Afghanistan: Deprived Of Foreign Aid, Taliban Face An Uphill Economic Battle – Analysis

By Frank Kane

The new Taliban rulers of Afghanistan are facing an immediate economic crisis as aid and other international financial flows dry up, but economists do not underestimate their ability to continue running the country’s $20 billion economy even as a pariah in the international financial scene.

The pressing concern is the stability of the domestic economy and currency, the afghani. Ajmal Ahmady, the central banker who fled the country as Taliban militias converged on Kabul last week, said that Afghanistan faced an economic crisis as the currency depreciated wildly, with the prospect of rapid inflation and a shortage of essential imports. “It’s a really challenging situation,” he told media.

“Macro-economic stability cannot be maintained in the short term. But in the medium to long term, if there is a political settlement and relations are re-established with the US, Europe and the Gulf states, they can begin to stabilize it,” Nasser Saidi, the Middle East economic expert, told Arab News.

Saidi, who has served as economics minister of Lebanon and vice governor of the Lebanese central bank for several terms, highlighted the likelihood that China and other non-Western countries would see economic and strategic advantages in Afghanistan under Taliban rule — if stability can be achieved.

But the present scenario is economic chaos. Even before the swift takeover of the country, symbolized by the fall of Kabul last week, the Afghan economy was in a mess — a “zombie” operation functioning largely on foreign donations, illegal exports like narcotics, and an administration open to corruption and bribery.

In the two decades of Western occupation, the Afghan economy at first grew at a rapid pace, bolstered mainly by US spending on military and, to some extent, civilian infrastructure. Until about 2015, economic activity and living standards improved rapidly.

But they have stagnated over the past five years as international aid slowed down. Per capita gross domestic product, even with all those foreign handouts, amounted to just $507 per year according to the World Bank, putting Afghanistan consistently near the bottom of world wealth tables.

Now Afghans face the immediate prospect of total collapse.

“With much of the economic progress of the last 20 years being built on external support, the return of Afghanistan to global pariah status is likely to see the rug pulled from under the economy,” said Gareth Leather, Asian economist at London-based Capital Economics.

Those crucial foreign donations will almost completely dry up, at least until there is some clarity about what kind of government the Taliban will put in place.

The US marked its military withdrawal by suspending access to $9 billion of foreign reserves held in America on behalf of the Afghan Central Bank. As the US has been the major provider of financial support to the country throughout its 20-year stay, and having spent $3 trillion funding the occupation, that will be a big immediate hit to the new regime.

The US Congress, in a letter to Treasury Secretary Janet Yellen, made clear its opposition to financial support for a “regime with a history of supporting terrorist actions against the US and her allies.”

In addition, the International Monetary Fund has cut off Afghanistan’s access to its lending facilities, explaining that “a lack of clarity within the international community” had led it to suspend a $370 million facility to be made available immediately.

Other big Western institutions, which might have been expected to invest in Afghanistan under different circumstances, are almost certain to follow the US and IMF lead.

So, what sort of economic regime can the Taliban put in place to compensate for the lack of Western foreign aid? The new rulers start with some advantages.

For one, they have taken over a real economy, built on a population of 38 million people, many of whom aspire to middle class states with all the trappings of a consumer society, especially in the larger cities. How far the Taliban will want to accommodate those aspirations remains to be seen.

The Taliban also has some experience in economic administration, having run large parts of the country for several years, and have developed a taxation system that has provided them with arms and resources to prosecute the war against Kabul and the US.

“They have controlled the trade routes to other countries for some time, which allowed them to finance the Taliban movement. But that will not be enough on its own to finance the entire government,” Saidi said.

Levies by the Taliban on goods such as cigarettes and fuel products account for a significant amount of the militant group’s income, according to some experts.

David Mansfield, an Afghanistan analyst at the Overseas Development Institute, told the Financial Times: “The primary source of Taliban finances is taxation of legal goods. Drugs have not been as significant a source of funding for the Taliban as many have claimed.”

Nonetheless, Afghanistan’s opium crop — also taxed by the Taliban — is still a big source of income for the country, and has grown steadily under the occupation, despite US counternarcotics operations costing billions of dollars since the invasion in 2001.

A survey by the UN showed that the opium harvest was 37 percent up in 2020, and there have also been reports of Afghan involvement in some of the basic ingredients for the manufacture of methamphetamine products for export.

Taliban spokesman Zabihulla Mujahid said recently that the organization wanted to make Afghanistan a “narcotics-free country” and appealed for international assistance in order to “revive our economy.”

If Mujahid is to be successful in his ambitions, he will have to fall back on traditional Afghan exports. New York-based consultancy Trading Economics lists the country’s main legal exports as carpets and rugs, dried fruits and medicinal plants — none of which can be viewed as generators of significant wealth in the modern global economy.

However, the Taliban does have an economic ace up its sleeve in the form of the country’s rich mineral and mining resources. Economists value these deposits as being worth as much as $3 trillion, ranging from traditional reserves like copper and bauxite to rare earth minerals and lithium, which are much in demand in modern telecommunications technology and renewable energy sources.

“I anticipate agreements with China to exploit Afghanistan’s natural resources. In that case, China will benefit from the debacle of the US withdrawal,” Saidi said.

“It will not come in the form of aid, but in investment in infrastructure and exploitation of natural resources. If Afghanistan is linked to the Belt and Road Initiative, the economic situation could improve dramatically,” he added.

One of the leaders of the new regime, Mullah Abdul Ghani Baradar, led a Taliban delegation to Beijing in July in a move viewed as reaching out to China for economic support ahead of the takeover of Afghanistan.

Other countries could also step in to fill the gap left by Western withdrawal. Pakistan, Iran and even Russia are already significant trading partners with Afghanistan, and would not be deterred by the unsavory nature of the new regime.

Arabian Gulf countries might also be persuaded to take part in the rebuilding of the country. “The Gulf countries don’t want to see a destabilized Afghanistan, and might be interested in the natural resources, too,” said Saidi, pointing to the prominent role already being played by Qatar in Afghanistan’s affairs.

The Taliban says it is a different organization from the 1990s movement, and that it has learned lessons from that time. How it handles the urgent challenges of the Afghan economy will be a litmus test of its competence.