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Analyses Last Updated: Sep 14, 2021 - 12:06:54 PM


Afghanistan’s looming economic catastrophe: What next for the Taleban and the donors?
By Hannah Duncan, Kate Clark, AN, 6 Sep 2021
Sep 13, 2021 - 12:58:42 PM

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When the Taleban captured Kabul, it ruptured Afghanistan’s relationship with the international community. The problems now facing its aid-dependent economy and new Taleban rulers are rapidly piling up. Adding to the damage already wrought by conflict, pandemic and drought, foreign aid is now suspended and in doubt, the treasury is empty and foreign reserves held overseas are frozen, meaning the banking system is paralysed, and many of the country’s skilled workforce have fled the country. Economic catastrophe looms for a population, half of whom were already living in poverty. As Hannah Duncan and Kate Clark report, mitigating economic disaster would require revising existing sanctions regimes and continuing aid. Negotiations between actors who have been hostile for years – the Taleban and the donor governments – will mean navigating a legal, practical and ethical minefield. Both sides will need to ask themselves: What is the cost of preventing collapse?
Customers sit along a road outside a bank waiting to withdraw money in Shara-ye Naw neighbourhood, Kabul. Photo: Wakil Kohsar/AFP 4 September 2021.

All along Jada-ye Maiwand [the main commercial avenue in the heart of Kabul], people are selling their household goods. There’s always a little trade in second-hand goods there, but now it’s huge – lots of people and on both sides of the road. Some are selling all their household goods: either they’re either planning to leave themselves or they’re selling the possessions of a relative who got out. But some people are selling poor little old items. “Why are you selling your clothes? I asked an older woman. “Is it to make some extra money?” “No, son,” she replied, “We need to buy bread.”

Kabul resident

This small snap-shot illustrates just one way in which the Taleban’s seizure of power – without a prior political settlement or official handover – has thrown the country into economic crisis. Residents of Kabul and other places also report that the prices of many essential items have risen: flour is up from 1,700 afghanis for 49 kilogrammes (7 seers) before the fall of Kabul to about 1,900 (about 21 to 24 USD) and even higher – 2,200 (27 USD) – in the countryside. Cooking oil has gone up from 600 afghanis for five litres to 750 (seven to nine USD). There were a few exceptions to the general trend; residents reported that the price of fuel had dropped slightly since the border with Iran had opened, while the price of rice was, so far, stable. Given that the value of the afghani is also depreciating – itself another harmful repercussion of the takeover – this equivalent value in dollars is rough and time-bound.

Shopkeepers speaking to AAN said people were now buying much smaller quantities than usual and only the basics. Shops selling non-essential items, such as clothes, have seen their customers drop away. As yet, at least in Kabul, there are no shortages of goods, but there are long queues outside those banks that are allowing customers to withdraw small quantities of money. These are small harbingers of what could become a lot worse to come. Afghanistan’s economy was already in trouble before the Taleban seized power: now, it is in free fall.

This report first lays out how sickly Afghanistan’s economy already was, dependent on aid and outside funding and hit by pandemic, drought and conflict. It then looks at the multiple shocks which have hit Afghanistan since 15 August: the halt in aid, cut-off of supply of dollars and resulting banking crisis, sanctions and a depleted workforce. Finally, the report considers some of the options – and dilemmas – facing the Taleban and Afghanistan’s donors if they are to mitigate a humanitarian catastrophe.

Highlights of the report:

The Taleban’s seizure of power – without a prior political settlement or official handover – has ruptured Afghanistan’s relationship with its international backers. The US government put a hard stop to the country’s usual cash supplies, donors have frozen aid and the World Bank and IMF halted planned transfers of funds.

The banking sector is in crisis, with cash reserves extremely low and international sanctions regimes restricting international transactions. Commercial banks are still, for the most part, closed as they have no money to give out to their depositors. This crisis is pushing the afghani to depreciate and prices of flour, medicine, electricity and other basic goods to rise across the country.

The effects of the banking sector crisis will be far-reaching. Afghanistan’s financial system has been the beating heart of its economy, upon which vital formal institutions which fuel and supply much of the rest of the informal, cash-based economy rely. Afghanistan already faced a humanitarian emergency – over half of Afghanistan’s entire population are in need of assistance, one-third malnourished and half of all children under five are severely malnourished.

Afghanistan was already in for a painful adjustment period, necessary to deal with its significant trade imbalance and already declining aid flows. Declines in aid have exposed a weak, undiversified economy that does not produce enough to pay for the current levels of imports and public services. Grants to Afghanistan are currently around USD 8.5 billion per year, equivalent to 43 per cent of Afghanistan’s GDP. These grants have paid for 75 per cent of public expenditure, 50 per cent of the budget, and around 90 per cent of government security spending.

The banking sector crisis and sudden cuts to aid – especially for development and security – mean the Afghan economy is now in free fall. Economic contraction will cause major layoffs, dramatic drops in access to services and a steep decline in people’s incomes and will hit cities and towns particularly hard. The number of Afghans living in poverty will increase.

