Upheaval in Afghanistan: Economy is at the mercy of the Taliban

Upheaval in Afghanistan
The economy is at the mercy of the Taliban

By Bastian Hosan

The Afghan economy, which is already ailing, is still under pressure with the takeover of power by the Taliban. It looks like the country isn’t just losing ground in international trade. The government can no longer hope for financial aid from abroad either.

Afghanistan’s economy is fragile and the country is dependent on economic aid. This is a summary of what the World Bank wrote about Afghanistan a few months ago. There is no private sector worth mentioning, most people work in less productive agriculture. There are hardly any state institutions that could promote the expansion of an economy – and when they do, their activity is concentrated in the metropolitan areas around the large cities such as Kabul or Mazar-e Sharif. In the World Bank’s gross domestic per capita ranking, the country was ranked 173 out of 190. That was in 2020.

Now the situation in Afghanistan has changed again and, above all, dramatically. With the withdrawal of international troops and the conquest of Kabul by the Taliban, chaos broke out in the already fragile country. People try to flee, dramatic scenes take place on the tarmac at the airport of the capital. The US military is evacuating its people. And the Bundeswehr is also on site with transport machines.

Amid the apparent chaos caused by the government’s flight, it is now emerging that the country’s economy could also be dragged further into a downward spiral. Last week the US stopped its dollar deliveries to the central bank – since then, the country’s currency, the afghani, has been trapped in a downward trend. Overall, the value is 1.7 percent lower against the US dollar.

Afghanistan’s economy in dire straits

The head of the Afghan Central Bank, Ajmal Ahmady, has since left the country. On Twitter, he describes what has happened in the country over the past few days. “The collapse of the government here in Afghanistan last week went so quickly and it was a total defeat,” he wrote there. “The situation was confusing and difficult to understand.” He blames the situation on the president, who has also fled, and who failed to ensure an orderly transfer of power from government to the Taliban.

This will now continue to put the Afghan economy in trouble. To date, around 60 percent of the state budget has been covered by aid from abroad. The country can no longer hope for that. Foreign Minister Heiko Maas had already announced that Germany would turn off the money if the Taliban came to power: “We will not give a cent to Afghanistan once the Taliban have taken over completely, introduce Sharia law and this country becomes a caliphate.” The development ministry has now also confirmed the announcement. All German and international employees of the German Society for International Cooperation (GIZ), which is responsible for state development aid, would have safely left the country.

So far, Germany alone has sent 430 million euros in aid to Afghanistan every year. And Germany is not the only country that will stop its aid to Afghanistan if the Taliban expand their power over the conquered areas again. American economic aid is also likely to be put on hold. Cash reserves that are stored in the USA are to be frozen. “The US central bank reserves will not be made available to the Taliban,” said the US government. As of April of this year, it is at least 9.4 billion dollars. That means: An economy that is already in a shabby state would also be robbed of its most important inflows of money.

Afghans do not have the money for goods from abroad

The World Bank sees several reasons for the fact that the Afghan economy did not emerge from the valley in which it has been stuck for decades, even before the country was retaken by the Taliban. One is the security situation in the country on the Hindu Kush. The Afghan government had to raise 29 percent of the gross domestic product just to finance the military and police apparatus. In countries with a comparable economic output, the average expenditure is three percent.

In addition, rampant corruption made it difficult for companies from abroad to access the country. In the past two years there have been no attempts by foreign companies to set up a new business in Afghanistan. According to the United Nations, there have been a total of four since 2014.

The government in Afghanistan has also long had problems making economic use of the country’s abundant natural resources. Raw materials were only extracted – if at all – in unofficially and illegally operated mines. Many farmers focus on the much more profitable cultivation of opium. Many people also work as smugglers. The cultivation of opium is also one of the sources from which the Taliban have financed themselves. According to the United Nations World Drug Report, the country produced 84 percent of the world’s opium. The terrorist group is said to have earned 416 million dollars a year from cultivating the drug.

Now it looks like the country is losing ground in international trade as well. In any case, not much was exported from Afghanistan to the world – at least not in terms of legal goods. Imports were also manageable: many Afghans simply didn’t have the money to buy goods from abroad. Last year the volume of trade between Germany and Afghanistan was around 70 million euros. In 2019 the country exported goods worth around $ 20 million to Germany. In total, goods worth around 6 billion dollars left the country. And yet: There would also have been reason for the economy to have a slight hope.

Infrastructure projects before the end

Cars, machines and systems have found their way to Afghanistan again and again in recent years. Infrastructure projects financed by international donors have repeatedly lured companies to Afghanistan, but they have not settled there or have only stayed there for projects. With the conquest of the country by the Taliban, these projects are now on hold. One is, for example, a major order for the electrification of the country, which Siemens Energy only secured in November. The aim was to develop the country into the energy hub of Central Asia, as the editorial network Germany writes. In addition, each of the 37 million people in Afghanistan should have access to electricity. Two thirds of Afghans have not yet been connected to the electricity grid.

It cannot be assumed that the situation for foreign companies will calm down again quickly. With the advance of the Taliban, concerns about foreign workers who might still be in the country and about Afghan local workers who work for companies in the country are growing. If the security situation in the country does not improve sustainably, only a few companies will dare to invest in the region – another low blow for the local economy.

For the markets in the region, the situation in Afghanistan could quickly develop into an economic smoldering fire. The economy in neighboring Pakistan, in particular, could be affected. The border between Pakistan and Afghanistan is long and difficult to control. In the past, the Taliban have repeatedly used the Pakistani regions bordering Afghanistan as retreats for their fighters. Now the country could be isolated internationally for this.

This text is at first Capital published.