Afghanistan: an economy in trouble

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The precipitous withdrawal of US troops and the resulting Taliban takeover of Afghanistan has universally been labelled a disaster. Looming over Afghanistan now is a different kind of disaster. The Afghan economy is in dire straits.

Fleeing Afghans have withdrawn cash from ATMs all over the country which has led to bank runs. Now, the cash-based Afghan economy is suffering, with citizens struggling to access working ATMs and savings. The country also finds itself in a liquidity trap. This means that any efforts to stimulate the economy with cash injections will be ineffective. As a result, refilling ATMs will do little to improve the economic situation.

These two factors, in combination with a collapse in currency value causing inflation to soar, mean that Afghanistan will be plunged into a void of economic and financial ruin.

Admittedly, these seemingly insurmountable economic problems have been festering in Afghanistan for some time. Before the Taliban, the country represented “a classic case of a demand-driven, supply-constrained, highly open economy” struggling with “very weak Government revenues” and foreign aid composing 42% of gross domestic product, states Aqdas Afzal, a journalist at the Pakistani newspaper Dawn.

To ensure peace in this war torn country, the Taliban must achieve financial stability

Like many others, the coronavirus hit the country hard, which forced businesses to close and ate up government revenues. Moreover, throughout the Western occupancy, Afghanistan was crippled by corruption. Afghan officials hoarded aid from NGOs and foreign governments, leaving citizens to live in poverty. The ex-President has been accused of taking millions from Government accounts.

The Taliban needs to find sources of revenue to stabilise the economy. Initially, this will probably involve expanding on previous income sources used to fuel its insurgency, which created an annual budget of $1.6 billion from drugs, mining, tax and extortion, charitable donations and property. However, the Ex-Central Bank Chief, Ajmal Ahmady, claims that the Taliban “had sufficient revenues to run an insurgency”, not a government. Yet, his view looks tenuous when one contrasts the figure to the Afghan government’s $5.6 billion budget with export and taxing from the majority of the population.

The new regime will still need serious external investment to stabilise the economy. And it appears they will be receiving it – from China. China has set itself apart from the world to recognise the Taliban Government, and invested in the country. The investment, they hope, will revitalise the economy. But it also has considerable benefits for China. They will profit from aiding the extraction of natural resources that have remained untouched, previously lacking the correct infrastructure. Moreover, the partnership would buttress the small border in the Xingjang province, notoriously troubled by separatism and so-called extremism.

The Ex-Central Bank Chief claims that the Taliban “had sufficient revenues to run an insurgency”, not a government

Furthermore, the new government will fund itself from customs and taxation. Finally, there remains space for western governments’ aid to continue in Afghanistan. The United States and International Monetary Fund have blocked access to Afghanistan’s foreign exchange reserves which means that the country now cannot import basic goods like food or medicines. Therefore, it appears essential to release these funds to prevent harm to citizens. However, the manner of release is equally important. Creating terms for the Taliban to comply with for the funds represents a potential lever to ensure the respect of women and adherence to human rights in the new regime.

As the region has shown us time and again, grievances of any type, including economic, may rattle the country with war once again. To ensure peace in this war-torn country, the Taliban must achieve financial stability through one of these options, or all.

Image: United Nations Photo via Flickr

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