There is no scenario under which the Taleban, after forming an administration, could resume ‘business as usual’ as regards the basic functions of government. They have neither the volume of resources nor the external recognition needed to get the systems used by the former government back up and running. In government (1996-2001) and in areas under their control since 2001, they showed little interest in running public services. It is unclear if they appreciate the full scale of the looming economic disaster.

In the face of an unfolding humanitarian catastrophe, Afghanistan’s donors hold the purse strings and the power to revise sanctions regimes. However, they face complex political, legal and operational dilemmas, fraught with ethical questions and uncertainty about the Taleban’s priorities. Humanitarian aid alone will not prevent economic collapse, but donors will hesitate to continue with the large aid flows that would be needed if that helps the Taleban administration survive.

Afghanistan is highly unstable, buffeted by an economic storm that is worsening by the day, and ruled by a group very narrowly drawn from society and with authoritarian ways of governing. Neither the Taleban nor the old donors are prepared with a vision of what to do next.Donors’ actions could help the new administration survive or nudge it into modification. Yet in the past, the western powers have shown themselves to be poor at conditionality and acting on evidence, rather than wishful thinking. Smart political calculation cannot be expected.

Customers looking for bargains at the now plentifully-supplied second-hand clothes market in Jada-ye Maiwand, the commercial avenue in the heart of Kabul. Photo: AAN, 2 September 2021.

An already sickly economy

Afghanistan has a weak, undiversified economy that is reliant on imports, even for basic goods. That is not only the result of 43 years of war but also of its extreme dependence on unearned (ie not gained as a result of work or effort) foreign funds since 2001. Monumental amounts of money have flowed into the country from donor countries who supported the post-2001 state in the form of civilian aid, support to the Afghan security sector and, dwarfing both of these for most of the years since 2001, spending by the West’s own armies inside Afghanistan – on transport, logistics, rent and local salaries. This has meant that since 2001, Afghanistan has been an extreme example of what economists call a ‘rentier state’, one whose economy and state spending is reliant on unearned external income, or ‘rent’.

Since 2014, when most foreign soldiers left Afghanistan, military spending has dwindled and volumes of civilian aid were also in decline. Even so, 75 per cent of government expenditure was still being funded by civilian aid and around 90 per cent of government security spending. According to World Bank calculations, humanitarian aid, development aid and security spending were equivalent to 43 per cent of Afghanistan’s GDP in 2019. After the Taleban takeover, most of those funds were cut off and, although some humanitarian aid will continue to flow, the scaffolding propping up the public sector and the broader economy has been stripped away.

The impact of such massive flows of rent over the last 20 years has been harmful in many ways, as AAN’s 2020 special report on the subject showed. Rent distorted Afghanistan’s economy, overvaluing the afghani, which made exports more expensive and sucked in what had become artificially cheap imports, leading to even weaker domestic production. It distorted wages and sectors of the economy – those fed by rent flourished at the expense of others. It encouraged corruption and stymied attempts to make government representative. Afghanistan’s only major export earner, opiates, has thrived, but illegality alone gives it a comparative advantage. All of this means that, as well as the shock of the sudden cut-off of rent, Afghanistan’s economy is not in good shape to cope with the economic storm now hitting it. Then, in the last two years, more shocks have come.

In 2020, the Covid-19 pandemic pushed Afghanistan’s economy into negative growth, meaning the economy was shrinking. Lockdowns, border restrictions, ill-health and deaths caused a decline in economic activity, a loss of government revenue and a need to increase expenditure. A fiscal hole of more than 800 million USD in 2020 opened up, on top of the enormous existing structural budget deficit. Many more Afghans were pushed into poverty, especially in cities and towns, where businesses closed down and jobs were lost. (More detail in this AAN report).

With the pandemic not yet over, in 2021, Afghanistan went into one of its worst droughts for decades and the second harsh drought in three years following low levels of winter snowfall and poor spring rains. As a result, the UN has been appealing for months to raise funding to support half the population – 18 million people – pointing out that one in three Afghans is already malnourished and half of all children under five are severely malnourished.

The Taleban then chose to launch their military offensive in spring 2021, with record numbers of civilian casualties according to the UNAMA (see AAN reporting), as well as untold numbers of combatant deaths and injuries. More than 550,000 people have been displaced by the conflict since the start of the year, according to the UN. Crops could not be harvested, homes were destroyed and breadwinners were killed or disabled. Of course, the economic damage of the Afghan war has been ongoing for decades and could now possibly be largely over, at least for a while. However, this year’s fighting has left many Afghans pushed to the edge of survival, especially as reported from many areas newly under Taleban control. The new rulers have carried out aggressive taxation, including demands for food for fighters.

All of this means the Afghan economy was in crisis, just as two armies’ worth of largely poor young men were pouring into the workforce with no more war to fight. The Taleban’s seizure of power on 15 August ruptured Afghanistan’s relationship with its international backers, causing further blows to this fragile economy and stripping away the few tools the country had to try and mitigate economic disaster. These factors will now be looked at in turn.

