Category: Uncategorised

Amer Zafar Durrani with Tehseen Ahmed Qureshi and Hudda Najeeb Luni

Islamabad, September 8, 2021

The debate on how Afghanistan’s economy will fare, once the coalition forces, and their proxies and supporting service providers, have left, rages on. These forces are now almost gone. Taliban have announced their interim government structure after reasserting their control over what we know as Afghanistan.

From an economic point of view, much has changed and yet much stays the same. Falsely propped-up consumption is fast going down. The prevalence of abject poverty in the masses stays the same. If anything, it is worsening by the day!

What will be the shape of the economy going forward? A question that is linked very much to the structure and ‘spirit’ of the ‘Taliban Group’ governance going forward. Will the re-assertive 21^st century Taliban dominated government follow the neo-colonial models, or, like Iran and China decide to beat a different drum?

Leading all this preface is the still an unanswered question. When we talk of a country, a nation-state, do we talk of its people or its government? Naïve? Yes, and no. Is the comity of nations now an enemy of Afghanistan or a friend of Afghanistan? Why should assistance be stopped to Afghanistan due to a change of government given that primarily it is the people that suffer? These can be explored at another time. Important, though, to keep these in mind as one mulls the present primary topic.

Afghanistan faces an economic collapse resulting from a sudden stop of foreign inflows, with a last measured[1] trade deficit at 25 percent of GDP in June 2021. Its foreign reserves, of USD 9 billion or so, have reportedly been frozen—by, you guessed it, their best friends till recent years, USA. There is no other, immediately visible, credit line.[2]. In the absence of foreign money, the only way left for the economy to balance the deficit is to contract. GDP shrinks, so demand falls, so imports decline. Exchange rate devalues a lot too, to cut imports.

Unlike what is being hyped in media, this is not altogether sudden—as, not all was rosy pre-August 15, 2021. The Afghan economy stopped growing post-2012 after foreign aid started to decline from a high of about 50 percent of GDP. ‘Development’ was not being, as it cannot be, imported. Afghans living below poverty were increasing from 34 percent to more than half of the resident population[3]. The large injection of foreign money did not translate into sustainable growth.

‘Foreign’ money boosted temporary consumer spending but did not increase the domestic productivity. Imports, and exports, more than tripled. From USD 2.5 billion to USD 8.9 billion in 9 years—2003 through 2012—from USD 100 million to USD 390 million. Despite the increase, exports underperformed despite this tripling leaving the wide trade deficit mentioned earlier[4]. The exports were hurt by the real exchange rate appreciation—a result of the internal spending boom. Domestic revenue mobilization was also artificially buoyed due to this temporarily enhanced economy.

Not all of Afghanistan’s revenue—about USD 5.3 billion in 2021—was directly ‘imported’. Domestic revenue mobilization until 2021 was about half of the total government budget. Like any other dysfunctional government in its neighborhood, much of this ‘domestic’ revenue was collected at the border—direct border tariffs and presumptive business taxes. This, also, was declining in recent years. Primarily due to reduced imports and with lessening foreign footprint and thereby the overall consumption through imports.

Afghanistan’s total budgetary outlay for FY21 was roughly USD 6 billion—30 percent of its GDP. Operation expenditures accounted for nearly USD 3.8 billion or 65 percent of the budget. With a domestic revenue collection amounting to around a third of the overall budgetary outlay and adding the external grants—also counted as revenue—the budget was short by almost USD 0.5 billion. IMF was to cover half of this.

Afghanistan became a member of IMF fund in 1985, since then eleven arrangements were made between the two. The country’s “Outstanding Purchases and Loans” stood at nearly SDR[5] 0.4 billion in June of 2021[6]. Interestingly, IMF pledged its largest ever allocation of SDR to Afghanistan—USD 0.4 billion—which was to be effective in August of 2021. This has now obviously been put on hold or ‘seized’.[7] Was the IMF, read US Government lackey, per global narrative, not aware of the ground realities, or was it giving a false sense of security to the US installed government of Ashraf Ghani? Will we ever know?

A major casualty of this upcoming budgetary contraction will be internal security and governance in Afghanistan—vide the inability to support the relevant institutions. Defense and internal security and justice accounted for almost 40 percent of the overall budgetary outlays. Couple this with economic affairs, we are looking at more than two thirds of the required budget to manage peace and stability in Afghanistan. Grants[8] and IMF financed this spending, hitherto. Where will this money come from now? More factors complicate the answers further. The opium economy of Afghanistan and the economy of the ‘Taliban Group’.

Afghanistan being a quasi-narco-state is not, and has not been, a myth since last 3 decades. Afghanistan produces a major share of the world’s opium with a record of almost 10,000 tons set in 2017. Farmgate prices’ returns, direct money going to growers, was estimated at USD 1.4 billion—7 percent of Afghanistan’s GDP. Taliban, the 19^th century version, banned poppy growing in 2000 with a view to acquiesce international legitimacy—popular backlash from Afghan growers and less than expected international reception led them to change their stance.

Things, as mentioned earlier, have been on a steady decline, leading to August 15^th. Three of the last four years have seen some of Afghanistan’s highest levels of opium production. Even as the COVID-19 pandemic raged, poppy cultivation soared, according to UNODC, 37 percent in 2020. UNODC also reported that the Taliban, the 21^st century version, likely earned more than USD 0.4 billion in FY19 from the drug trade.

