“Terrible prospects”: Taliban threatens financial crisis

After conquering Kabul, the Taliban are preparing to rule over an ailing country. One of the great difficulties: you need money to govern. But the foreign exchange reserves are blocked and payments from abroad stopped.

The takeover of power in Afghanistan went so quickly that the pace may have surprised even the Taliban. Now, however, the Islamists are suddenly faced with a huge problem: they have no access to the country’s billions in foreign currency reserves and the West is stopping its payments.

According to the head of the Afghan central bank, Ajmal Ahmady, who fled abroad, the central bank controls around nine billion dollars. Of this, seven billion dollars in the form of cash, gold, bonds and other investments would be with the US Federal Reserve. Most of the remaining amount is also not in Afghan vaults, but is in other international accounts – for example with the Switzerland-based Bank for International Settlements (BIS), which is the bank of the central banks. Only a maximum of 0.2 percent of the reserves are accessible to the Taliban. The reason: the US government and the central bank frozen most of Afghanistan’s currency reserves after the fall of Kabul.

Since Afghanistan imports far more than it exports, and thus has a large current account deficit, the central bank “relies on receiving physical cash deliveries every few weeks,” tweeted Ahmady. “The amount of remaining cash is close to zero as deliveries ceased after the security situation deteriorated.” He told the Financial Times: “If people think it’s bad but it’s going to end soon, they underestimate the consequences.” The military phase is over, now the phase of economic consequences begins.

And they are likely to be violent. He now expects the Afghani currency to depreciate even further, tweeted Ahmady. The reason for this is that the central bank cannot provide the domestic banks with enough dollars. “Inflation will rise,” said the central banker. At the same time, the Taliban are likely to use capital controls to prevent foreign currency outflows. They are also likely to limit withdrawals from accounts. “It’ll be terrible if people can’t get their money,” Ahmady told the FT.

For the broad mass of the population, inflation will mainly be felt in the form of higher food prices. The value of the Afghan currency had already fallen sharply when the Islamists took over.

Germany stops payments

As one of the poorest countries in the world, Afghanistan is “cruelly dependent on foreign aid,” says expert Vanda Felbab-Brown of the US think tank Brookings Institution. The amount of the previous aid payments is at least ten times what the Taliban leadership earns in the country.

According to the World Bank, the country’s gross domestic product in 2020 was 19.8 billion US dollars, of which aid funds made up almost 43 percent. According to a report by the UN Security Council’s Sanctions Committee released in May 2020, the Taliban’s current revenues are estimated at $ 300 million to $ 1.5 billion a year. The Taliban often derive their income from criminal activities. An important industry is the cultivation of opium poppies, from which opium and heroin are obtained. The extortion of local companies and ransom demands for kidnappings also put money in the coffers of the Islamists.

After the Taliban came to power, several countries announced that they would freeze aid funds. Germany, one of the most important donor countries, also stopped its payments. In the meantime, the International Monetary Fund (IMF) has also suspended Afghanistan’s access to resources amounting to around 450 million US dollars. A $ 370 million loan program from the IMF, which was intended to boost Afghanistan’s economy during the Corona crisis, has also stopped.

A financial crisis is likely to make it difficult for the Taliban to consolidate their power. But it will probably also increase the flow of refugees, as the already low standard of living will continue to fall. “In the medium term there will be large migration flows from Afghanistan,” says central bank chief Ahmady. Even if you believe in Europe and elsewhere that this can be prevented: “It just doesn’t work.”