Monday, September 20, 2021

On The Brink Of Collapse: No Saving Grace for Afghanistan’s Economy

The international isolation of Afghanistan’s economy is as bad as it can get.


Highlights

  • With Taliban busy in moral policing anti-radical ways of life on gunpoint, nation lacks any economic plan in sight.
  • The nation heavily dependant on foreign aids witness its worst economic health after withdrawal of western powers.
  • One in three Afghans is suffering from acute food shortage.
  • Illicit channels, primarily drug smuggling, nation’s only resort to stay afloat.

Afghanistan News, Kabul: Afghanistan’s economy is on its knee. While the new ruling power of the country, Taliban, is busy restoring the old conservative Islamic laws and ways of living on the nation on gunpoint, nobody knows what the economic fate of the nation would be.

Apart from the human rights crisis in the region, the biggest challenge that the country faces is international isolation. The already fragile, ailing economy of Afghanistan is now on the verge of absolute collapse, leaving millions deprived of the basic necessities.

According to the assessment by the United Nations, as many as 14 million Afghans are undergoing an acute food shortage. This translates to one in every three Afghans.

The quick takeover of the nation by Taliban has virtually stalled the economy with its assets frozen, banks closed and crucial foreign aid cut off.

Long queues were seen outside banks in Kabul and other cities in the country but many account holders returned empty-handed since the banks were out of cash.

ATMs too were unable to dispense money. The desperation among the common Afghan can be easily perceived.

An economy taking its last few breaths

The Afghan economy is almost entirely cash-based with just 10% of people estimated to possess a bank account. Moreover, the economy of the country has, over the last 20 years, been propped up mostly by foreign aid according to the World Bank– which has provided a total of over $5.3 billion for development and emergency reconstruction projects in recent years.

With the private sector comprising a minuscule portion of Afghanistan’s economy, employment has mostly been concentrated in low-productivity agriculture, with data from the World Bank showing about 44% of the total workforce engaged in agricultural activities and 60% of households making some form of income from agriculture. 

Over many decades, the growth of the private sector in the country has been constrained by insecurity, political instability, weak institutions, inadequate infrastructure, widespread corruption, and a difficult business environment. The country was ranked 173rd out of 190 countries in the 2020 Doing Business Survey.

The trade deficit of the country is about 30% of its gross domestic product (GDP) which is structural in nature as the country has very little to offer for export. World Bank data shows about 57% of the total public spending in the country is financed by grants while at the same time, the expenditure for national security and the police is about 28% of the GDP which is extremely high compared to global standards.

In comparison, security spending by low-income countries is about 3% of their GDP on average. The illicit economy of the country comprises a significant proportion of production, exports, and employment which include opium production, smuggling, and illegal mining.

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There has been fast economic growth in Afghanistan albeit against low base numbers of previous years, and most of it has been because of foreign aid. Since NATO and the United States invaded the country in 2001, the economic growth of the country has been an average of 9.4% between 2003 and 2012, driven by an aid-driven services sector, and strong agricultural growth.

However, between 2015 and 2020, the economic growth slowed down to an average of 2.5%. One of the reasons for this, as noted by the World Bank, is a decrease in aid flows from about 100% of GDP in 2009 to about 42.9% of GDP in 2020.  It should be noted that within this period, there was also a huge reduction in foreign troops in the country– from about 130,000 in 2011 to a little over 15,000 by the end of 2014.

It leaves one to wonder whether there was a relation between the number of troops stationed and aid flow.

And now with all foreign troops leaving the country in the hands of Taliban, one can hardly be optimistic about aid flow into the country and consequently the further fall in its economy.

What Lies Ahead for Afghanistan’s Economy under Taliban Rule

In addition to the security threat, the withdrawal of foreign troops from the country is also expected to have dire consequences for the economy. It is widely accepted that along with the foreign security forces, most international civilians will leave Afghanistan due to security concerns. 

With time, it is also expected that international attention on Afghanistan will get significantly reduced, along with a potential reduction of international aid pledged to the country.

Private investments already stand threatened, on the verge of extinction because of terror outreach. It is quite possible that a recession will hit the Afghan economy, compounded by the COVID-19 pandemic, with reduced international aid and a decrease in foreign investment. This is predicted to create a vicious circle as a recession would have a negative impact on the security situation with the Taliban-headed government potentially unable to pay employees and fund health and education programs.

While the news of some support from China and Pakistan to Kabul, it would be minuscule to the amount of international aid that flowed into the country previously.

As soon as the Taliban took over Kabul on Aug 15, foreign aid to Afghanistan’s economy was suspended by many of the Western powers, including the United States and Germany. Payments to the country have also been halted by the World Bank and the International Monetary Fund since then. The available foreign reserves of Afghanistan’s central bank- Da Afghanistan Bank (DAB), have also been frozen, which amounts to about $9bn. The IMF has stopped financing for Afghanistan, which includes almost $500 million that was scheduled to be transferred around the same time as the Taliban took over the country.

With very little means of income other than through illicit channels and with expected sanctions on Taliban by many Western countries, the hit to the Afghan economy appears to be significant in the short to the long term. Though the Taliban has governed in the past, it was 20 years ago. The Islamist extremist group has no cadres with practical experience in dealing with the economic and social problems of the current Afghanistan which is very different from what they were more than 20 years ago.

Conclusion

The Afghan economy is heavily dependent on international aid and international trade, and under the current situation, both are expected to be negatively affected.

It is most likely that foreign aid to the country, under the Pledging Conference, will be significantly reduced with the Taliban taking over the country by force. The withdrawal of foreign forces from the country is also expected to indirectly undermine international aid for Kabul, while the security and stability of the country are expected to be directly impacted. That will significantly impact the chances of foreign private investments flowing into the country under the Taliban. If these factors turn out to be true, it will be enough to push the Afghan economy over the cliff and into the precipice of a recession.

Debdutta Ghosh
Debdutta Ghosh is a Journalist who has been associated with leading media firms of India like Asian Age, Indian Express and Hindustan Times as well as television channels such as Zee News/Business and ABP News as a reporter for more than 20 years. With a Post-Graduation Diploma in Mass Communication & a Bachelor Degree in Science, his expertise as content expert lies in the areas of Business News Analysis, PR, and Marketing Communication.

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