Afghanistan’s new woes: Dwindling economy, severe food shortage

If the Taliban taking over their country wasn’t enough, the people of Afghanistan have a new crisis to face. Afghans now must face yet another period of uncertainty with respect to the dwindling economy and severe food shortage.

Afghanistan saw promising developments in terms of GDP and per capita income following the US’ invasion after 9/11. But despite promises, over a third of the population lived on less than $2 a day. Whatever improvement was seen in the economy was mostly because of foreign aid and the presence of US and NATO forces. Their presence enabled businesses to run without any direct interference from the Taliban. Now with the return of the Taliban, the freezing of central bank reserves by the US and the stopping of foreign aid, Afghanistan is staring at a very bleak future.

As of today, in spite of the front put forth by the Taliban and their newfound PR exercise, the fact is that food prices are skyrocketing. Most banks are shut. And those that have opened are enforcing a withdrawal limit. Additionally, salaries are not being paid, policy paralysis is showing up all around, and countries like Pakistan are exploiting the crisis by inflating Afghan imports.

ECONOMY FALLING LIKE NINEPINS

The United Nations had warned that Afghanistan would soon face a major food crisis as the nation awaits a new government. Local sources indicate that the food prices have almost doubled and are expected to see a continuous rise in the coming days. Al Jazeera recently reported that food prices in Afghanistan have increased by about 50 per cent, and petrol by as much as 75 per cent.

One in three Afghans (close to 12 million Afghans) will go hungry soon owing to the impending food shortage crisis and 2 million malnourished Afghan children may need urgent assistance, according to Ramiz Alakbarov, UN's humanitarian chief in Afghanistan. What further precipitates the issue is the fact that most of the international countries have decided to stop their aid to Afghanistan now that the US and the NATO troops have vacated altogether. While some countries like China and Russia have been engaging with the Taliban, it remains to be seen if these nations will lend the country a helping hand right now. In terms of other countries trying to bail Afghanistan out, it is still a huge question mark as until a government is formed and its nature and stands are known, countries who have in the past doled out aid will remain skeptical.

It is no surprise that the economy of Afghanistan is expected to take a major hit with the GDP likely to shrink by 9.7 per cent this financial year and by 5.2 per cent next year as per the credit rating agency Fitch Group. The Fitch Group’s report also mentioned that the aftereffects of US’ sudden pullout will be felt for quite some time until some sort of stability hits the nation.

Many well-to-do families managed to flee the nation amid all the chaos, and those who could not are unable to live a hassle-free life as shutting down of office spaces and shops along with non-payment of salaries have made things difficult.

The decrease in value of the Afghan Afghani has also resulted in fluctuations and hike in prices of goods and services, especially ones connected to Pakistan. Reports indicate that the bordering villages and towns of Pakistan have stopped accepting the Afghan currency owing to its depreciating value. In September 2020, the value of $1 was equal to 76.9 Afghani. Today, it is hovering around 85 with some fluctuations taking it as high as 90 Afghanis. The shutting down of local currency exchanges has pegged the price to these levels. Experts fear that reopening of the exchanges will push it above 100 Afghanis.

Families that depended on foreign remittances have also been hugely affected by the shutdown of money exchange and transfer service providers like Western Union and MoneyGram. According to the World Bank, remittances account for 4 per cent of Afghanistan’s GDP or $800 million a year.

Amid the US troops pull-out and the rise of the Taliban, the International Monetary Fund has blocked access to Afghanistan’s $460 million in emergency reserves while the United States has also blocked about $7 billion in Afghan central bank reserves held in US institutions. Soon after this, the World Bank froze its outstanding aid amounts to Afghanistan, citing its concerns over ‘the country’s development prospects, especially for women,’ under Taliban rule.

HOW IS TALIBAN HANDLING THE CRISIS?

The biggest challenge for the Taliban will be to financially support a nation that has changed a lot in the last two decades. With soaring prices and rising inflation, the first real step taken by the Taliban was limiting bank withdrawals equivalent to $200 a week because of concerns about a cash shortage. Haji Mohammad Idris, the newly appointed head of the Afghan central bank has his tasks cut out and will need to quickly put his plans (if any) into action if the supply of cash across Afghanistan is to continue uninterrupted.

