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Taliban's Mammoth Task Ahead as Afghan Economy in Doldrums. Currency Down 90%, World Halts Aid

Internally displaced Afghan children looking on next to their shelters on the outskirts of Kabul, Afghanistan February 3, 2021. (Reuters/Omar Sobhani)

Internally displaced Afghan children looking on next to their shelters on the outskirts of Kabul, Afghanistan February 3, 2021. (Reuters/Omar Sobhani)

The Taliban have promised to improve Afghanistan's economy, but to do that the new regime will have to rely largely on foreign aid.

As the Taliban fighters took the capital city of Kabul on Sunday in a stunningly swift end to Afghanistan’s 20-year war, the country, one of the world’s poorest, now faces a downward spiraling economy. In just ten days, the Taliban seized city after city without resistance following the withdrawal of Western troops. However, they fail to enjoy the support from the world community leading to most nations withdrawing financial aid and stopping development projects in Afghanistan.

The Taliban have promised to improve Afghanistan‘s economy, but to do that the new regime will have to rely largely on foreign aid, which is difficult to come as some global donors halt their support. Washington-based crisis lender IMF on Wednesday said it had decided to withhold its assistance to Afghanistan amid uncertainty over the status of the leadership in Kabul.

The Afghan economy had already taken a hit during the Covid-19 pandemic, and with the Taliban takeover the currency fell drastically.

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No Access to Afghan Reserves Held in US:

Beyond their cash on hand, the Taliban may have few other funds to draw upon. The Taliban will not have access to most of the nation’s cash and gold stocks. The Taliban will not have access to most of the nation’s cash and gold stocks

The majority are in the United States, where President Joe Biden’s administration said the Taliban will not have access to them. And Western Union announced it was temporarily cutting off wire transfers to the country — another vital source of cash for the people.

The US Federal Reserve holds $7 billion of the country’s reserves, including $1.2 billion in gold, while the rest is held in foreign accounts including at the Basel-based Bank for International Settlements, Ahmady said.

According to the World Bank’s most recent estimates from May, remittance flows to Afghanistan from overseas were estimated at $789 million in 2020.

Taliban Face Critical Need for International Aid:

Some major global donors have halted their support for the country, one of the world’s poorest, including the IMF which on Wednesday announced it would freeze aid to the country amid uncertainty over recognition of the government. The World Bank could follow suit.

“Afghanistan is tremendously dependent on foreign aid. Foreign aid is about 10 times or even more than the Taliban has been able to obtain from its own finance," said Vanda Felbab-Brown, an Afghanistan specialist at the Brookings Institution, a Washington think tank.

International economic aid, and access to international economic funds is crucial to Afghanistan’s economy. In 2020, aid flows represented 42.9 percent of Afghanistan’s $19.8 billion GDP, according to World Bank data.

International Response to the Taliban:

The reception the group received following the shock takeover of the capital Kabul appears less reserved than during the first stint in power.

Russia, China and Turkey have all welcomed the insurgents’ first public statements. However, many donor countries, starting with the United States, are wary. Washington has insisted that it expects the Taliban to respect human rights, including those of women.

Canadian Prime Minister Justin Trudeau said his country has “no plans" to recognize the Taliban. Germany announced the suspension of its development aid on Monday. Berlin was going to provide 430 million euros ($503.1 million) in aid this year, including 250 million euros ($292.5 million) for development.

It is not clear if neighboring China, the world’s second-largest economy, will fill the void should relations with western nations remain cold.

The IMF has also announced that it would stop aid to Afghanistan. The aid included an existing $370 million loan program, as well as access to reserves in the form of Special Drawing Rights (SDR), the lender’s basket of currencies. The IMF is set to distribute 650 billion in SDRs on August 23 to all eligible members, of which Afghanistan’s share was valued at about $340 million, Ahmady said.

In June, the IMF released the latest installment of the $370 million loan to Afghanistan approved in November and aimed at helping support the economy amid the Covid-19 pandemic.

The World Bank has more than two dozen development projects ongoing in the country and has provided $5.3 billion since 2002, mostly in grants.

The status of those programs is unclear as the development lender works to pull staff out of the country.

Afghan Currency Dives on Taliban Takeover:

Afghanistan’s currency has slid after the Taliban swept back into power and prompted its central bank governor to flee. The unit sank to 86 Afghani per US dollar on Tuesday marking a six percent decline from last Friday, when it had stood at 80 Afghani per dollar.

Afghanistan’s central bank governor Ajmal Ahmady revealed Monday that it stopped receiving dollar deliveries on last Friday. Until that point, the Afghani currency had been relatively stable despite the Taliban’s lightning advance. “Currency spiked from a stable 81 to almost 100 then back to 86," Ahmady tweeted in reference to recent volatile price action. Ahmady had left Kabul airport on Sunday night on a military plane, following news of the departure of President Ashraf Ghani.

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One in Three Afghans at Risk of Severe or Acute Hunger: WFP

The combined effects of war and drought linked to global warming have put one-third of Afghanistan’s population — 14 million people — at risk of severe or acute hunger, the UN World Food Programme warned. “2021 is an extraordinarily difficult year for Afghanistan," AFP quoted WFP representative and country director Mary-Ellen McGroarty.

The war-torn country is facing its second severe drought in three years, on top of the fighting and displacement of people, she said. Wheat production has fallen 40 percent after one of the driest periods in almost 30 years. “It’s had a devastating impact as well on livestock," McGroarty explained.

“As the conflict has escalated right across the country, farmers are unable to harvest the land, they’re fleeing from their homes," she said. Orchards have been destroyed in some areas, along with civilian infrastructure such as bridges, dams and roads.

The combined impact of the conflict with the drought is leading to rise in food prices. The price of a bag of wheat is today 24 percent higher than the five-year average.

Opium and Taxes:

The Taliban gets much of its revenue from criminal activities such as the cultivation of poppies used to make heroin and opium, as well as from drug trafficking, according to a May 2020 report from a UN Security Council sanctions committee.

Extortion of businesses as well as ransom from kidnapping also provide income, according to the report which estimated the group’s revenues at $300 million to $1.5 billion a year. The Taliban is expert in taxing just about everything in areas they control, from government projects to goods.

The international community has spent billions of dollars over the years to help Afghanistan eradicate poppy cultivation, but the country still produces more than 80 percent of the world’s opium. The industry employs hundreds of thousands of people in a country with high unemployment after 40 years of conflict.

The Taliban has acknowledged that it cannot improve the situation without foreign help. “We have spoken to many countries. We want them to work on our economy. We want them to help us," Taliban spokesman Zabihullah Mujahid said Tuesday. However as they did when they ruled the country from 1996 to 2001, the group will ban opium production, he said.

(With AFP inputs)

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first published:August 20, 2021, 16:48 IST