The cut in aid

As it stands, NATO has stopped military support. Canada, Germany, the United Kingdom, the World Bank and other donors have suspended aid. Even if and when donors un-freeze some or all of the support they had committed to, it is difficult to see them simply turning the taps back on for a Taleban government. Humanitarian aid will resume, but development aid is in doubt, at least on the scale that it has been given in the pre-2021 years. Grants to the security sector must surely be over.

Most immediately put at stake are the many public services funded by development aid. They include the country’s health and education systems, rural and urban infrastructure, social welfare programmes (such as emergency drought relief for farmers and those hit the hardest by the Covid-19 pandemic), agricultural research and imports and subsidies. Development programmes support the media and civil society, women’s entrepreneurship projects and export promotion and fund core revenue collection and macroeconomic management functions. Projects which employed United Nations consultants, for example, helped to manage the Automated System for Customs Data (ASYCUDA). Discretionary on-budget financing contributed significantly to paying the salaries of civil servants across the board – teachers, doctors, tax collection officials and the drivers, guards and cleaners who make government operations possible.

Irrespective of the banking sector crisis (more on which below), the predicted loss of large volumes of foreign aid will cause major layoffs, dramatic drops in access to services and a steep decline in people’s incomes. According to World Bank analysis on the impact of the Taleban takeover, seen by AAN, the former government employed around 420,000 civil servants whom the Taleban will not be able to continue paying without outside help. This number alone accounts for around eight per cent of all those formally employed and they are not only the rich – 39 per cent of families who rely solely on civil service employment for their income already live in poverty. Donors will also stop paying the salary costs of around 300,000 members of the security services (some of whom were ‘ghosts’, ie fake soldiers and police whose salaries were pocketed by seniors, but not all) and the allied costs of logistics and transport.

There will be a significant impact on the broader services that supported the public sector or on which employees spent their wages – transport, catering, IT, research, construction, all the way down to hairdressers, tailors and shopkeepers. Together, the World Bank calculation is that a further 2.5 million Afghans were employed in services and construction, accounting for 77 per cent of urban employment. The scale of the funds lost is immense. The US alone had planned to spend 3.33 billion USD on the Afghan National Security Forces (ANSF), as well as 364 million USD on civilian assistance (see the 30 July 2021 report by the Special Inspector General of Afghanistan Reconstruction (SIGAR)). Of course, not all of that would have reached Afghanistan, but still, a considerable amount would have done.

The banking crisis

The unconstitutional change of government in Kabul saw the US government put a hard stop to the country’s usual cash supplies, donors froze aid and the World Bank and the International Monetary Fund (IMF) halted planned transfers of funds. Among the funds frozen when the Taleban captured Kabul were nine billion USD of Afghanistan’s own foreign reserves held in the New York Federal Reserve. This hard stop on foreign currency inflows, combined with various sanctions regimes, has caused the banking sector to almost completely seize up.

Afghanistan’s cash reserves were usually flown into the country by the US government as needed to resupply the central bank. Cash volumes were kept relatively low and were tightly monitored. With this resupply channel frozen, the central bank faces a liquidity crisis, as evidenced by the long lines at cash machines (ATMs) in Kabul and restrictions on the amount of cash that can be withdrawn. The exact severity of the cash crunch is unknown, but it seems likely there was not much held in the central bank in Kabul for the Taleban to inherit. In May, AAN was told, 300 million USD in reserves was held locally. In the lead-up to the fall of Kabul, the US, concerned about the situation, stopped sending money, while the central bank sold dollars and bought afghanis to try to prop up the fast depreciating national currency. (For some detail, see this 18 August Twitter thread from the former head of the central bank, Ajmal Ahmady.) There was also undoubtedly cash held off the books by different government officials, although in whose hands it is in now is not known.

Even if the Taleban do have access to more cash than is known about, it is highly questionable whether they would push it back into the banking system or spend it on public services – or simply take it for themselves. In 2001, after the Taleban had taken most of the cash from the central bank when they fled Kabul, the briefly-in-power Burhanuddin Rabbani took what was left and, as he told one of the authors, used it to pay off his commanders.

What is certain is that the now Taleban-controlled central bank lacks dollars. That means commercial banks are still for the most part closed because they have no money to give out to their depositors. Some are allowing minimal withdrawals of afghanis, including from dollar accounts and there are long queues of people waiting to do this.

The various sanctions regimes applied to the Taleban further paralyse the banking sector as they affect access to international accounts and payments. International transactions are all but frozen as commercial traders await clarity on the extent to which sanctions regimes might apply to international commerce.

Even though Afghanistan’s economy is largely cash-based and only ten per cent of Afghan households have bank accounts, the effects of the banking sector crisis are far-reaching. Afghanistan’s financial system has been the beating heart of its economy, pumping money into and around the country to enable the delivery of core services and fuelling the private sector, including telecommunications providers, energy providers, exporters and importers of vital goods and services. According to a 2020 World Bank report, two-thirds of formal enterprises have a bank account, alongside government departments and NGOs. It is these formal institutions which fuel and supply much of the rest of the informal, cash-based economy.