As per the UN, it is estimated that since the beginning of the year, conflict and insecurity have driven more than 550,000 Afghans from their homes as some 70,000 displaced people have converged from across the country into Kabul. The post war situation coupled with the socioeconomic impacts of the COVID19 pandemic have made essential supplies and food items out of reach for most Afghan families.

Taliban’s major challenge will be to revive the economy and the same may turn out to be an opportunity for countries like China, Russia, Turkey, and Qatar. The Taliban is said to hand over the operations of its airports in Afghanistan to Qatar and Turkey. China has already been trying to develop Afghanistan’s natural resources in Badakhshan.

Economists and experts who are watching the situation unravel in Afghanistan feel that the nation could see an economic slump similar to that of Syria, Lebanon or even Myanmar more recently. There is also a risk of hyperinflation if the Afghani currency weakens further.

While Afghanistan’s president and vice-president left for the Taliban to pick up the reins, most of the bureaucrats and economists also left the nation for good leaving the country to rely on for the incoming Taliban. In contrast, people like Hamid Karzai (ex-Afghanistan President) have stayed back and want to support the people of Afghanistan. The Taliban have held talks and sought some help from people like Hamid Karzai to offer their economic expertise in handling the financial crisis that is currently unfolding. Haji Mohammad Idris' ascension to lead the Afghan central bank was a surprising move for many who followed the Taliban. He was neither well known, nor known to be having any solid experience in economics or finance. This has raised concerns with respect to future handling of the Afghan economy.

While the so-called Taliban 2.0 promises a lot, their first tenure from 1996 to 2001 offered little to assuage any concerns surrounding their handling of the economy. Taliban’s primary source of revenue was the illegal narcotics market and cross border smuggling of goods. The economy was so bad back then that printing of new Afghani notes was dropped for a certain period owing to loss of value for the currency.

Starting 2001, the country saw a rejuvenated period owing to rapidly accelerated foreign aid that hit a peak of $6.74 billion in the year 2011. From 2001 to 2012, Afghanistan saw an annual growth rate of around 9 per cent, mainly backed by foreign aid investments.

AFGHANISTAN’S EXPORTS, RESERVES & ESTIMATED NATURAL RESOURCES

During the Taliban's first tenure, Afghanistan accounted for more than 3/4th of the world's opium economy. Till today, the country does not have any major exports that can bring in a significant revenue to the nation. The most important factor in assessing the country’s prospects can be brought down to the fact that foreign aid amounted to almost 41 per cent of the country’s GDP. With majority of the top bureaucrats and think tanks having left the country, the evacuations have resulted in a brain-drain of sorts and it remains to be seen how the Taliban will address this economic slide even when they finalise the government formation.

The FAO (Food and Agriculture Organisation) wing of the United Nations has also released a report warning of a drought like situation prevailing across the nation of Afghanistan. The impact of global warming is being seen across the globe in terms of unprecedented droughts, floods, etc. Afghanistan is now facing a very severe drought with around 40 per cent of crop loss.

Afghanistan’s exports have never crossed much more than $3 billion. Hence, this will be a major problem in the coming years unless something changes drastically, for good.

DAB (Da Afghanistan Bank) is Afghanistan’s central bank. It currently has assets worth 784.6 billion Afghanis. The assets include gold worth 102.7 billion Afghanis. Foreign currency cash reserves amount to 28.7 billion Afghanis.

The governor of the DAB, Ajmal Ahmady released a statement saying that total DAB reserves were approximately $9.0 billion as of August. But the same was not held physically in DAB’s vaults, but in safe, liquid assets such as treasuries and gold as per international standards.

The major investment categories of the DAB include the following assets:

• Federal Reserve = $7.0 billion (US bills/bonds: $3.1 billion, World Bank Treasury RAMP assets: $2.4 billion, Gold: $1.2 billion, cash accounts: $0.3 billion
• International accounts = $1.3 billion
• BIS (Bank for International Settlements) = $0.7 billion

Like mentioned earlier, the IMF had approved a $650 billion allocation recently and the DAB was set to receive $340 million on August 23rd. But this is now in limbo owing to whatever has transpired in Afghanistan over the past month.

