Afghanistan faces economic shock as sanctions replace foreign aid

WASHINGTON – As the Taliban attempt to move from an insurgent movement to a functioning government, Afghanistan faces increased risk of financial collapse after being bolstered for the past two decades by foreign aid which now represents almost half of its legal economy.

The fate of the Afghan economy will be determined by the decisions the Biden administration and other countries must make about recognizing the Taliban as a legitimate government. Meanwhile, the United States and the international community are already blocking the flow of money, leaving Afghanistan in the grip of sanctions designed to cut the Taliban off from the global financial system. Analysts say the looming shock threatens to amplify a humanitarian crisis in a country that has already endured years of war.

Signs of tension were evident this week as the value of the Afghan currency, the afghani, plunged to record levels and the country’s most recent central bank governor, Ajmal Ahmady, warned that inflation would likely drive up food prices. The United States, which has poured about $ 1,000 billion into Afghanistan in 20 years, has decided to block the Taliban’s access to 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 researcher at the Center for Global Development. “You are considering the possibility of a currency collapse and a financial crisis that could inflict real suffering on normal people.”

The Afghan economy was facing serious problems and international support was starting to wane, even before the Taliban took power.

The withdrawal over the past year of U.S. forces and government contractors who have contributed to Afghanistan’s tax base has sapped revenues as the country, like much of the world, faced recession. coronavirus pandemic. The Congressional Research Service noted this year that 90 percent of the Afghan population lived on less than $ 2 a day and warned that the loss of U.S. support would weaken one of the world’s smallest economies.

At the end of 2020, foreign donors meeting in Geneva pledged $ 12 billion in aid to Afghanistan over the next four years, down 20% from the previous four years. Some of the aid agencies have based the new conditions for the money on advances in human rights and progress in peace talks between the government and the Taliban.

Concerns about food insecurity are mounting and an impending drought is expected to make matters worse.

“The withdrawal of American troops or the reduction of international subsidies to Afghan security forces would have a series of unpredictable impacts on security, political cohesion and the economy,” the World Bank wrote in its Afghanistan Development Update, published in April. “Fiscal space remains severely limited in a context of falling income and falling international subsidies. “

Although Afghanistan’s budget deficit has been relatively small as a percentage of its economy, the World Bank has warned that the country is at “high risk of external and overall debt distress” due to its dependence on foreign subsidies and low levels of debt. exports.

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

Paul Cadario, a former World Bank official, suggested that a key question was whether the Taliban would be able to complete the infrastructure projects that foreign development groups had funded and maintain the utilities to create. a viable economy. However, he said, it remains uncertain whether the Taliban will allow further work on projects related to public health and education, and the status of grassroots institutions like the tax administration remains in limbo. .

“Presumably, part of what the government does will be paid for by the Taliban with money from other sources of income like opium,” said Cadario, researcher at the Munk School of Global Affairs and Public. Policy of the University of Toronto.

A United Nations report in June highlighted the Taliban’s lack of economic credibility, detailing how their funding comes from criminal activities such as drug trafficking, opium poppy production, extortion, kidnapping for ransom and mining. He estimated that the group’s income from these practices was between $ 300 billion and $ 1.6 billion per year.

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

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

“I think it will be an imminent problem between the United States, international partners and the Taliban government regarding the future of these funds,” Zerden said.

Any decision to release the funds risks meeting fierce political resistance from Republicans. A group of Republican lawmakers urged Treasury Secretary Janet L. Yellen this week to prevent the International Monetary Fund from giving the Taliban access to emergency currency reserves. Separately, House Republicans have written to the Special Inspector General for the Reconstruction of Afghanistan asking if continued aid to Afghanistan is legal and in the best interests of the United States.

Officials in the Biden administration have said they are carefully monitoring the actions of the Taliban and that it is premature to say whether the United States will recognize the new government as legitimate.

The most powerful leverage the United States and the rest of the world hold against the Taliban are the sanctions, which have been used aggressively to deprive the group of funding and restrict the ability of its leaders to travel. A 2020 deal between the Trump administration and the Taliban called for a review of US sanctions against the Taliban with the aim of removing 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 ​​Taliban-related sanctions dating back to September 11,” said Juan C. Zarate, who served as the first-ever Deputy Secretary of the Treasury for Terrorist Financing and Financial Crimes . . “Sanctions will be a critical obstacle to both legitimacy and business activity with Taliban and Afghan entities and the economy. “

The Treasury Department has not commented on whether it has started reviewing sanctions against the Taliban. Although the sanctions have been accused of inflicting suffering on civilians in places like Venezuela and Iran, the United States often makes exceptions, through blanket licenses, to allow certain types of transactions for humanitarian reasons.

Any sanctions imposed on Afghanistan will be more painful than those the United States has imposed on Iran, which has a much more sophisticated economy and has managed to evade 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, making it even more difficult to cancel them even if countries like China and Russia want to do business with Afghanistan. Aid groups and non-governmental organizations will find it difficult to operate in Afghanistan as long as the sanctions are in place.

Mr Zarate said sanctions against the Taliban would likely only be lifted if the group changed its behavior, but its history of human rights abuses and reliance on illicit financing made this unlikely.

“I imagine the thicket will get worse rather than better,” Zarate said, suggesting there will be calls for the United States to impose more sanctions. “There won’t be much sympathy.”

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