With the supply of US dollars turned off and a frozen banking sector, the problems mount up, starting with imports. According to a World Bank analysis shared with AAN by an international aid agency on 24 August, Afghanistan’s imports add up to 45 per cent of its GDP – more than six times greater than its exports, which represent only seven per cent of GDP. In the past, the difference was made up by foreign aid money. Moreover, Afghanistan imports pretty well everything – 77 per cent of its electricity, along with fuel, clothing, medicine, household goods, fertilisers and seeds and food, including staples: 20 to 40 per cent of the wheat needed to bake bread (the amount varies depending on Afghanistan’s own harvest) and 27 per cent of rice consumed in the country, are imported. The waves of harm ripple out, touching what seem unlikely sectors. For example, Afghanistan’s Covid-19 vaccination plan is conditional upon a cold storage chain that was being set up across the country, which needs imported fuel and electricity – just as Afghanistan’s purchasing power dives.

The liquidity crisis is already causing harm, pushing the afghani to depreciate and prices of flour, medicine, electricity and other basic goods to rise across the country. If inflation does take hold, many Afghans will be pushed over the edge.

All currency exchange was initially frozen, but the dearth of dollars pushed its value up and will have sucked in hard currency from neighbouring countries, especially Pakistan. Individual money changers are now starting to exchange money and the major money changers (hawaladars) of Serai Shazada, who buttress Afghanistan’s formal and semi-formal financial sector, re-opened yesterday on 4 August (media report here). [1]

Money transfer companies like Western Union and MoneyGram, which Afghans abroad use to send money home, also resumed transactions on 2 September (report here). This should ease the crunch, at least for some people. However, money changers and transfer companies are no substitute for the formal banking system and the shift from an economy largely reliant on a banking system to access aid flows and pay for imports to only informal networks would still carry dramatic losses in trade, jobs and incomes. Afghanistan’s economy would eventually adjust, but it would be painful.

Sanctions

Various international sanctions, most notably those imposed by the United States and the United Nations (Security Council Resolution 1988 and Executive Order 13224), were designed to cut off individual members of the Taleban accused of association with terrorism and narcotics and/or the organisation as a whole from the global financial system. As the Taleban swept into Kabul and took over the government, the combined effect of sanctions and the unconstitutional change of government saw the United States and other donors, international organisations like the World Bank and IMF and commercial actors reflexively move to shut off flows of money into the country.

In a situation where a sanctions regime suddenly applies not to an insurgent group, but the country’s de facto rulers, the knock-on effect on aid and the banking sector is grave. The fact of these pre-existing sanctions also makes finding solutions more difficult. Anyone transacting with the government is at risk of transacting with members of the Taleban or Haqqani network in breach of sanctions and is thus likely to be nervous about doing so. This complicates even the delivery of humanitarian aid for which exemptions are typically made.

US sanctions have the most ‘bite’ and are the ones to watch (see this explanation from the Just Security website). The US has long designated the Taleban in its entirety as a terrorist group, imposing sanctions that freeze any assets associated with the Taleban held within US jurisdiction and barring Americans from dealing with the movement, whether through funds, goods or services. The US was quick to issue a license – to itself and its subcontractors – to continue facilitating humanitarian aid in Afghanistan but has not yet clarified how the sanctions apply to commercial transactions nor fully clarified the scope of the humanitarian concessions.

A depleted workforce

The Taleban takeover has also had repercussions for Afghanistan’s workforce. It sent waves of shock and dread through much of the population, with people fearing going to work or resume trading. If the Taleban banish women, other than health workers, who are the only female workers that the Taleban have explicitly said can and should return to work, from the paid workplace, this will further deplete the workforce of skilled personnel.

In addition, the recent evacuation of tens of thousands of Afghans with connections to countries that have fought in Afghanistan has served as an effective and rapid brain drain. Educated elites who ran many of the specialised areas of government policy and administration have fled. In addition, the independent media and civil society, a workforce of people who, in many countries, effectively oil the machinery of a modern economy by informing, whistle-blowing and lobbying, especially over corruption, legal and property rights and human rights, has been gutted. Effecting positive change over the last twenty years has never been easy. Even so, the loss of so many of Afghanistan’s most independent-minded and tenacious activists, academics and journalists will be a huge long-term deficit.

What the economic crisis will mean for daily life

Residents in Kabul contacted by AAN this week all spoke of worry, rising prices and difficulty in getting cash. Many of those living in the rural areas are encountering even higher price rises, given the additional transportation costs. The looming economic disaster will hit cities particularly hard. According to Afghanistan’s statistics agency, cities and towns have expanded vastly since 2001 and now house 25 per cent of the country’s population. They have a concentration of people who have depended on foreign funding, either directly – receiving salaries or contracts paid by foreign governments, armies or foreign-funded NGOs – or indirectly – working in or owning restaurants, wedding halls, private universities, shops and other service providers (see previous AAN report here). What does Kabul, a city of six or seven million people, produce any more?

