Game Changer for the Afghan Economy?

By Paul Fishstein, non-resident fellow

As Afghanistan’s strangled economy continues to spiral downwards, some have called the Biden administration’s General License (GL) exempting international commercial transactions from US sanctions a “game changer.” Without significantly greater US leadership and pro-active engagement, however, this is wishful thinking.

The February 25 GL was the most extensive of the seven GLs issued by the US Treasury’s Office of Foreign Assets Control (OFAC) since late September 2021. The GLs are intended to help the Afghan economy—which is in freefall—by assuring banks, firms, and individuals outside of Afghanistan that conducting legitimate transactions with people and institutions in Afghanistan will not put them on the wrong side of US sanctions imposed on the Taliban immediately following the 9/11 attacks. Unlike the previous GLs, which authorized only humanitarian transactions, the most recent GL explicitly approved commercial ones.

However, early indications suggest that the latest GL will have little effect on the main sanctions-related constraints on the Afghan economy. Businessmen still report not being able to get money into the country and Afghan citizens have been unable to access their own money, including business owners unable to withdraw funds to pay their workers.

A critical missing link is an international correspondent (intermediary) bank, without which Afghan businesses are unable to conduct transactions outside of the country (which is essential for importing food, medicine, and other essential goods). CitiBank stopped performing this function during January 2022, citing concerns about risk, and despite apparent entreaties by Treasury officials, has so far refused to resume it. Also, the latest GL still requires banks and firms to assess for themselves whether particular transactions are subject to sanctions, and most firms will err on the side of caution.

More broadly, the Afghan economy is suffering from a catastrophic lack of demand as a result of the sudden termination of development assistance and direct support to the government. Despite the good intentions of the GLs, the Afghan private sector is simply collapsing.

Meanwhile on the humanitarian front...

With no viable banking system, UN agencies have scrambled to import physical cash dollars and then to convert them into local currency via a presumably temporary “Humanitarian Exchange Facility.” These funds are providing food and other relief supplies, paying public sector officials such as healthcare workers and teachers, and, most recently, trying to preserve “human capital and key economic and social services.” However, these band-aid solutions are expensive and inadequate; they cannot compensate for the loss of an entire financial system. If not done carefully, they also risk establishing a parallel economy which marginalizes the Afghan private sector and civil society organizations.

The World Food Programme, which this year has fed nearly 13 million Afghans (more than one-third of the population), reports that, with 95% of all Afghan households lacking sufficient food, the program’s funds are running dry. Similarly, noting a “severe deterioration” in the humanitarian situation, UN OCHA warns of the risk that agencies will be unable to provide essential water/sanitation, nutrition, education, and health supplies “due to funding shortfalls, import and transport delays, market availability and liquidity challenges.” The OCHA December appeal for $4.4 billion—the UN’s largest-ever humanitarian appeal for a single country—has so far raised only $570.6 million, or 13%.

These concerns are now being heightened by the unfolding crisis in Ukraine and its justifiable and inevitable call on the international community’s financial resources and political attention. Also, with Ukraine having been projected to provide 12% of global wheat exports in 2022, there will likely be an increase in the price of Afghanistan’s staple food. Traders in Kabul have already reported price increases of up to 40% for imported basic food and household items following the Russian invasion

SRSG warnings to the Security Council on consequences of a failure to act

In her March 2, 2022 briefing to the UN Security Council, the UN Special Representative for Afghanistan acknowledged the positive intention of the GLs, but warned that they would be insufficient to overcome the challenges to reviving the economy. She noted that donor-funded feeding programs had “averted our worst fears of famine and widespread starvation,” but that this served “only to buy a little time,“ and that “it is imperative that we not find ourselves six months from now in the situation we faced six months ago: with millions of Afghans facing another winter of starvation and the only tool at our disposal being expensive and unsustainable humanitarian handouts.” She starkly stated that the economy was “nearing a tipping point that will see more businesses close, more people unemployed and falling into poverty. It is approaching a point of irreversibility.” Indeed, having lost 40% of GDP and 75% of the government budget overnight on August 15, 2021, Afghanistan’s economic crisis will not be mitigated by humanitarian assistance and on-paper exemptions from OFAC sanctions. In the absence of concerted, pro-active support to revive the economy, the world will almost certainly see a number of distressing consequences.

Most important, Afghan women and men who were just a few years ago lauded by the West as model modernizers will suffer. Many will be deprived of a chance to build a life because they had to abandon their education out of the need to try to earn a living. Nor is a living even guaranteed in an already excruciating labor market: job losses since the Taliban takeover may soon exceed 900,000 and unemployment is projected to double in the next two years. On top of this, during 2021, an estimated 1.2 million (486,000 from August) Afghans returned from Iran, most either forcibly deported or left due to lack of employment and harassment by the authorities. A special category of jobless is the estimated 85,000 Taliban fighters, over 300,000 Afghan National Defense and Security Forces members, and numerous local militias, most of whom are now unemployed and need to transition into civilian occupations.

What happens in Afghanistan generally doesn’t stay there. Despite the difficulties Afghans are already experiencing there, an estimated 6,000 (mostly male) Afghans head west to Iran each day, primarily due to lack of employment opportunities at home. Half leave via the official border crossing in Herat, while half arrange to be smuggled illegally through Nimroz province. Heart-breaking video footage shows long lines of Afghans trudging through deserts and snow-covered landscapes. When the spring makes the passage more accessible, the numbers will only increase. Most will attempt to reach a Europe that is now at the start of a new refugee crisis without any foreseeable end, and who will most likely be incapable of mustering either the resources or the empathy to absorb the likely numbers of Afghans.

