After Taliban Takeover, Can Afghanistan’s Economy Survive?

The U.S. and international partners should navigate carefully but proactively or risk making a dire economic and humanitarian situation worse.

The Taliban’s unexpectedly rapid and complete victory over the now defunct Islamic Republic of Afghanistan brings with it yet another shock to the long-suffering Afghan people and the country’s very weak economy. Already plagued by insecurity, COVID, corruption, government over-centralization and mismanagement, declining revenues and drought, the Afghan economy will now face a host of challenges in the aftermath of the Taliban’s takeover and the international community cracking down on aid and assistance. As a new Afghan government takes shape, the actions of the Taliban and the response of the international community could greatly exacerbate or modestly ameliorate the current economic and humanitarian crises.

Coming Challenges

Already one of the poorest countries in the world, Afghans and their economy will now have to deal with the fall-out from the fall of Kabul. Several immediate challenges include:

The previous Afghan government and its core institutions are in disarray, and suffering from a severe “brain drain” of experienced top managers as well as qualified technical and professional staff, many of whom have fled the country or are trying to do so;
Already dealing with a large displacement crisis, there is risk of widespread dislocation and refugee flight;
The disruption to Afghan government revenue and aid means that the coffers are empty, and the Finance Ministry will be facing problems in meeting basic expenses such as salaries of government employees (including teachers who are civil servants);
Basic social services — a success story over the past two decades — are consequently in danger, even before potential Taliban restrictions;
Though the Taliban’s rhetoric generally has been pro-private sector, the uncertainty associated with their takeover will further depress already extremely low private investment, and will stall major projects at least for a time;
Such uncertainty extends to the financial sector, including not least what kind of “Islamic banking” approach the Taliban regime may take; and
The dissolution of the Afghan national security forces will impose a significant economic shock since hundreds of thousands of army and police personnel are losing their incomes, affecting many more people in their households.

If the Taliban decides to impose sudden, harsh changes in urban areas — which have had a very different ethos and way of life for the past 20 years — it will further stimulate panic and flight of people and would exacerbate the shock to Afghanistan’s already reeling urban economy. Stopping women from working, either by formal edict or by Taliban actions on the ground, would harm livelihoods and increase poverty. Wholesale changes to the government administration similarly could be disruptive and destabilizing. Basic social services, already at risk due to lack of funding, could be devastated by Taliban actions including formal or de facto restrictions on girls’ education. And haphazard or irresponsible macroeconomic management in the current situation easily could precipitate hyperinflation and supply shortages, with knock-on effects on the economy and poverty.

Beyond what the Taliban may or may not do, the U.S. government, other donor countries and some international agencies have been making decisions that could risk rendering an already very bad situation even worse, potentially precipitating or at least exacerbating a looming economic and humanitarian catastrophe. These include:

The U.S. Federal Reserve has “frozen” all of Afghanistan’s foreign exchange reserves in its hands, amounting to some $7 billion. While intended to block misuse of these funds by the Taliban, this action also means that Afghanistan’s central bank has no ability to manage the exchange rate by trading its dollar and other reserves for the local currency, potentially leading to a collapse of the afghani, a plunging exchange rate and hyperinflation.
The International Monetary Fund (IMF) has similarly frozen the Afghan government’s access to IMF resources (its so-called Special Drawing Rights, or SDR), which otherwise could have been deployed to help manage both the balance of payments and the government finances. The SDRs include Afghanistan’s $450 million share from the global IMF quota increase in response to COVID, which countries are supposed to have access to automatically.
Along with other donors such as Germany, the World Bank has stopped all disbursements of its own resources and donor-contributed Afghanistan Reconstruction Trust Fund money to Afghanistan — including both direct support to the Afghan budget and high-priority development projects such as basic public health and rural development. The Asian Development Bank also has suspended disbursements.

