24 January 2023, NIICE Commentary 8518
Avinash Singh
On February 29, 2020, the US and the Taliban signed an agreement to completely withdraw the US forces from Afghanistan by May 1, 2021. The agreement was conditioned on the fact that the Taliban would not allow its soil to be used by groups including Al Qaeda against the US and its allies in the region. The complete withdrawal of US forces occurred on August 30, 2021, but the Taliban had entered Kabul and taken control of the capital weeks before that.
Economic Sanctions by the International Community
After the Taliban took over Afghanistan, the World Bank at the behest of donor countries cut off the two billion dollars in outside assistance through Afghanistan Reconstruction Trust Fund that was used to pay the salaries of teachers, healthcare workers, etc. In addition to that IMF, USAID, and Asian Development Bank (ADB) cut off the additional budgetary funds. The IMF blocked government access to Special Drawing Rights i.e., access to IMF funds, which the Taliban could have used to manage its balance of payments and pay government employees. Furthermore, the United States, World Bank, and other international communities revoked the credentials of the Afghan Central Bank. As a result, the central bank was not able to access the international banking system. The New York Federal Reserve, Bank of England, and many other European banks froze Afghanistan’s foreign reserve to the tune of approximately 9 billion dollars. The central bank of Afghanistan could have used this reserve to trade dollars for local currency and to import essential commodities. This gave rise to a liquidity crisis as the Afghan Central Bank could not access the reserve to make essential payments or exchange dollars for Afghan currency. Since the Taliban is seen as an armed group rather than a legitimate government, the United States, European Union, and UN Security Council imposed sanctions on Taliban leaders and imposed an arms embargo on the Taliban. In addition to that, western countries cut down their diplomatic ties and shut down their mission in Afghanistan.
Socio-Economic Impact on Afghanistan since Taliban’s Rise to Power
Taliban came to power in Afghanistan after two decades of insurgency. Since coming to power, they have been imposing extreme forms of Islamic laws and have struggled to have a functioning government. Before the Taliban came to power, Afghanistan was already reeling with insecurity, the COVID-19 pandemic, and a corrupt overly centralized government. Since the Taliban came to power, the health services have been pathetic and Afghan people have struggled to find economic opportunities to sustain their life. Women’s rights and the rights of minorities have been threatened. According to UNDP reports, 700,000 jobs have been lost. According to United Nations, more than 90 percent of people suffer from food insecurity and World Food Program reported that nearly half of the Afghan population is facing an emergency level of food insecurity. According to a World Food Program survey, almost 100 percent of female-headed households are food insecure and are forced to take drastic measures. Foreign aid contributed 75 percent of government spending and approximately 40 percent of their GDP during the transition. This aid disappeared overnight exacerbating the economic crisis.
The economic situation has worsened, there is mass unemployment, malnutrition is on the rise, women’s rights are subjugated, and there are migration and internal displacement. Brain drains and a lack of competent Afghans to run the institutions is other problems faced by Afghanistan. Afghanistan was one of the last countries on the list of the Human Development Index and the situation has turned even worse since the Taliban came to power. Moreover, the banking sector has been affected by the sanctions imposed on Taliban leaders. They have found it hard to engage with International Financial System. The currency has plummeted, and imports have become costlier. Inflation has made cost-of-living higher. The agricultural sector is affected by drought and natural disasters like floods and earthquakes. Taliban has banned opium cultivation which has further affected the livelihood of many Afghan farmers. Disbanding the Afghan national security force and stopping women from working has left thousands of people unemployed and affected their livelihood.
Positive Developments so Far
To address the humanitarian emergency, there have been sanctions waivers to international agencies and NGOs that provide basic needs such as food, education, and healthcare services. Under Humanitarian Response Plan, the UN and partner countries have proposed 4.4 billion in US dollars to make payments to civil servants. Another 600 million dollars has been proposed under the 2022 Refugee Response Plan to help internally displaced refugees and refugees in neighboring countries. The aid is directly being routed to the recipient rather than through Taliban-controlled institutions. Taliban has provided security to aid agencies which have made it easier for aid agencies to access previously inaccessible places for aid disbursement. There have been talks between the Taliban and the US to unfreeze assets held in foreign banks, however, no progress has been made so far. Furthermore, the Taliban is working hard to engage with the international community to get diplomatic recognition. The Taliban has done remarkably well when it comes to revenue collection at border crossings. Taliban has been incentivizing private sectors to invest and are providing them with tax concessions and addressing their security concerns. They have been able to stem corruption in customs, however, there is corruption in government agencies and instances of extortion of nongovernment organizations. Fighting within Afghanistan has stopped, and a sense of security persist which can be beneficial for the long-term economic prospect.
Prospects for Taliban and Afghanistan
Afghanistan’s future depends on international recognition of its government, restoring diplomatic ties with western countries, and reducing sanctions imposed on its leaders. Regional countries can play a significant role in helping Afghanistan come out of this crisis. China, Russia, Pakistan, and Iran have been supporting the Taliban and have kept their embassies active to engage with the Taliban. However, they have not recognized them formally. There are reports that suggest that the Taliban still has ties with Al Qaeda and this could further dampen their efforts to get the sanctions removed. Taliban’s main focus has been to maintain internal security, which they have been able to maintain to a large extent. However, there are elements within the Taliban that can be a threat to neighboring countries and harm their efforts to attract foreign aid flows. Taliban’s treatment of women will further affect their request for foreign funds.
India and China can play a significant role in helping the Taliban come out of this crisis. However, India has its own security concerns and fears the Islamic movement might infiltrate India. Taliban’s close ties with Pakistan are another concern for India, as Pakistan can use its closeness to the Taliban to harm Indian interests in Afghanistan. China also fears the spread of instability in the Xinjiang region of China as Uyghur militants operate from Afghan soil. Turkestan Islamic Party (TIP) is an Uyghur militant group that has an alliance with Ql-Qaida and the ambition to liberate Uyghur Muslims from China. Tehreek-e-Taliban is constantly attacking Pakistan and wants to annex the Pashtun-dominated areas into Afghanistan. If the Taliban can stop terror activities emanating from its land against India, Pakistan, and China and provide a secure environment for their interest in the county, revoke bans imposed on women, and cooperate with the international community, then there is a hope that it can attract foreign direct investment and international aid which can propel Afghanistan’s economy.
Conclusion
Mismanagement of funds, haphazard macroeconomic decisions, layoffs, lack of foreign aid, economic sanctions, falling Afghan currency making imports expensive, and hyperinflation have made matters worse for Afghanistan. Though economic shock can mostly be attributed to the foreign aid cut-off, rather than the Taliban’s mismanagement of the economy. If the Taliban continues to impose an extreme form of Islamic laws and prevent women’s right to education and their participation in the formal economy, do not stop terrorist groups from operating from their soil and do not cut back their ties to Al Qaeda, foreign aid will be hard to come by. Without UN aid and other non-cash humanitarian support, a lack of assistance from the IMF, World Bank, and donor countries, it will be tough for the Taliban to bring about macroeconomic stability and the country might head toward another civil war.
Avinash Singh is a Research Intern at NIICE.