Urban Afghans desperately need the banking system to start working again so that they can access what funds they have in their accounts, but what will happen when salaries are no longer paid? The damage felt by the emerging economic contraction will be felt nationwide. There is little resilience in many households which have little or no savings or alternative sources of income. According to UN reports, 47 per cent of the population were already living below the poverty line and one-third were at crisis levels of food insecurity. By comparison, Afghanistan’s population in the 1990s may have been better able to survive a collapsing economy. Civil servants in Kabul then, who received minimal inflation-shrunk salaries if they received wages at all, might have a little bit of land outside the city to help them survive; that is now far less common. Rural households today are also much more likely to have a mixed economy, with salaries supplementing food grown or revenue from crops sold (see previous AAN report here). Analysis shared with AAN by an international aid agency on 24 August predicted “immediate and hugely negative impacts on the fiscal situation, macroeconomic stability and poverty.”

This crisis has already highlighted the fragility of an economic system so deeply dependent on international aid and other forms of rent, as well as the bluntness of the international sanctions system, which is likely to cause the most harm to the poorest and most vulnerable. However, what to do about it is not straightforward.
Some of the second-hand goods being sold by Afghans in Kabul, as they prepare to sell up and leave the country… or get cash to eat. Photo: AAN, 2 September 2021.

Dealing with the crisis

Governments, organisations and research institutions funded by governments have spent a lot of time over the last three years thinking through so-called ‘post-peace’ scenarios. They theorised how a future Afghanistan following a negotiated peace settlement with the Taleban could work, debating the form of the constitution, how to ensure women’s rights and the size and focus of development aid that would be needed for Afghanistan to achieve ‘self-reliance’. Almost no one seems to have thought what they would do if the Taleban took power by force as international troops withdrew.

The various donor countries and international organisations – including the World Bank, International Monetary Fund and the United Nations – are now scrabbling to reconfigure their programmes and funding in a complex political landscape. Geopolitical interests loom large as the different aid agencies and donors consider whether and then how they work through the multiple logistical, legal and ethical problems that need solving for international support to Afghanistan to resume. At the same time, the Taleban need to form a government and restore/establish critical functions, including revenue generation and service delivery.

It could be that both sides have an interest in turning the taps back on and averting a total and rapid collapse: neither are interested in compounding Afghanistan’s humanitarian needs and both have incentives to find ways to meet the critical needs of the population, even while wrangling over the bargaining chips – how much aid and who controls it, for example, or how to keep al-Qaeda, the Islamic State in Khorasan Province (ISKP) and other internationally-minded violent jihadist groups in check. On 30 August, the UN Security Council discussed Afghanistan and passed a minimal resolution reiterating the importance of combatting terrorism and allowing humanitarian access in Afghanistan, while on 1 September, the US State Department reiterated America’s focus on counterterrorism and commitment to humanitarian assistance.

Bargaining chips aside, authentic commitments to preserving or improving the welfare of the Afghan people over the longer term appear thin, perhaps as donors struggle to reconcile doing so under Taleban rule. Humanitarian aid is set to continue – but how and at what level is still up in the air. Resumptions in development aid – such as funding selective development projects which might support more long-run gains in welfare – will be far trickier politically. On the one hand, the donors will have demands which might not be to the Taleban’s liking. On the other hand, the donors may find it anathema to work with a theocratic, authoritarian, hardline government that has taken power by force and whose cadre their armies have been fighting for many years. The risk is high that mistakes, misjudgements and mismanagement will end up costing the Afghan people dearly.

Options for the Taleban

There is no scenario under which the Taleban, after forming an administration, could just resume ‘business as usual’, as regards to the basic functions of government. They have neither the volume of resources nor the external recognition needed to get the systems used by the former government back up and running. It is unclear whether and how foreign aid committed to Afghanistan might be channelled through a Taleban administration. Though most donors are signalling commitments of humanitarian support, even significant levels of humanitarian assistance are no substitute for functional national health and education systems or the well-resourced community development councils, one of the more successful rural development initiatives.

Going by their record in 1996-2001 and in areas under their control since 2001, one can expect the Taleban to retain existing government structures and also to be disinterested in the mechanics of delivering services. There is likely to be a scramble for posts, as is typical after a change in regime, but also some recognition of the necessity of retaining staff with technical expertise and, overall, a dearth of resources.

Since the takeover, there have been signals that the new rulers in Kabul are trying to ensure continuity. They announced the appointment of an acting head of the central bank, for example, said that “the salaries of civil servants will be paid as before” and “[b]anking, financial and customs activities will start soon,” and asked Turkey to continue to operate the international airport in Kabul, saying they would provide security.

During the 1996-2001 emirate, the Taleban appointed their own people to head up ministries, but at least in those needing technical expertise, kept professional deputies or heads of directorates. As Taleban ministers were often also battlefield commanders, they would frequently be away from their desks at the frontline. Governing has never been what the Taleban are primarily interested in; it is noticeable, for example, that a Taleban political wing or party never developed, nor policies for government. (For more on this, see this AAN analysis.)

