How dire is the outlook for the Afghan people and economy? Will things get worse?

Afghanistan is suffering from a catastrophic “perfect storm.” Pre-existing problems — drought, the debilitating effects of decades of fighting, COVID-19 and a stagnant economy with widespread poverty and joblessness — were bad enough. Recent developments have precipitated an enormous economic shock, including the sudden regime change, the abrupt cutoff of foreign aid and international financial connections and the burgeoning loss of human capacity as technical, professional and managerial personnel fled the country while others went unpaid or became unemployed. The Afghan economy is in free fall, with GDP crashing by 30 percent and no recovery expected.

Unfortunately, the worst is yet to come as winter sets in, making it harder for humanitarian assistance to reach many areas, for people to move to where they can access relief and for essential goods to reach those in need. Many rural Afghans will face a critical situation as they exhaust whatever food and financial resources they have in the lean period before the next harvest. In urban areas, poor and middle-class households are on the brink as government salaries have gone unpaid and day labor and other employment has dried up.

We are looking at terrible months ahead, with the bulk of the population falling into poverty, widespread hunger and potentially starvation deaths. Children will be especially vulnerable to malnutrition and health problems. In a nutshell, Afghanistan is entering famine territory.

Have U.S. and international sanctions contributed to the humanitarian and economic crises?

The primary economic shock was the abrupt cutoff of aid — some $8 billion a year, equivalent to 40% of the country’s GDP — after the Taliban takeover in August. Sanctions exacerbated this shock and hindered macroeconomic adjustment, private sector activities and delivery of humanitarian aid. The freezing of Afghanistan’s $9 billion of foreign exchange reserves and stoppage of inflows of cash dollars, combined with snowballing loss of confidence, precipitated a cash liquidity squeeze (together with the inability to print more domestic currency banknotes, also due to sanctions). As a result, Afghan banks have been forced to severely limit the amount of money that can be withdrawn from bank accounts. All kinds of transactions, including humanitarian aid, have suffered. Foreign banks have become extremely reluctant to engage in financial transactions with Afghan entities and persons for fear of running afoul of sanctions.

What is the significance of the U.S. Treasury and U.N. Security Council’s moves on December 22 offering sanctions relief?

Earlier, the U.S. Treasury had exempted personal remittances from sanctions as well as aid for humanitarian purposes and to support other basic human needs. Several shipments of U.S. dollars in cash to a private-sector Afghan banks, to be deployed for humanitarian assistance, were authorized.

In addition to providing sanctions relief for the U.S. government, international agencies and NGOs in their official business dealings with Afghanistan, the December 22 Treasury measures expanded and clarified the kinds of aid permitted, including: (1) humanitarian projects (drought and flood relief; food, nutrition and medicines; health services and vulnerable or displaced populations); (2) rule of law, citizen participation, government accountability and transparency, human rights, access to information and civil society; (3) education (combating illiteracy, increasing access to education, international exchanges and education reform); (4) development projects directly benefitting Afghans, including health, food security and water and sanitation; and (5) environmental and natural resource protection.

The U.N. Security Council resolution on the same day provided a broad exemption from U.N. sanctions for humanitarian assistance and support of basic human needs, as well as the financing, goods and services needed to ensure delivery of such assistance.

These coordinated U.S. and U.N. actions are welcome but insufficient. Cash liquidity within Afghanistan remains a huge constraint — the tens of millions of U.S. cash dollars sent into Afghanistan in recent months compares with the around $100 million per month imported by Afghanistan’s central bank (Da Afghanistan Bank, or DAB) prior to the fall of the previous government in August. Moreover, foreign banks remain reluctant to facilitate trade transactions, including for basic goods such as food, further weakening the Afghan private sector and increasing unemployment and poverty.

Are there other feasible actions to ensure that aid gets delivered to Afghans?

More needs to be done to ensure that essential aid actually gets delivered to the Afghan people, most urgently on two fronts:

First, inject more cash liquidity into the Afghan economy. The shipment of cash U.S. dollars for humanitarian purposes needs to be continued and scaled up, but other things can be done as well. Afghani banknotes held by Afghan businesses can be put to good use by depositing them in aid agencies’ local bank accounts in exchange for donor deposits into those companies’ foreign accounts. Modest amounts of Afghan currency should be printed and made available to Afghan banks for individuals and humanitarian aid. And options for deploying e-money through mobile phone accounts should be explored. Combined, these measures can make a difference.

Second, foreign banks must not hinder delivery of assistance and essential goods. The U.S. government needs to go out of its way to ensure that risk avoidance by U.S. and other foreign banks does not stop or slow the flow of funds into Afghanistan for allowed purposes. With minimal profits on Afghanistan-related financial transactions and the specter of sanctions hanging over them, foreign banks seem to prefer not doing business with the country. Private reassurances and a general “non-enforcement policy” appear to be insufficient to offset their risk avoidance. Though the Treasury Department’s special licenses for specific purposes and any “comfort letters” are confidential, the templates for these communications and the non-enforcement policy should be made public. Such transparency will clarify whether more needs to be done to reassure banks they will not be in trouble for inadvertent sanctions violations, or whether the banks are being excessively risk-averse and public pressure can induce them to be more helpful. Commercial imports of food into Afghanistan and flows of food within the country through trading channels must, in particular, be unimpeded by sanctions.

Famines and starvation deaths stem not from food supply shortages, per se, but from a lack of resources and purchasing power for the starving population to buy food. The solution, therefore, is not so much aid agencies physically shipping in and distributing food to as many people as possible (though that is critically important in the short run), but ensuring that money is in the hands of those in need and that food can be freely imported through commercial channels.  

Beyond the immediate need for humanitarian aid, what more can the U.S. do to stem the Afghan economy’s collapse?

Humanitarian aid, while essential, cannot alone bear the burden of alleviating Afghanistan’s economic and humanitarian crises. The scale of the problem is far too great — existing food aid programs, for example, are currently able to reach only a fraction of poor and at-risk Afghans. Moreover, the cost of providing humanitarian support year after year to the bulk of Afghans in need will be extremely high and unsustainable.

Among broader economic measures that should be explored are:

• Expanding sanctions relief to encompass private business and commercial transactions — the risk that these will materially support the Taliban in a substantial way is acceptably low compared to the costs of a continued economic implosion.

• Finding ways to pay the salaries of health workers, teachers and other providers of essential services using a combination of Afghan revenues and aid funding (the latter not going through the government).
• Making the $900 million of Afghanistan’s foreign exchange reserves that correspond to Afghan banks’ own foreign currency reserves with DAB available to those banks. This would shore up the banking system and forestall its imminent collapse.
• The gradual release of additional foreign exchange reserves over time to cushion the economic shock and support the balance of payments, facilitating the Afghan economy’s adjustment. Reserves could also be used for specific purposes not directly involving the Taliban, such as paying bills for electricity imports from Uzbekistan and Tajikistan and servicing sovereign debts owed to international financial institutions incurred by the previous government.

Finally, the Afghan government must play its part. The Taliban need to restore capacity and a degree of independence in the Ministry of Finance and DAB and appoint competent, experienced technocrats to key positions. A credible, publicly available national budget for this year, which can be assessed by the World Bank and other outside agencies, is a priority.

Despite the grim situation and dire outlook, there are some positives. The fighting has died down and security is generally better than in recent years. Stemming the deterioration in confidence among the Afghan people and businesses — which depends in large part on the Afghan government — will be an essential ingredient for economic stability.