Afghanistan is one of the world’s poorest countries with a GDP per capita (PPP) of around only $2,100, with its dire economic situation only exacerbated by the pandemic. Fighting in recent years and uncertainty about the future have only made investors jittery. And this year, financial stress and a drought have added to Afghanistan’s woes. The country has endured fighting for over 40 years – so long that most Afghans can’t remember a time of peace. On August 15th, the Taliban swept victory in the nation following their rapid advance across the country, and capture of Kabul. The move came following the withdrawal of foreign forces from Afghanistan following a deal between the US and the Taliban – two decades after US forces removed the militants from power in 2001. The conflict has killed tens of thousands of people and displaced millions. While the Taliban have pledged they will prevent Afghanistan from becoming a breeding ground for terrorism against the West, questions are already being asked about how the group looks to govern the country, particularly how the ailing economy will fare under extremist rule.
Even preceding the ascent of the Taliban, the Afghan economy was already in a fragile state, heavily dependent on foreign aid and development assistance. A nation is considered aid-dependent when 10% or more of its GDP comes from foreign aid; in Afghanistan’s case, around 42% of its GDP is comprised of international aid and funded 75% of public expenditure (BBC, The Guardian and World Bank). With both economic and political instability at the forefront of Afghanistan’s growing worries, this aid has been shrinking over recent years, with fewer private companies, fuelled by uncertainty, willing to invest in a country so unstable. With the Taliban in power, such uncertainty has only augmented, with the US, UK, International Monetary Fund, World Bank, EU and Germany, among several donors, having already suspended the development funds they planned to give the nation. While they may continue to provide humanitarian aid, this will likely be channelled via charities rather than the Taliban government. For Afghanistan, the consequences will be dire, with a likely sizeable contraction in government financing, resulting in the lay-off of civil servants and NGO staff and the collapse of essential services such as health and education.
Another unfortunate aspect of Afghanistan’s crippling economy is the depreciating value of its currency, the Afghani – one dollar is now 88.2 afghanis, versus around 80 before the fall of the previous government. How the Taliban deal with this will be a likely struggle, given the US Federal Reserve have ‘frozen’ all of Afghanistan’s foreign exchange reserves in its hands, amounting to some $7 billion. While intended to block misuse of funds by the extremist government, Afghanistan’s central bank has subsequently lost the ability to manage the exchange rate by trading its dollar and other reserves for the local currency, presaging a further collapse in the afghani, a plunging exchange rate and hyperinflation.
Compounding to Afghanistan’s enlarging economic stress is how it will feed and provide for the population sustainably, given the cost of goods that ordinary people rely on to survive, such as flour, oil and rice, has been rising each day – according to the UN, the cost of wheat, rice, sugar and cooking oil has increased by more than 50% compared with pre-COVID-19 prices. This poses a very tangible threat to the livelihood of millions of Afghan children that could be pushed into severe hunger, only exacerbated by the drought that has severely dented crop yields, foreshadowing significant food shortages the nation will face this winter.
Queues run for hundreds of metres outside banks which – fearing a run on accounts as people desperately seek to secure their assets – have limited withdrawals, sparking a cash crisis that is freezing economic activity in large cities. With 4% of Afghanistan’s GDP made up of remittances (World Bank), the country is one of the most dependent on remittances in the world, where citizens would typically rely upon family members living outside the country sending money home from abroad. However, in response to the Taliban takeover, catalysed by western nations halting foreign aid shipments, international transfer companies, Western Union and MoneyGram, have suspended their services in Afghanistan – effectively eliminating the influx of family cash from abroad, leaving many Afghans in a distressing state.
Nevertheless, while Afghanistan faces the spectre of multiple crises happening at once, the Taliban understand that governing effectively will necessitate delivering on people’s basic needs and providing credible hope for its citizens who have witnessed conflict for far too long. The Taliban already appear benevolent in their approach, calling for renowned relations with many of the countries from which they wrested back control of Afghanistan, including the US. This illustrates a positive signal that the extremist government looks to integrate with the global economy as they seek to try and gain access to much-needed foreign aid and development funds. The Taliban are fully aware that without access to international aid, the Afghan economy will most likely disintegrate – a catalyst for further social disorder in the country that may become uncontrollable. It is crucial to note that this approach by the Taliban is far from conventional, given 20 years ago they would never have sought out foreign assistance. However, now, the UN managed to airlift supplies via Qatar using the Pakistani national airlines – indicative of openness to assistance by the Taliban. The vested economic interests in Afghanistan by the West may give them some leverage to influence the incoming Taliban administration, either by unfreezing Afghanistan’s foreign exchange reserves and access to development funds to progress on human rights, or denial of space to jihadist groups. While this presents some hope for the nation’s economy, ultimately, Afghan citizens will be the ones to suffer in the meantime.
This article was written by: Prerak Goel, currently a student at the London School of Economics, pursuing BSc Economics.