The Economic Collapse of Afghanistan: What Can Be Done?

Ashraf Ghani’s escape had devastating political, economic, and socio-cultural effects on the lives of the Afghan people. One of the consequences of the August 15 event is an inevitable economic crisis. In such a way that with a decline in domestic demand, rising unemployment, and the devaluation of the national currency, mass poverty has increased unprecedentedly. Although the crisis is likely to have a variety of factors, the loss of investors’ confidence, the severe shortage of liquidity in banks, and the lack of sufficient liquid assets in the Afghan markets are all contributing factors to the escalation of the crisis.

As the crisis escalates, the Taliban government appears to have no plan to overcome the situation, preventing an economic collapse and managing a humanitarian catastrophe in Afghanistan. In addition, EU member states, the United States, the United Kingdom, and several other countries are working to provide immediate assistance to the Afghan people, preventing an economic collapse in Afghanistan. The United Nations, on the other hand, is seeking to provide aid immediately in coordination with donors.

The situation in Afghanistan requires the distribution of cash assistance to deal with a humanitarian catastrophe and an economic crisis. Although foreign aid may temporarily prevent a humanitarian catastrophe, Afghanistan’s economy will not recover from the downturn because it will not contribute to economic stability.

What Can Be Done?

Insufficient Domestic Demand and lack of liquidity, especially the lack of currency (as two main factors), have led to a slump in the market and the devaluation of the Afghan currency. Therefore, the international community must inject cash into Afghanistan’s economy to save the country’s economy and prevent a humanitarian catastrophe. There are three ways to inject currency (foreign currency) into the Afghan economy in the short and medium-term. It is worth noting that the effectiveness of injecting foreign currency through global cash grants to save Afghanistan’s economy depends on the timing and amount of these grants.

  1. Cash Donations to People

Aid groups and the United Nations can distribute cash to poor people to make their most effective contribution to preventing a humanitarian catastrophe and the complete collapse of Afghanistan’s economy. People buy necessities with cash. It includes food, treatment, clothing, and shelter according to their needs and priorities. Consumption of these funds directly by households will increase demand in domestic markets. Increasing domestic demand will help the private sector from falling and losses and regain its ability to pay for expenses, such as wages, rent, electricity, and debt. Paying for expenses such as wages and rent will, in turn, increase the income flow to families. Creating new demand in the market will also help improve the economic situation and prevent a human catastrophe.

Relying on the supply of goods from Afghanistan’s neighboring countries will feed the people. But it will lead the Afghan economy to a more definite and faster collapse. Importing goods will further reduce domestic demand, maintaining the liquidity problem. As a result, Afghanistan’s private sector will fall in a very harmful and catastrophic way due to the severity of the market recession.

  1. Injecting Cash Into da Afghanistan Bank

Ajmal Ahmadi’s irresponsible and extrajudicial term at the Central Bank plunged Afghanistan’s 85% liquidity sector into an unprecedented and severe liquidity crisis. Commercial banks now have just over $2 billion in public deposits, about 70 percent of which are in dollars.

The central bank now owes about $ 500 million and 39 billion afghanis to commercial banks, the volume of which can naturally increase and decrease daily. This money includes money kept in current accounts, overnight deposits, and required reserves of commercial banks with the central bank, as well as investments in the bank’s capital. Thus, the severe shortage of liquidity in the banking sector has directly reduced the purchasing power (consumption) of depositors and thus hurts aggregate demand in the economy and the market slump.

On the other hand, the freezing of the Central Bank of Afghanistan’s foreign exchange reserves by the United States has made it unable to repay its foreign currency debts owed to commercial banks. Thus, the United States will not recognize the Taliban leaders unless they establish an inclusive government, sever ties with al-Qaeda, adhere to basic human rights, especially women’s rights, and implement other provisions of the Doha Agreement. Therefore, access to these reserves will apparently not be possible for them until then.

On the other hand, the freezing of the central bank’s foreign exchange reserves directly affects the life of about 3.5 million depositors and the survival of Afghanistan’s commercial banks. Therefore, if the liquidity problem of Afghanistan’s commercial banks is not resolved in any way possible, with the collapse of these banks, the country’s financial system will be left in favor of remittances and money changers for many years to come. Therefore, it is proposed that the US Government transfer the debts of the Central Bank of Afghanistan directly to the commercial banks of Afghanistan under the supervision of the United Nations.

Thus, on the one hand, the liquidity problem would be solved without the intervention of the central bank of the Taliban government. On the other hand, with the depositors’ access to their deposits, currency shortage in the market will be addressed. If the collapse of Afghanistan’s banking system is not prevented, the growing influence of remittance operators will pave the way for the financing of terrorism and will sound the alarm for the future security of the region and the world.

  1. Increasing Afghanistan’s Exports

Increasing exports is a mid-term option for foreign exchange to enter the country. Afghanistan has a capacity for the production and export of marjoram, saffron, quinoa, dried and fresh fruits, medicinal plants, carpets, decorative stones, such as marble, and a few other items. In the difficult economic situation of Afghanistan, it requires countries such as China, Russia, Pakistan, Iran, and Uzbekistan, which are struggling to free up Afghanistan’s foreign exchange reserves, to pave the way for their exports to their domestic markets. The Taliban government, if it has a strong will to solve the economic problems of the Afghan people, can remove the barriers to exports, negotiating with the above-mentioned countries to increase exports through the corridors of air and land and finding a solution.