By Rina Muller, Extern, Trade Impact Foundation
Even prior to August 2021, before the United States left Afghanistan allowing the Taliban to regain control, Afghanistan’s economy was already among the poorest in the world, with a gross domestic product (GDP) per capita of 368.8 USD. Economic growth was sustained, though at a declining rate due to decades of war, an ongoing drought, and the COVID-19 pandemic. The $8-9 billion received annually in civilian and security aid made up 75% of government spending and 40% of the overall economy. Yet, despite the vast quantities of humanitarian assistance, by 2020, poverty was at a staggering 47%, and two-thirds of households were, reportedly, unable to afford food and other basic items.
In the year after the Taliban took over, Afghanistan’s GDP growth fell by 20.7% and, by now, an estimated 85% of the population is living below the poverty line. Many Afghan households’ income was reliant on funding from foreign assistance from organizations like the International Monetary Fund (IMF), United States Agency for International Development (USAID), or the Asian Development Bank (ADB), all of which decreased funding after August 2021. In the past year only $3.5 billion was contributed in aid inside Afghanistan, compared to earlier amounts of over $8 billion. This year, the UN made an appeal for $4.6 billion in aid for Afghanistan, arguing it is the minimum required to help Afghans in need. However, many donor governments are worried about bolstering the Taliban’s rule and facilitating further human rights violations, especially in terms of women’s rights.
Women’s Rights Under the Taliban
In daily life, the Taliban mandated that women be escorted everywhere, from the marketplace to the doctor’s office, by a male relative, or mahram. Afghani women report this mandate negatively affects their already limited access to healthcare, their basic freedoms for actions as simple as buying bread, and their influence in decision-making in their homes.
Under the Taliban regime, girls are forbidden access to secondary education, and their primary education is severely limited. Afghani women are also banned from most jobs, including working with national and international NGOs (Non-Governmental Organizations) or even the UN. These mandates further limit women’s freedoms and hinder aid efforts in Afghanistan.
These actions affect both the West’s willingness to provide aid to the country, and the long-term economic impacts of the Taliban takeover. United Nations Development Programme (UNDP) Deputy Resident Representative of Afghanistan, Surayo Buzurukova, reports that according to recent simulations the removal of women from the workforce will make it impossible to achieve real growth and reduce poverty in Afghanistan.
Practical Obstacles to International Aid
In addition to the ethical and humanitarian concerns of potentially funding a tyrannical Taliban regime, practical obstacles exist. Even if enough money and supplies could be gathered, NGOs and government aid groups face issues getting the money into Afghanistan’s economy. Before August 2021, humanitarian assistance from the international community was transferred through the international banking system. However, once the Taliban took over, Afghanistan was cut off from the international banking system and many foreign banks became wary of engaging in transactions with Afghani banks for fear of disobeying pre-existing sanctions on the Taliban. While these sanctions only apply to Taliban leaders and members, not Afghanistan as a country, they would continue to apply now that the government and public finance sector are associated with Taliban leadership.
Many aid groups have therefore started using the unofficial and unregulated Hawala system to transport money to Afghanistan. Hawalas can be used to hold deposits, offer loans, and make international payments, making the system a necessity to both humanitarian aid groups and Afghan households navigating around a broken banking system. Unfortunately, utilizing Hawala transactions comes with steep costs, sometimes reaching over 10%, and carries much more risk than the traditional bank system. Furthermore, Hawalas are meant to be used for smaller scale transactions and cannot handle the money that humanitarian assistance organizations need processed.
Domestically, ever since the Afghanistan banking system was cut off from the international banking system, it has struggled to manage both day-to-day operations and the functions necessary for a healing economy. Afghanistan’s central bank, Da Afghanistan Bank, lost its credentials to interact with the international banking system and financial institutions, such as the World Bank, the IMF, and many countries’ domestic banking systems. This revocation blocks Da Afghanistan Bank from receiving assets, grants, or assistance from the World Bank, increasing the difficulty of dealing with the humanitarian and financial crisis. In September and December 2021, and February 2022, the US, UK, and several EU governments issued licenses that allow for transactions with Afghan government entities necessary to engage in humanitarian operations, such as importing medical aid, and other legitimate transactions. While these licenses authorize certain transactions with Da Afghanistan Bank, they do not revoke the bank’s status of being cut off from the international banking system, or recognize the credentials of any of the bank’s officials.
To date, foreign governments have not certified either the new head of the central bank or the Taliban’s finance minister as authorized representatives for the purposes of engaging in international transactions, or accessing the central bank’s accounts and assets held in foreign banks.
In fact, the US, in freezing Da Afghanistan Bank's $9 billion in foreign assets in August 2021, severely impacted the bank’s ability to deal with inflation, which peaked at 18.3% in July 2022, and caused massive liquidity problems in the country. The liquidity crisis led to withdrawal limits, restrictions on electronic transactions with USD, and limited importation, as without being able to liquify the money, the bank could not engage in as many bank transfers. The freezing of frozen assets means that the central bank can not even utilize their foreign currency reserves to provide short-term liquidity to settle dollar transactions or make essential payments.
Recently, the Afghan banking sector has shown some signs of normalization, with some major transactions able to resume function, though many electronic settling transactions are still blocked. The liquidity situation has improved to the point that most banks can now service individual withdrawals up to the limit for pre-August 15, 2021 deposits and there is no withdrawal limit for fresh deposits. However, international payments and trade finance are still restricted and in 2022 the banks’ revenues from core functions decreased by 32%.
The Need for Aid in the Face of the Current Financial Humanitarian Crisis
The broken Afghan banking system continues to hinder both domestic economic growth and international aid efforts. Whereas aid beforehand made up 40% of the economy, it now only accounts for 20-25% of GDP, and even small negative changes in the current situation, such as a reduction of aid or cash shipments, an inability to finance the current account deficit, or worsening instability in the banking sector, can cause mass spillover effects, adding to the already tens of millions suffering from poverty and food deprivation.
By now, Afghanistan’s economy has leveled out at a fragile and tragic “famine equilibrium.” In 2022, four-fifths of Afghan households reported experiencing significant decreases in, or complete loss of income. Indeed, the World Food Programme assesses that about twenty million people, half of Afghanistan’s population, face either a level three, “crisis”, or level four, “emergency” in levels of food security, citing that Afghanistan “continues facing the highest prevalence of insufficient food consumption globally,” with 92% straining to meet basic food needs. Both the UN and the World Bank concur that most of the population, millions of people, cannot afford food and necessities, and face starvation without outside help.
The situation is only expected to worsen and income per person is predicted to continue falling this year and the next. Until Afghanistan can expand its economy to a livable equilibrium, a practically impossible task without allowing women in the workforce, its population is reliant on foreign aid and humanitarian assistance. Despite all the practical obstacles to obtaining and distributing this aid, such assistance is nevertheless necessary, for without it, millions of people will starve.