United States policy and interests

After the chaotic August withdrawal, there was hope that the US would proactively assist those Afghans who were at physical risk due to their association with the US and support the thirty-eight million others who would be at risk from the sudden collapse of the economy and social services. Yet it appears that domestic political considerations have slowed and limited the Biden administration’s response to the economic and humanitarian crises.

However, maintaining a low profile on all things Afghan risks tarnishing the US’s international reputation by what appears to some to be, at best, reticence. It has also allowed the emergence of harmful narratives in which much of the world is using terms such as “collective punishment” and “undeclared economic war” to describe the spillover of US sanctions onto ordinary Afghans and the insufficiency of humanitarian relief. (According to the USAID Afghanistan Complex Emergency Fact Sheet, total USG humanitarian funding is $308 million—against the UN’s appeal for $4.4 billion.)

The US also further sours its relationship with the Afghan people. Although the way the US left Afghanistan in 2021-2022 differs from the way it did so in 1993—in defeat rather than victory—there are definite echoes of that earlier abandonment. None of this should take anything away from the many dedicated officials who by all accounts are working tirelessly, often behind the scenes, on a number of fronts (e.g., evacuation, resettlement, humanitarian, economic) in an impossible policy environment.

A worse scenario for Afghanistan and the US

It’s not hard to see how an economy that continues to fail leads to a breakdown in order and the re-emergence of open conflict. Given the number of armed groups, with at least one of them, ISIS-Khorasan Province (ISIS-KP), ideologically hostile to the idea of an Afghan state of any sort, this could eventually produce a level of conflict similar to the 1992-96 civil war—which in advance of the August Taliban takeover was considered the nightmare scenario. From a strictly US national security perspective, this would be a disaster. As put by one editorial, “the US would surely pay a higher price if Afghanistan collapses: Poverty and hunger would fuel refugee flows, create more space for terrorist organizations and leave a lasting moral stain on American credibility.”

A way forward

In the same March 2, 2022 statement to the UN Security Council, the UN’s top official in Afghanistan was frank about the practical need to engage carefully with what she referred to as the “de facto authorities” to reduce mistrust, communicate concerns, and, where possible, take steps that work in the interests of the Afghan people. Both the US and the Taliban have an interest in avoiding further economic collapse that would lead to instability and resumption of armed conflict, precipitate even more out-migration if not outright state-collapse, and perpetuate Afghans’ suffering. It is also the case that each side must deal with domestic constituencies. Keeping all of that in mind, the US and the international community should do the following:

  • Allow use of Afghanistan’s foreign reserves, frozen on February 11, 2022 by President Biden’s controversial and widely misunderstood Executive Order, for their intended purpose of macroeconomic management, working with the various proposals for how this could be done without diplomatically recognizing the Taliban or allowing the Taliban to divert the funds. The US should also find a way to release the approximately $1 billion in private funds of Afghan citizens and businesses, the continued holding of which has no justification under sanctions against the Taliban.
  • Secure a commitment from a financial institution to perform the role of correspondent bank, indemnifying it if necessary and pro-actively encourage international banks to engage in transactions with Afghan firms and financial institutions. To complement these efforts, increase support for digital payments platforms such as HesabPay to expand the range of low-cost options for directly supporting Afghan households. Simply granting sanctions exemptions, however generous and flexible, will not be sufficient.
  • Work with the Afghan private sector to take advantage of the Taliban administration’s stated intention to rely on the market economy as the main driver of growth and development, to reduce corruption, and to remove obstacles to investment, especially in agriculture, mining, and regional trade. While this will not be a straight or easy path, many Taliban statements on the economy would not have been out of place at a USAID-sponsored event on private sector development.

For their part, if the Taliban wish to prevent a total collapse of the economy, and with it the likely collapse of their own administration, they must mitigate the profound international skepticism about their intentions by doing the following:

  • Commit to an inclusive government and to the upholding of human rights, including women and girls, as articulated in UN Security Council Resolution 2615. International donors have stipulated that such gender inclusivity is a sine qua non for additional aid. Any restrictions on mobility, education, and employment are unacceptable to a society in which women have participated more fully in the last twenty years. Women’s participation has an economic and poverty reduction imperative as well; UNDP recently estimated that restrictions on women’s employment could immediately cost the Afghan economy $1 billion, resulting in the GDP dropping by a further 5%.
  • Establish a rules-based order and administrative coherence. To encourage any substantial level of investment, expansion, and innovation, the Taliban will have to avoid the type of chaotic administration that characterized their 1996-2001 rule, which was marked by inconsistent and confusing edicts issued by competing power centers. Paradoxically, the economy would benefit from a reasonable level of administrative decentralization or deconcentration of decision-making. The business community has long suffered the effects of over-centralization, especially during the last years of the Ghani administration.
  • Restrengthen key institutions such as the central bank and Ministry of Finance by continuing to retain the technical staff who have remained in their positions after the fall of the Republic, appointing independent, non-political people to key positions in those institutions, and agreeing with the international community to establish a system to rigorously monitor the use of funds. More and more Afghans and others have been raising legitimate concerns about the costs, overheads, and accountability of any parallel system that would be established to channel international funds; and building independence and transparency in key Afghan institutions would remove one of the main arguments against allowing them to control those resources.

No one is suggesting that the US administration should lift the sanctions against the Taliban or otherwise legitimate their grip on power. But mass immiseration and starvation amongst the Afghan people must be averted. It is imperative—morally and pragmatically—that the US and the world do much more for the people of Afghanistan than they are currently doing.

 

Photo: A conference officer adjusts the microphone ahead of the Security Council meeting on the situation in Afghanistan. (UN Photo/Manuel Elías)