In the areas of rural Afghanistan that have been under Taleban control for several years, as AAN has reported (see our dossier, “Living with the Taleban”), the Taleban also appointed their own commanders and occasionally judges to the various civilian roles, for example, shadow provincial governor or head of the district or provincial health commission. They also sought to influence how services were delivered, for example, trying to change the school curriculum, interfering with staffing and insisting on priority care for wounded fighters. However, they never paid for any services or substituted them. Rather, they kept the systems and structures of existing government virtually intact. Despite efficiently taxing the population, the Taleban did not use the money to deliver public services but rather to fund the war. Health, education and other sectors continued to be funded ‘across the frontline’ by the government, using donor resources.

As to the resources needed now to run a state, the Taleban have proven they are very efficient in collecting revenue from people in areas under their control, but given that so much of this revenue was ultimately externally generated, such efficiency will hardly help cover the government’s overall costs. It is unclear what is left to tax. So much of what the Taleban taxed ultimately derived from aid or other rent – teachers’ salaries, NGO projects, electricity and telephone companies. Beyond that, revenue generation will be reduced by economic contraction more broadly: jobs will be scarcer, incomes lower, private sector activities will be reduced and there will be fewer imports and exports to tax. The opium economy, mining and inflows from regional or political allies will likely continue, but the Taleban leadership will now have to do much more than fund a military campaign.

Moreover, up to now, Taleban commanders were very diligent in sending revenues back to the centre. That could change. After years of hard combat and sacrifices, fighters and commanders feel it is ‘pay-back time’. This was the pattern also at the end of the resistance against the USSR and communist government. If previous changes of regime in Afghanistan are any indication, the priority for the new administration is likely to be paying fighters, not running public services.

It may be in the coming months the Taleban are able to establish and maintain peace and security. This could go some way towards building the trust needed for markets to function and goods to flow. Artisanal mining can continue, farmers can return to their fields. However, on its own, an end to fighting and bloodshed can neither restore the integrity of the financial system nor make up for the loss of foreign income coming into Afghanistan.

Options for the donors

The governments which funded the post-2001 state now face hard questions. These are not only about what to do in the face of the immediate economic crisis but also what their long-term relationship will be with Afghanistan. Humanitarian financing is the easiest part of current donor support to continue and even expand, but support beyond that may also be in governments’ national interests – or, they may decide, possibly not.

The trade-offs for donors will be tough and fraught with ethical dilemmas and no small dose of hurt feelings, as the Americans, in particular, lick their wounds. Afghanistan’s international partners have spent the best part of twenty years fighting the group that has now taken power by force. The Western donors have the money and control of the international aid systems upon which Afghanistan so relies, and so what they do matters acutely.
New rulers, new flags being sold on the streets of Kabul. Photo: AAN, 2 September 2021

Whatever aid the donors give will help the Taleban to survive in government, but withholding it might lead to worse outcomes. Helping an economic recovery critical to stabilising Afghanistan would mean helping stem the outflow of refugees (seen as a political problem by many in Europe) and reduce the risk of a collapse into the sort of violent chaos in which violent foreign Islamist groups could thrive. Or, to take another example: Is it better to stop funding schools given this inevitably also supports the Taleban state, or continue funding education, given that in the long-term, an educated population generally makes for a more stable, prosperous and in Afghanistan’s case probably more western-friendly, society?

The lessons of the 1990s may also cause donors to think twice about withdrawing support from Afghanistan. After the West lost interest in Afghanistan following the mujahedin’s Cold War victory over the communist government and its Soviet and then Russian backers, the country fell into a brutal civil war, became a haven for al Qaeda and other extremists and fostered the rise of the Taleban.

The question now is how far the former government’s international partners are willing to go in the face of economic ruin and extreme humanitarian need – for which they also take some significant responsibility. Conscientious observers are asking what ultimately will serve the Afghan people better: Is there a disincentive to the Taleban having to provide core services themselves over the long term, or is that the best way to pick the country back up peacefully? Will recognising and working with the Taleban help condemn Afghan men, women and children to brutal repression and flagrant abuses of human rights – as in the past – or act as leverage to moderate Taleban behaviour, with the incentives to govern more respectfully? Is there an argument to be made that stability will only come if the Taleban widen their government to make it representative of the Afghan people, and so that should be a goal of the Western donors, rather than accepting the Taleban administration as a fait accompli that they now have to deal with?

It is unclear what level of international commitment there might be to supporting Afghanistan and how effectively political will – if it exists – might translate into action. Beyond interest in counterterrorism, commitments have been thin and hedgy – particularly by the US, which really holds the pen in negotiations with the Taleban and in the UN Security Council. The passing of UNSC Resolution 2593 on 30 August elucidates the mood of the member states, who “reiterated the importance of” combating terrorism, allowing foreign nationals to safely leave Afghanistan and granting humanitarian access, but made no solid demands. In Europe, tensions over the risk of refugee flows drive much of domestic debates.

AAN’s sources describe the US government as somewhat hawkish and uncooperative thus far, but say the governments of many other western countries have more nuanced attitudes, even if everyone appears to have been caught short without a plan. China, Turkey, Pakistan and Iran have an interest in stability and in Afghanistan being a reliable trade partner and not too large a source of refugees. However, their willingness or ability to fill the gap left by Western donors is doubtful, though they may more quickly recognise a Taleban government. The G7 has met to discuss Afghanistan but has not yet indicated that they are seriously discussing whether or how to recognise a Taleban government, nor where they sit on revising sanctions regimes.

