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Afghanistan faces economic shock as sanctions replace foreign aid

WASHINGTON – As the Taliban attempt the precarious transition from insurgent to functioning government, Afghanistan is at increased risk of financial collapse after having been backed by foreign aid for the past two decades, which now accounts for nearly half of its legal economy .

The fate of the Afghan economy will be determined by decisions by the Biden government and other countries to recognize the Taliban as the legitimate government. Meanwhile, the US and the international community are already stopping the flow of money and leaving Afghanistan in the stranglehold of sanctions that were supposed to cut the Taliban off from the global financial system. Analysts say the impending shock threatens to exacerbate a humanitarian crisis in a country that has already weathered years of war.

Signs of tension were evident this week as the value of the Afghan currency, the afghani, fell to record lows and the country’s youngest central bank governor Ajmal Ahmady warned that inflation was likely to drive food prices higher. The United States, which has invested about $ 1 trillion in Afghanistan in 20 years, has blocked the Taliban from accessing Afghanistan’s $ 9.4 billion in international reserves. And the International Monetary Fund has suspended plans to distribute more than $ 400 million in emergency reserves to the country.

“In the short term, it’s potentially catastrophic,” said Justin Sandefur, senior fellow at the Center for Global Development. “You are looking at the possibility of a currency collapse and a financial crisis that could cause real pain to ordinary people.”

Afghanistan’s economy was facing major challenges and international support began to wane even before the Taliban came to power.

The decline in the American armed forces and government contractors who contributed to Afghanistan’s tax base over the past year has blown revenue as the country, like much of the world, grappled with the coronavirus pandemic. The Congressional Research Service found that 90 percent of the Afghan population lived on less than $ 2 a day that year and warned that losing American support would weaken one of the world’s smallest economies.

In late 2020, foreign donors that met in Geneva pledged $ 12 billion in aid over the next four years, a 20 percent decrease from the previous four years. Some aid agencies put new terms for the money on progress in human rights and progress in peace talks between the government and the Taliban.

Concerns about food insecurity are mounting and the threat of drought is likely to make matters worse.

“The withdrawal of US troops or the cut in international grants for the Afghan security forces would have a number of unpredictable effects on security, political cohesion and the economy,” wrote the World Bank in its Afghanistan Development Update published in April. “The fiscal leeway remains tightly limited in connection with a weaker sales development and declining international grants.”

Although Afghanistan’s budget deficit was relatively low relative to its economy, the World Bank warned that the country was at “high risk of an external and aggregate debt crisis” due to its reliance on foreign grants and low exports.

The World Bank, which has provided more than $ 5.3 billion for development and emergency aid projects in Afghanistan since 2002, this week evacuated its staff and families from the country to Islamabad, Pakistan. A World Bank spokesman did not comment on the future of his work in the country.

Updated

Aug 21, 2021, 6:06 p.m. ET

Paul Cadario, a former World Bank official, suggested that a key question is whether the Taliban would be able to carry out the infrastructure projects that foreign development groups had funded and maintain public services to create a functioning economy. However, it remains uncertain whether the Taliban will allow work on public health and education projects, and the status of basic institutions such as the tax administration remains pending.

“Presumably some of what the government does is paid for by the Taliban with money from other sources of income such as opium,” said Cadario, a fellow at the University of Toronto’s Munk School of Global Affairs and Public Policy.

A June United Nations report highlighted the Taliban’s lack of economic credibility and detailed how its funding came from criminal activities such as drug trafficking, opium poppy production, extortion, ransom kidnappings and mineral exploitation. It estimated the group’s revenue from these practices was between $ 300 million and $ 1.6 billion per year.

Alex Zerden, U.S. Treasury Department’s financial attaché at the U.S. Embassy in Kabul from 2018 to 2019, said the United States needed to decide quickly how to sever its financial ties with Afghanistan.

Congress allocated $ 3 billion to the Afghanistan Security Forces Fund for 2021, and the Biden administration had requested more money for next year. The Taliban are also likely to push for access to the country’s reserves, which are located in the United States.

Understanding the Taliban takeover in Afghanistan

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Who are the Taliban? The Taliban emerged in 1994 amid the unrest following the withdrawal of Soviet forces from Afghanistan in 1989. They used brutal public punishments, including flogging, amputation and mass executions, to enforce their rules. Here is more about their genesis and track record as rulers.

Who are the Taliban leaders? These are the top leaders of the Taliban, men who for years have been on the run, in hiding, in prison and dodged American drones. Little is known about them or how they plan to rule, including whether they will be as tolerant as they say they are.

What is happening to the women of Afghanistan? When the Taliban was last in power, they banned women and girls from most jobs or from going to school. Afghan women have gained a lot since the Taliban was overthrown, but now they fear that they are losing ground. Taliban officials are trying to reassure women that things will be different, but there are indications that they have begun to reintroduce the old order in at least some areas.

“I think this will be a looming problem between the United States, international partners and the Taliban government over the future of these funds,” said Zerden.

Any move to free up the funds is likely to face stiff political opposition from Republicans. A group of Republican lawmakers this week urged Treasury Secretary Janet L. Yellen to prevent the International Monetary Fund from giving the Taliban access to emergency currency reserves. Separately, House Republicans wrote to the Inspector General for Reconstruction in Afghanistan asking if continued aid to Afghanistan was legal and in the interests of the United States.

Biden government officials have said they are closely monitoring the Taliban’s actions and that it is premature to say whether the United States will recognize the new government as legitimate.

The greatest leverage the United States and the rest of the world exert on the Taliban are sanctions, which have been aggressively used to starve the funding group and restrict their leaders’ travel options. A 2020 agreement between the Trump administration and the Taliban called for a review of U.S. sanctions against the Taliban with the aim of lifting them, but the group’s overthrow of the Afghan government makes that less likely.

“Afghanistan is now emerging in the international community in a sea of ​​sanctions linked to the Taliban since September 11th,” said Juan C. Zarate, the first deputy finance minister for terrorist financing and financial crime. “Sanctions will be a critical barrier to both legitimacy and commercial activity with the Taliban and Afghan entities and the economy.”

The Treasury Department did not comment on whether it had started to review sanctions against the Taliban. Although sanctions are accused of causing pain to civilians in countries like Venezuela and Iran, the United States often makes exemptions through general licenses to allow certain types of transactions on humanitarian grounds.

Any sanctions imposed on Afghanistan will be more painful than those imposed by the United States on Iran, which has a far more advanced economy and has managed to bypass restrictions and continue to export hundreds of thousands of barrels of oil every day.

The United Nations Security Council has also imposed sanctions on the Taliban that make it even more difficult to lift them, even if countries like China and Russia want to do business with Afghanistan. Aid agencies and non-governmental organizations will have difficulty operating in Afghanistan while the sanctions are in place.

Zarate said sanctions against the Taliban would likely only be lifted if the group changed their behavior, but that their history of human rights abuses and reliance on illegal finances made it unlikely.

“I can imagine the thicket getting worse rather than better,” said Zarate, hinting that there will be calls in the United States to impose more sanctions. “There won’t be much sympathy.”

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