Sanctions Have Replaced Foreign Aid in Afghanistan, Putting the Country’s Economy in Jeopardy.

 

Afghanistan is facing a greater risk of financial collapse as the Taliban make the hazardous transition from insurgent movement to functioning government. The country has been supported for the previous two decades by foreign aid, which now amounts for about half of its legal economy.

Decisions by the Biden administration and other countries on whether or not to recognize the Taliban as a legitimate government will influence the fate of the Afghan economy. Meanwhile, the US and the international community are already cutting off the flow of money, trapping Afghanistan in a web of sanctions aimed at cutting the Taliban off from the global banking system. Analysts warn the impending shock might exacerbate a humanitarian disaster in a country that has already been through years of conflict.

The value of Afghanistan’s currency, the afghani, fell to new lows this week, and the country’s most recent central bank governor, Ajmal Ahmady, warned that inflation will certainly send food prices rising. The US, which has spent nearly $1 trillion in Afghanistan over the last two decades, has taken steps to prevent the Taliban from accessing the country’s $9.4 billion in international reserves. The International Monetary Fund also put on hold plans to give the country more than $400 million in emergency reserves.

 

“It has the potential to be devastating in the short term,” said Justin Sandefur, a senior fellow at the Center for Global Development. “You’re looking at a monetary collapse and a financial catastrophe that might cause real hardship to ordinary people.”

Even before the Taliban took charge, Afghanistan’s economy was in dire straits, and international help was dwindling.

The withdrawal of American personnel and government contractors who contributed to Afghanistan’s tax base over the last year reduced revenue at a time when the country, like most of the rest of the globe, was dealing with the coronavirus pandemic. According to the Congressional Research Service, 90 percent of Afghanistan’s population lives on less than $2 a day, and the loss of American funding would weaken one of the world’s smallest economies.

Foreign donors gathered in Geneva in late 2020 to offer $12 billion in funding to Afghanistan for the following four years, a 20% decrease from the previous four years.

New requirements for the money were predicated on advancements in human rights and progress in government-Taliban peace talks, according to several aid organisations.

Food insecurity is becoming more of a concern, and a looming drought is projected to exacerbate the situation.

The World Bank said in its April Afghanistan Development Update that “the removal of US troops or decreases in international grant support to the Afghan security forces would have a range of unanticipated repercussions on security, political cohesion, and the economy.” “In the context of weakening revenue performance and diminishing international funding, fiscal headroom remains closely constrained.”

Despite Afghanistan’s low budget deficit as a percentage of GDP, the World Bank cautioned that the country was at “high risk of external and overall debt distress” due to its reliance on foreign aid and limited exports.

The World Bank, which has invested more than $5.3 billion in development and emergency reconstruction projects in Afghanistan since 2002, withdrew its employees and their families from the nation this week and relocated them to Islamabad, Pakistan. A spokeswoman for the World Bank declined to comment on the future of the organization’s work in the country.

Updated

20th of August, 2021, 8:10 p.m. ET

 

A crucial concern, according to Paul Cadario, a former World Bank official, is whether the Taliban would be able to deliver on the infrastructure projects that international development organizations have been sponsoring, as well as sustain public services to maintain a functional economy. However, he stated that it is still unclear whether the Taliban will let work on public health and education programs to continue, and that the stability of key institutions such as tax administration is in jeopardy.

“It’s likely that some of what the government undertakes will be paid for by the Taliban with money earned from other sources of revenue, such as opium,” Mr.

Cadario is a fellow at the Munk School of Global Affairs and Public Policy at the University of Toronto.
The Taliban’s lack of economic legitimacy was highlighted in a UN report released in June, which detailed how they are funded through criminal operations including as drug trafficking, opium poppy farming, extortion, kidnapping for ransom, and mineral exploitation. The group’s income from those practices were estimated to be between $300 million and $1.6 billion each year, according to the report.
From 2018 to 2019, Alex Zerden, the Treasury Department’s financial attaché at the US Embassy in Kabul, stated the US will have to quickly figure out how to unravel its financial links with Afghanistan officials.

The Afghanistan Security Forces Fund was given $3 billion by Congress in 2021, and the Biden administration had requested extra money for the following year. The Taliban are also likely to demand access to the country’s riches kept in the US.

Any attempt to release the cash will almost certainly be met with furious Republican opposition. This week, a group of Republican congressmen pushed Treasury Secretary Janet L. Yellen to prevent the Taliban from receiving emergency cash reserves from the International Monetary Fund. Separately, House Republicans wrote to the Special Inspector General for Afghanistan Reconstruction, questioning if continued aid to Afghanistan is legal and in the US’s best interests.

Officials in the Biden administration have stated that they are closely monitoring the Taliban’s behavior and that it is too early to determine whether the US will recognize the new government as genuine.

Sanctions, which have been used aggressively to starve the Taliban of funding and restrict the ability of its leaders to travel, are the most significant tool the US and the rest of the world have against the Taliban. The Trump administration and the Taliban agreed in 2020 to evaluate US sanctions against the Taliban with the objective of eliminating them, but the Taliban’s overthrow of the Afghan government renders this unlikely.

“Afghanistan today finds itself in a sea of sanctions related to the Taliban dating back to 9/11,” said Juan C. Zarate, the first-ever assistant secretary of the Treasury for terrorist financing and financial crimes. “Sanctions will be a major impediment to both legitimacy and business activities with the Taliban and Afghan entities, as well as the economy.”

The Treasury Department declined to comment on whether it has begun a review of Taliban sanctions. Although sanctions have been criticised for causing suffering to civilians in nations like Venezuela and Iran, the US frequently makes exceptions for humanitarian reasons by issuing general licenses to enable specific types of transactions.

Any sanctions imposed on Afghanistan will be more severe than those imposed on Iran, which has a far more complex economy and has managed to avoid limits while still exporting hundreds of thousands of barrels of oil per day.

Sanctions against the Taliban have also been imposed by the United Nations Security Council, making it even more difficult to overturn them, even if countries like China and Russia wish to do business with Afghanistan. While the sanctions are in force, aid agencies and nongovernmental organizations will have trouble operating in Afghanistan.

Mr. Zarate stated that the Taliban’s sanctions would likely be lifted only if the group changed its behavior, but that this was improbable given the group’s history of human rights violations and reliance on illegal funds.

Mr. Zarate predicted that the situation would worsen rather than improve, implying that further sanctions would be sought in the United States. “I don’t think there’ll be a lot of sympathy.”

 

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