In terms of practicalities, all eyes are on the US Treasury, anxiously awaiting signals on both sanctions and the holding of foreign reserves. A Biden administration official confirmed to the BBC: “Any Central Bank assets the Afghan government have in the United States will not be made available to the Taliban,” a position criticised by Russia, which called on the US to release cash on humanitarian grounds.

Revisions to sanctions regimes will be critical to allowing international banks, businesses and agencies upon which the core operations of government depend to function. The US Treasury is expected to release a statement in the coming days which will set the tone on this; it is likely to issue updated guidance to clarify sanctions regimes, such as whether basic transactions can resume and the mechanisms through which humanitarian aid can flow. The UN sanctions committee is discussing several scenarios for maintaining, tightening or easing sanctions in different ways, as a set of carrots and sticks for the Taleban to respond to. Sanctions experts have confirmed to AAN that changes to the UN sanctions regime are effectively subordinate to America’s and the UN are unlikely to rush ahead with changes, without clearer signals from the US.

As Venezuela has discovered, US sanctions can be targeted at a government without targeting people’s private activities. [2] American organisations and individuals can transact within the country and with the people of Venezuela, and there are broad carve-outs for transactions even with the government for agricultural, medical and humanitarian supplies. Iran, by contrast, is subject to crippling sanctions with much more sweeping effects. A key question will be the conditions upon which the US and UN will make such revisions and what they will be expecting from the Taleban in return. However, neither the UN nor the US may be able or want to move quickly and even relatively mild sanctions regimes can still have a paralysing effect on transactions and trade, as firms and individuals fear complex compliance burdens or the hassle of investigations.

When it comes to resuming aid flows, there are legal and political hurdles. The World Bank, for example, was funding a broad range of the government’s basic service delivery and infrastructure programs, including the health and education sectors, largely through its management of the Afghanistan Reconstruction Trust Fund (ARTF). The World Bank predominantly works through governments, but does have criteria determining when they can work with de facto governments or non-governmental organisations to re-channel aid, most commonly through UN agencies. This, for example, has been the case in Yemen. [3] Such a move requires political will and backing from their major funders. [4]

The UN is positioning itself to coordinate and deliver humanitarian and development efforts in concert with NGOs on the assumption that the Taleban will allow this. Secretary-General António Guterres has also announced that the UN will be convening “a high-level humanitarian conference for Afghanistan on 13 September to advocate for a swift scale-up in funding & full, unimpeded access to those in need.” As said before, humanitarian aid, the subject of this conference, is the politically easy part of the new relationship to resolve. Former UNAMA deputy and humanitarian coordinator Mark Bowden has posited that: “The priority tasks to focus on are releasing frozen assets, mobilising humanitarian assistance, refocusing the UN presence in the country and setting ground rules for future collaboration in all sectors of the economy.” UNAMA’s current mandate is set to run out on 17 September. It seems likely that its exiting terms will be rolled over temporarily, but new terms will eventually have to be set by the Security Council to reflect the new situation on the ground. They will be an indication of how the major powers are thinking about Taleban-controlled Afghanistan, and what the Taleban administration is prepared to accept.

Whatever parameters are set on continuing western aid to Afghanistan, there will be operational difficulties and complexities. The scale of the country’s humanitarian needs is vast and will mushroom if the economy collapses. UN agencies and NGOs will need to find ways of working with Taleban officials, communicating and transacting efficiently in a new landscape, possibly devoid of functional banking systems, short on electricity, fuel and other basic supplies and will need access to secure air and land transport corridors.

Some of the former government’s existing service delivery programmes could, in theory, be retrofitted to continue to serve basic health, education and emergency food supply needs. Provision of primary healthcare, for example, has been largely funded by international donors and through the World Bank, overseen by the Ministry of Public Health in Kabul and contracted out to NGOs across the country who actually operate health clinics. Community Development Councils, which NGOs in Afghanistan have worked with for decades, still exist and have the capability to manage local development projects. The Taleban and international donors could apply themselves to the question of how to salvage and build upon these structures. The programme of funding schools, via a World Bank organised programme working with the Ministry of Education may prove less palatable to continue, given it would mean working directly with the now-Taleban controlled ministry.

As to the immediate need to stave off hunger, AAN’s sources say that the World Food Programme’s (WFP) food supply chains have been disrupted since the Taleban took over Kabul – though it is unclear how much of this was due to loss of access to the airport. In a drought year such as this, WFP would usually stockpile supplies in August and September for distribution over the winter months. However, unofficial reports suggest this has already been disrupted.

Conclusion

This year, a harsh drought coincided with the pandemic and an intensification of the Afghan conflict, which had already caused human and economic loss. Yet even if the snow had come, the harvests been ample and the conflict abated, the Republic, with an economy fundamentally reliant on unsustainable levels of aid, would still have been in trouble.

