US Must Review Criminal Sanctions Policy Amid Afghan Financial Crisis
The widely recognized illegitimacy of the Taliban regime, due to its involvement in terrorism and human rights abuses, has cast uncertainty on Afghanistan’s macroeconomic tracks.
The country’s economy is estimated to have contracted by 40% since the Taliban took control in August. This had substantial negative implications on basic services, financial systems and markets, leading to a rapid deterioration of the situation for ordinary people.
The money is not physically available and therefore cannot enter the country’s economy.
Even before the regime transition, the previous civilian government relied heavily on donor support who financed more than three-quarters of its spending, with most of the support going to security and counterterrorism activities. The rest of the aid was associated with large-scale diversion by local strongmen, undermining the legitimacy of the state.
Four months after the formation of the Taliban-led government, public finances remain precarious and strained.
The foreign assets of the Afghan Central Bank – more than $ 9.5 billion in the United States alone – have been frozen and Afghan banks heavily dependent on physical shipments of U.S. dollars find themselves in the midst of a boom. acute and immediate liquidity constraint. The World Bank and the International Monetary Fund (IMF) have also suspended their financial support.
With foreign aid representing such a large share of the state budget, the suspension of access to central bank assets has resulted in a severe squeeze on financial liquidity. Afghanistan has relied almost entirely on foreign cash to pay civil servants’ salaries, and with this uncertainty too, banks, passport offices, schools and universities have remained largely closed. The lack of funding which has resulted in a dangerous worsening of the humanitarian crisis.
The US sanctions against the Taliban do not manifest a clear political objective, as it was a party to the Doha agreement of March 2020, triggering the possible takeover by the Taliban. Reaffirming existing US sanctions against the Taliban, the US Treasury has blocked the Afghan Central Bank from accessing foreign currency reserves, even as collateral providing short-term liquidity to settle dollar transactions. With banks unable to pay depositors, the liquidity crisis continues to worsen.
In November, through a open letter, Taliban Foreign Minister Amir Khan Muttaqi urged members of US Congress to release Afghan assets frozen after their takeover of the country, warning that the economic situation could trigger a mass exodus. The value of the Afghan currency continues to decline against the US dollar to over 110 afghanis.
In an attempt to stop the drastic depreciation of the Afghan (Afs), the Taliban announced a ban on the use of foreign currency declaring that “the economic situation and the national interests of the country demand that all Afghans use Afghan currency in all their trade”. There are also reports that there are about $ 4 billion Afghans in the economy, but about $ 500 million is in circulation, and the “rest is sitting under the mattress or under the pillow” because that people are afraid of.
If the Afghan government continues to be seen as unworthy of international aid, there could be implications for trade finance, as the country has imported around $ 7 billion worth of goods, products and services. last year. This could mean stopping the flow of money to Pakistani and Indian traders, who are Afghanistan’s main buyers.
The Taliban takeover has severely affected shipments of perishable goods such as vegetables and fruit, and traders face difficulties due to various laws on trade with Afghanistan at the Torkham border post.
Despite assurances from Pakistan that the border will remain open, only a limited number of trucks are allowed to cross. After a considerable delay, on December 3, the government of Imran Khan declared that it would allow the transport of 50,000 metric tons of wheat and vital medicines from India to Afghanistan, on Afghan trucks, from the border from Wagah to Torkham.
the United Nations Development Program (UNDP) warns of ‘colossal’ collapse of Afghan banking system within months, which could take decades to rebuild, given the inability of the population to repay their loans, the drop in deposits and the shortage of liquidity.
He proposed that deposit insurance systems be included in the banking system with adequate liquidity for short and medium term needs and credit guarantees and options for late repayment of loans. Humanitarian organizations estimate that at least US $ 606 million needed to assist 11 million Afghans affected by crisis This winter. There is no way to transfer salaries to bank accounts, and as a result, aid organizations too find it difficult to pay doctors, nurses and other aid workers in the field. While donors have contributed generously, liquidity issues in the midst of the crisis have meant that financial commitments have not translated into actions on the ground.
The World Bank’s Board of Directors approved the transfer of $ 280 million from a frozen trust fund to two aid agencies, subject to the approval of 31 donors to the Afghanistan Reconstruction Trust (ARTF).
Whether sanctions should apply to the Afghan Central Bank or to transactions involving government offices or ministries controlled by sanctioned Taliban entities needs to be considered.
There are no clear guidelines from the relevant UN Security Council sanctions committees. Meanwhile, companies printing Afghan currency in Europe fear that dealing with the sanctioned Central Bank could affect their own credentials and, as such, may not ship new bills to Kabul. The Taliban do not have the capacity to print money.
Human Rights Watch had suggested that US authorities allow the Afghan Central Bank to engage in limited settlement transactions with outside private banks or to settle incoming dollar deposits from legitimate private depositors, such as UNICEF, UNDP. and others.
December 13, The United States has announced that it will issue licenses to banks to allow Afghans living abroad to transfer money to relatives in Afghanistan, reiterating that this would not facilitate sanctions against the Taliban. It is anticipatory to predict what the resumption of international flows will be.
For now, even payments by wire transfer to accounts in Afghanistan have become impossible for humanitarian organizations, as international currency cannot be changed into local currency by the country’s banks.
It is hoped that the situation will stabilize to some extent once banks can process incoming dollar deposits. The United States must reconsider its sanctions policy and allow legitimate financial transactions related to humanitarian activities.
Vaishali Basu Sharma is an analyst in strategic and economic affairs. She worked as a consultant to the Secretariat of the National Security Council for almost a decade.