The complete loss of aid is triggering a fiscal collapse, including inability to pay civil servants’ salaries. There is the potential for Afghanistan’s private banks to experience severe collateral damage, even though they are not Taliban-owned and some have received Western support and endorsement in the past. Their access to foreign currency assets appears to be in jeopardy, as risk-averse foreign correspondent banks and other banks cut off financial transactions with the rest of the world. And Kabul and other Afghan cities will go dark if there is no foreign exchange to pay for continuing electricity supplies from neighboring countries.

A Careful but Proactive Approach

While it is fully understandable that the United States and other long-time Afghanistan supporters are trying to exert financial leverage to incentivize the new Taliban regime to preserve rights and gains, the economic situation is going downhill rapidly. It may be difficult and time-consuming — both administratively and politically — to unwind many of these actions, once taken, in the future. In particular, since there has not yet been a formal transfer of power to a new government (whether purely Taliban or a more inclusive arrangement), it would seem premature and counterproductive to impose the full panoply of U.S. and international anti-Taliban sanctions on the temporary caretaker government. It would be better to hold onto sanctions removal as a positive incentive, but that would be hard to credibly commit to if the sanctions are imposed on a not-yet-formed government whose exact shape remains unclear.

The Taliban’s unexpectedly rapid and complete takeover does have one silver lining. Military and civilian casualties, conflict-related displacement of people and destruction of cities and infrastructure have been far less than would have been the case if there had been a longer period of civil war. Such an extended conflict could have stretched out for months, perhaps even a year or longer, with cycles of escalation and burgeoning bloodshed.

While things could have been worse from a humanitarian and economic standpoint, what happens now will depend in large part on actions by the Taliban themselves in coming days, but also on the response of the United States and the rest of the international community. In a worst-case scenario, punitive Western measures and sanctions and Taliban recalcitrance will feed on each other, plunging Afghanistan into an economic and humanitarian catastrophe with worsening poverty and hunger, lack of the most basic social services, enormous humanitarian funding and delivery needs and massive outflows of refugees, mainly to neighboring countries.

In this extremely challenging and fluid context, the United States and other international partners will need to navigate carefully and nimbly to make the best of the situation and follow as much as possible the “do no harm” imperative. Some broad principles that could help guide specific policies and actions in the coming months include:

Recognize how dramatically the military balance has changed, and act accordingly. A decisive battlefield victory has consequences and cannot just be wished away. Options and negotiating stances which might have been more viable a few months ago, before the two sides were fully tested in combat, may no longer be available or at least will have to be modified.
Demarcate clearly between the Taliban regime and the Afghan people. Sanctions often are harmful to the people of a country but less damaging to the country’s government if it is non-democratic and/or unresponsive to people’s pain. This dilemma has no easy answers, but it will be particularly acute in the case of Afghanistan given its extreme economic and fiscal dependency on aid and relationships with international financial institutions. Exemptions from sanctions typically include purely humanitarian assistance (such as food and life-saving medical supplies), but for Afghanistan the relief will need to be broader.
Alleviate sanctions’ impacts on private businesses and low- to mid-level government staff. These groups need to be included in the broader category of the Afghan people who should be shielded as much as possible from the damage of sanctions. The bulk of them don’t have ties to the Taliban. Afghan private businesses need to be kept afloat to the extent possible in the face of all the other headwinds, and civil servants — by far the largest number of whom are teachers — need to be kept employed and paid.  
Find ways to ensure continuation of basic social services such as health care. Service delivery has been one of the success stories of the previous government, and it would be tragic if the international response to the Taliban takeover results in loss of these gains.
Given the limited levers remaining to use vis-a-vis the Taliban, Afghanistan’s partners would best engage in coordinated approaches. No one agenda — whether terrorism, drugs, refugees and migrants or geopolitical competition — can be allowed to dominate at the expense of Afghanistan’s best interests or while sidelining the other key priorities. A joint approach including Afghanistan’s traditional allies and donors as well as the regional countries — with all playing responsible roles — would work best if at all possible.  

Economic implosion and a humanitarian catastrophe are a clear and present danger for Afghanistan. While much depends on what the Taliban do next, the United States and other international partners have a responsibility to not make the situation a whole lot worse through total economic disengagement and excessively punitive knee-jerk sanctions or other measures.

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