Afghanistan was already in for a difficult adjustment period, necessary to deal with its significant trade imbalances and declining aid flows. If the Republic had survived, the adjustment could have been a more gradual process. It would have needed Afghan leaders to muster a determination to act to save the Republic, rather than their own self-interest, ie salvaging, rather than stealing from the state. Beyond a few courageous reformers, there was almost no evidence of the elites recognising the economic and political peril the Republic was in, as they failed to notice the wolf at the door in the form of the Taleban. Indeed, the decline in rent and the impending end to the era of easy money may well have incentivised a scramble to steal what state resources were left among those with access before they got out of the country. Nevertheless, the Taleban’s seizure of power has taken away even the possibility of embarking on gradual reform.

Afghanistan’s economy is now falling off a cliff and that means hard questions for everyone. Now they ‘own’ Afghanistan and its problems, the Taleban leadership will have to ask themselves: What is sovereignty worth if it means the country goes bankrupt? Will they make concessions to keep aid going, the banks open and to ward off economic catastrophe?

The country’s erstwhile backers have also been caught unprepared for the new Afghanistan. It seems unlikely they will make a swift, consensus-based and nimble pivot from development financing to humanitarian support and to revise sanctions regimes suddenly ill-suited to reality. Decisions taken over the coming weeks and months will clarify what is driving donors and what they are and are not willing to do to prevent collapse.

Where one lands on the question of continuing Western support to Afghanistan is, like many things, about risks and priorities. There are those who believe that whatever the likeability of the Taleban, it will be better for the wider Afghan population and the world if the new regime manages this transition well. Others may feel that as long as the Taleban monopolise power within a very small section of Afghan society – male, clerical, largely rural, overwhelmingly Pashtun, and overwhelmingly from the south – and if they behave in newly-captured areas like an army of occupation, the situation is inherently unstable. This may not be the end state, therefore, and how the Western donors deal with the new administration might help it to survive or nudge it into modification. Past experience has shown, however, that the donors are poor at conditionality and acting on evidence, rather than wishful thinking, so smart political calculation cannot be expected. In the face of an unfolding humanitarian disaster, Afghanistan’s donors hold the purse strings and the power to mitigate the worst of the suffering of the Afghan people. However, Afghanistan’s economic crisis goes beyond humanitarian needs, and that is where all the dilemmas and real decisions lie.

Dealing with the Taleban has never been easy. Both during their 1996-2001 government and in recent talks, they have proved able negotiators, excelling particularly in sticking to their goals and grinding down the other side with tedious frivolous demands. The movement is now in victory mode and may not be in the mood to accept the concessions donors may demand in exchange for funding, especially over the rights of women and girls – which proved a shibboleth in the 1990s. It is unknown if Afghanistan’s new rulers fully understand their own predicament, nor, indeed, do we know what their priorities are or what they might concede.

The other player in all of this, of course, is the Afghan people. When the Taleban were last in power, Afghanistan was poorer, less educated and more rural. Today, more of its people have higher expectations from life and government. Young Afghans have come of age in a country increasingly connected with the modern world. Globalisation, digital connectivity and 20 years of investment in education mean Afghans are generally better informed and more mobile.

Economic collapse could trigger resistance to the Taleban, especially if oppressive behaviour by the new administration makes them unacceptable to the wider population. Yet, the consequences might not be to moderate Taleban behaviour or widen the circle of those in power, but to engender fresh conflict, more chaos and more fragmentation. Afghanistan is currently highly unstable, already buffeted by an economic storm that is worsening by the day and with neither the new government nor the old donors prepared with a vision of what to do next.

References
References ↑1     The Serai Shazada is a key part of any Afghan government’s regulation of the currency.
↑2     This US government report on sanctions describes the Venezuelan sanctions regime thus:

The Venezuela sanctions program is designed to limit the illegitimate former Maduro regime’s sources of revenue and hold accountable those who stand in the way of restoring democracy in Venezuela, while also ensuring the flow of humanitarian goods and services to the Venezuelan people. U.S. persons are not prohibited from engaging in transactions involving the country or people of Venezuela, provided that the Government of Venezuela, other blocked persons, or proscribed conduct are not involved. To ensure that humanitarian goods can reach the people of Venezuela despite a nexus to the Government of Venezuela, the United States maintains broad exemptions and authorizations that allow for the provision of humanitarian assistance and the commercial sale and export of agricultural commodities, food, medicine, and medical devices, to Venezuela.
↑3     The World Bank has delivered aid to Yemen through UN agencies since 2017, stating in a 2018 report that:

In Yemen, the ongoing conflict and political instability has made it nearly impossible for the World Bank to operate. And yet it is clear that despite the high risks associated with taking action, inaction—or a much-delayed response—by the World Bank would be far costlier from the strategic, institutional, and development points of view.
↑4     In the 1990s, the World Bank could not work in Afghanistan because the Taleban regime was never recognised (except by Pakistan, Saudi Arabia and the United Arab Emirates) and there was no political will by the major powers to find ways for the Bank to get round this rule.


Source:Ocnus.net 2021

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