Ajmal also added that given Afghanistan’s large current account deficit, the DAB was reliant on obtaining physical shipments of cash every few weeks. The amount of such cash remaining is close to zero due a stoppage of shipments as the security situation deteriorated, especially during the last few days. This was the major reason why maximum withdrawal limits were placed for banking customers.

For the questions as to what percentage of these funds can be accessed by the Taliban now that they have taken over, it is understood that the Taliban can perhaps only access around 0.1-0.2 per cent of Afghanistan’s total reserves. It is also understood that without treasury approval, it is unlikely that any donors would support the current Taliban government.
Besides these funds, Afghanistan also seems to possess a lot of natural resources that are yet to be utilised on a large-scale basis. Afghanistan’s natural resources could be close to an estimated $3 trillion. Reports indicate that the country has a rich pool of copper, gold, oil, natural gas, rare earth metals, marble, iron ore etc. In the past, many of these have been illegally mined by the Taliban to generate some revenue in addition to their opium and drugs trade. They specifically mined a lot of Iron ore, marble, and gold.

FUTURE OF AFGHANISTAN ECONOMY

While the US may have evacuated Afghanistan, and the Taliban may have announced freedom of sorts, the nation’s economy may still be dependent on what Joe Biden decides to do. It all boils down to the question of the legitimacy of this Taliban lead government. Will the freezing of assets and stopping of foreign aid continue to hold?

With the food scarcity alert issued by the United Nations, it remains to be seen if countries will continue taking a hard line or soften their stance in terms of providing monetary aid to Afghanistan. It also remains to be seen if the Taliban will hold good their promise to refrain from Opium trade and supporting terrorism and try to get the nation back on its feet and track. A collapse of the nation in terms of economic uncertainty may lead to a full-blown civil war if not corrected early.

Taliban’s existing revenue streams (close to $2 billion per year) may still be sufficient to feed themselves but will certainly not be enough to feed an entire nation. A lot of ifs and buts will contribute to the fortunes of Afghanistan in the coming months.

With even gold markets and trading suspended, people cannot seem to barter anything to get a bag of grains for now. The Afghan economy is in deep trouble.

The question is how long the US can continue to hold Afghanistan’s reserves. Any sort of relaxations with respect to these reserves now will further hurt the already abysmal ratings of Joe Biden. The Republicans especially will fiercely oppose any sort of release of the Afghan reserves. On the other hand, we are talking about the Taliban here - a terrorist group which will go to any extremes to achieve their goals. The Taliban will certainly not lie low for a long time and will get restless as money dries up.

It is important to note that the Taliban has a lot of sanctions on itself, in terms of financing and restriction of its members from travelling abroad. This again points to the question of legitimacy of the new government. Any sanctions that are placed on Afghanistan will further deteriorate the ground situation and this will be far more difficult for the people of Afghanistan as against what a country like Iran faces. Iran has a more robust internal economy and has ways to evade restrictions imposed by the US.

The sanctions on the Taliban also make it difficult for incoming foreign aid and NGOs wanting to help local Afghans. So, any sort of relaxations of these sanctions would only follow credible government formation and ruling by the Taliban.

Aside from the US and EU nations who have predominantly occupied the top spots when it comes to foreign aid for Afghanistan, countries like Saudi Arabia, and the UAE have usually been the top funders for organisations like the Taliban. It remains to be seen if they will continue this trend as of late their spending and investment patterns have changed quite a bit. This can especially be seen in their dwindling investment interests in countries like Pakistan, which was once a top investment destination for both these countries. Pakistan currently is in a very precarious economic situation and none of these countries have done a great deal to resurrect that.

So, this now leaves China, Russia, and Qatar as the only realistic options for the Taliban if US and EU nations do not reverse their aid freeze. The Talban definitely has a few options to increase revenue. For starters, they can request China to play a bigger role in extracting minerals and natural resources in Afghanistan. They can also try and exploit the transport routes that flow through Afghanistan and benefit countries like China and Russia.

Remember, Afghanistan is not part of the BRI (Belt and Road Initiative) and if the Taliban can agree to some deviations in this respect, Afghanistan may be very useful for China. But again, the Taliban will have to ensure its Uyghur voices are suppressed and don’t cause harm to China at any levels. Will their love for revenue outweigh their love for religion? Time will tell.

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