So, the ‘Taliban Group’, if one can call it in corporate terms, has been running a state within a state. Call it the Taliban Group economy. This group has been running defense and civil expenditures. Consider, therefore, that they now need to adjust their budget to incorporate the wider state they have now charged themselves with. In some ways, they handled the defense part of this budgetary outlay far more efficiently than the Ghani government! There is hope in this. Instead of questioning the ability of this group to manage the Afghanistan economy, providing doomsday scenarios, speculating on how they should follow the neo-colonial diktat, maybe they should be given an update on what they are now taking charge of.

Afghanistan’s economy is now a classic nexus of fragility and disasters, beyond simply an overt aid-dependency. Private sector, the key driver of growth, is almost non-existent—the formal side of it, at least, though some would argue that Afghanistan is entirely running on private largesse. Security and political instability are the major hindrance to private sector growth. Private sector development and diversification is constrained by insecurity, political instability. Institutions are weak, infrastructure is inadequate, corruption is widespread, property rights are ambiguous! Majority of the labor force is concentrated in low-productivity agriculture—44 percent of the total workforce works in agriculture and 60 percent of households derive some income from agriculture (can be read poppy by some). Afghanistan has weak. In other words, a textbook failed state as neo-colonials would put it.

Displaced Afghan nationals compound the situation. Afghanistan has the third-largest displaced population in the world. Since 2012, some five million people have fled and not been able to return home, either displaced within Afghanistan or taking refuge in neighboring countries. Add this to a high birth rate, we have a young unemployed population looking towards the new government—more than quarter, or maybe even more, of Afghans present, were born after 9/11. With internal receipts dwindling and external aid—at least on surface—drying up some external financing will be sought by the Taliban Group—directly or indirectly. Here is where the most possible clash of ideas looks likely. The global financial architecture is not Sharia[9] compliant.

Islamic finance, Sharia compliant, has two crucial parts, banking services and the Sukuk market—the Islamic equivalent of the bond market. Together they equate for around 95 percent of the documented USD 1,800 billion worth of Islamic finance assets.[10] Taliban like Iran, or even in fact China, will opt for integration into this system.

Here again, there is hope, as currently there are more than 200 Islamic financial institutions around the world with investment funds in excess of USD 250 billion and growing at 16 percent annually, offer a possible solution.[11]

In summary, there is hope as long as the Taliban Group recognize that the state is its people and the welfare of its people is what legitimizes the existence of the state, not integration into neo-colonial systems, alone. In ensuing dialogues, we should talk in detail about role of neighbors, especially Pakistan, and the likelihood of the Taliban Group showing the tenacity and perseverance in staying away from the neo-colonial legacies and striving to better the lives of Afghans beyond their current narrow interpretation of what betterment of lives entails!

This article by the author was originally written for the Global Village Space, September 2021, edition, and this is the unedited submission.

[1] World Bank. (2021). World Development Indicators, available at https://databank.worldbank.org/reports.aspx?source=2&country=AFG

[2] Bloomberg (2021). US Freezes Nearly $9.5 Billion Afghanistan Central Bank Assets, available at https://www.bloomberg.com/news/articles/2021-08-17/u-s-freezes-nearly-9-5-billion-afghanistan-central-bank-assets

[3] Ibid

[4] World Bank. (2021). World Development Indicators, available at https://databank.worldbank.org/reports.aspx?source=2&country=AFG

[5] What is an SDR, exactly? SDR is an international reserve asset created by the IMF from a basket of currencies including the US dollar, Japanese yen, Chinese yuan, the euro and the British pound. While not an official currency itself, the SDR is like an artificial currency that IMF member states can exchange for freely usable hard currencies like US dollars. Countries can exchange their SDRs for those freely usable currencies at a fixed exchange rate, which changes daily and is posted on the IMF’s website.

[6] https://www.imf.org/en/Countries/AFG#

[7] https://www.aljazeera.com/economy/2021/8/19/what-will-happen-to-afghanistans-economy-under-taliban-rule

[8] The Afghanistan Reconstruction Trust Fund (ARTF): This is a multi-donor trust fund that helps coordinate international aid to improve the lives of Afghan people, this fund is administered by The World Bank on behalf of donor partners. The fund includes 34 donors who have contributed to development and reconstruction in Afghanistan. Major Donor Partners include Germany, US-USAID, UK-FCDO, Sweden, Canada, EU-EC, Netherlands, Norway, Italy, Finland, Austria Denmark, Japan, Czech Republic, Switzerland, Estonia, Ireland, Poland, and Republic of Korea. ARTF is the largest single source of funding for Afghanistan’s development expenditures, including 30 percent of Afghanistan’s civilian budget, as well as it supports core government functions.

[9] According to IMF’s definition “The provision of financial services that are compliant with Sharia law. Sharia does not allow the payment or receipt of interest (riba), gambling (maysir) or excessive uncertainty (gharar). In practice, this means that common investing techniques such as short selling (betting against a security) are banned and all transactions must demonstrate a real economic purpose.”

[10] https://www.weforum.org/agenda/2015/07/top-9-countries-islamic-finance/

[11] https://www.sbp.org.pk/departments/ibd/lecture_8_related_reading_1.pdf