reserves, import coverage has dropped from more than 15 months to only two days overnight.

International aid flows are likewise expected to decline. Germany has already announced a suspension of $300m in aid, while the IMF has suspended its $440m SDR allocation. During the G7 meeting this week, it is expected that UK prime minister Boris Johnson might call for new sanctions.

I expect the economic impact to be felt in three main ways. First, the afghani currency will probably decline, increasing inflation. There are already reports that wheat prices have doubled in Kabul. Even those depositors with money will not be able to fully withdraw their savings.

Second, aggregate real income will probably fall. Government revenues under the Taliban will drop significantly. As donors provide less fiscal support, government services will have to be cut. Many government employees will be laid off and, for those that remain, salaries will be much lower.

Third, refugee flows will increase. We are seeing a minor flow now at Kabul Airport, but both neighbouring and further-off countries should expect millions more Afghan refugees to arrive over time.

Some have minimised the economic issue by writing that Taliban revenues from illegal mining, opium production or trade routes are large. Or that China or Russia will intercede with large investments. These are over-optimistic scenarios.

Taliban revenues from such sources could be considered relatively large when only running an insurgency campaign. They are wholly inadequate to operate a functional government. 

Furthermore, the assertion that China, Russia or even Pakistan will invest large sums in Afghanistan is not realistic. In 2019, as Afghanistan’s minister of commerce, I attended the second Belt and Road Initiative conference in Beijing. However much we tried, Afghanistan was never part of the BRI, and I would not expect it to be a part of the initiative in the near future.

Even if such investments were to occur, they cannot replace the combined financial firepower of the main bilateral and multilateral donor agencies. The Taliban must negotiate with such partners if they expect to be able to access international reserves or receive donor funding. That will require adherence to global standards of governance and education for women, among other issues.

Such negotiations take time, if they come to fruition at all. Afghanistan will face a humanitarian crisis long before then. Therefore, the international community must immediately plan to provide higher levels of aid in the form of food and financial assistance through the United Nations.

In order to support refugee flows, a humanitarian corridor must be established. International agreements on the number of refugees to be taken need to be signed. Let me be clear. If the current situation persists, refugee flows will increase. The international community should try to make the flow as humane as possible, rather than forcing middle class Afghan families to pay smugglers to transport them across borders.

Afghanistan is once again facing a blanket of darkness, and the future there is as uncertain as ever. The scenes from the airport will haunt us for a long time to come. But let us take action now to ensure that the result is not a humanitarian crisis as well.

Register for an FT subscriber webinar on Wednesday August 25 with Ajmal Ahmady and General David Petraeus to discuss The Fall of Afghanistan: What Next?

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Oliver Bolt

Oliver Bolt

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