Afghanistan: Teetering On An Economic Crisis

The Taliban's return to power may usher in both an economic and ahumanitarian crisis.

Afghanistan is on the cusp of an economic crisis after the Taliban’s return to power led Washington to cut Kabul’s access to crucial US deposits. Foreign donor organizations, including the World Bank and International Monetary Fund, also froze financial support. As a result, speculation is mounting about whether China, Qatar and Pakistan, supporters of the Taliban regime, can muster an aid package that would stave off a total economic collapse.

Da Afghanistan Bank, the country’s central bank, reportedly has around $10 billion in reserves, much of which is held abroad. The Biden administration swiftly froze $7 billion in US-based deposits after the US departed the war-torn country in August. Afghanistan has historically been heavily dependent on foreign aid, which accounted for more than 40% of its GDP in recent years.

Adding to Afghanistan’s economic woes is a severe drought which has devastated crops and left farmers destitute. Any further deterioration in public finances could lead to cutbacks in essential services such as education and healthcare. Decades of conflict have wrecked the country’s infrastructure adding to the hardship of ordinary Afghans.

The country’s currency, the afghani, has come under intense pressure, halting supplies of vital imports in the largely cash-driven society. Banks have limited the amount customers can withdraw, causing long queues outside Kabul banks.

According to experts, those financial flows aren’t likely to be unleashed anytime soon, as lenders pause and assess how to deal with the Taliban. “The Taliban takeover has aggravated multiple crises that already existed, leading to thousands fleeing the country, the freezing of funds from multilateral organizations and halting of key development projects,” notes Gargi Rao, business fundamentals analyst at GlobalData, in comments on the company website.

If left unchecked, the impact on the Afghan economy could be catastrophic. “GlobalData projects the country’s real GDP to contract within the range of 12.4% to 22.3% in 2021,” Rao further comments.

Still, China’s vocal support for the mullahs is constrained by the political fallout that could ensue if it decides to bankroll the Taliban. Doing so could put it on a collision course with Washington at a time when tensions are already close to the breaking point.