Afghanistan faces 30% economic slump under Taliban rule

Afghanistan’s economic output could shrink by 30% this year as the Taliban government finds itself isolated from the global community, the International Monetary Fund warned Tuesday, a shock that “threatens to push millions into poverty.”

“With nonhumanitarian aid halted and foreign assets largely frozen, Afghanistan’s aid-dependent economy faces severe fiscal and balance-of-payments crises,” the report said.

Uncertainty hangs over the a cash-based economy now controlled by the Taliban, which swept back to power in September after a chaotic withdrawal of U.S. combat forces.

“Afghanistan was getting $7 billion to $8 billion a year in aid previous to the arrival of the Taliban,” said Torek Farhadi, a former adviser at the IMF and a member of former Afghan President Hamid Karzai’s government. “This was budget support plus military support, which was trickling down the economic system. This has now been entirely cut off. It is as if someone loses an income without insurance to replace it. The country has lost all its foreign aid income.”

The IMF also estimated that while the region has secured 576 million vaccine doses, Afghanistan is short by 7 million.

Security concerns triggered by refugee outflows may also have implications for larger economies like Pakistan, Iran and Turkey, and could weigh on risk sentiment and growth prospects, warned the IMF in its latest outlook for the Middle East and Central Asia.

If an additional 1 million displaced Afghans resettle in other countries, the cost of hosting refugees would top $500 million a year in Pakistan — or 0.2% of gross domestic product — and $300 million for Iran, or 0.03% of GDP. The cost to Tajikistan would reach $100 million, or 1.3% of GDP.

“This humanitarian catastrophe will erode human development gains made in Afghanistan over the last two decades,” said Uzair Younus, visiting policy analyst at the U.S. Institute of Peace, a nonpartisan institution in Washington.

Younus, who monitors the Pakistani economy and studies its formal and informal links with the smaller neighbor, highlighted recent changes to Pakistan’s foreign exchange regime triggered by the Afghanistan crisis.

“[An economic crisis in Afghanistan] will also further increase demand for U.S. dollars in Pakistan, where the central bank has recently mandated that travelers to Afghanistan can only carry $1,000 as opposed to the previous limit of $10,000,” Younus said. The analyst cited local reports in Pakistan’s money exchange markets indicating that dollar demand has grown following the Taliban’s takeover in Kabul.

Below are extracts from the IMF outlook report about the deteriorating economic and humanitarian conditions in Afghanistan, and projections about the regional impact.

On women and vulnerable groups: 

The crisis in Afghanistan is impoverishing millions, especially women and vulnerable groups, and has already displaced thousands of Afghans internally. This can set off a wave of refugees, the main channel of outward spillovers to the region.

On regional spillover: 

The turmoil in Afghanistan is expected to generate important economic and security spillovers to the region and beyond, including a potential surge in refugees to neighboring countries, Turkey and Europe. While financial spillovers have been limited, “cash” trade across borders is likely to grow.

On economic contraction: 

Cash shortages and the loss of correspondent banking relationships have crippled Afghan banks. These shocks could cause up to a 30% output contraction, with falling imports, a depreciating Afghani and accelerating inflation.

On a refugee crisis in the region: 

By the end of 2020, there were 3.5 million people displaced inside Afghanistan and nearly 3 million Afghan refugees around the world, half of them in Pakistan. A further large influx of refugees could put a burden on public resources in host countries, fuel labor market pressures and spark social tensions, underscoring the need for assistance from the international community.

On sectoral and social implications: 

Large donor funding to Afghanistan in recent years created a substantial “cash” flow across borders, with U.S. bank notes exported from Afghanistan as part of legitimate trade and possibly illicit flows. This cross-border flow of cash likely will grow, raising new concerns tied to money laundering and terrorism financing, but the net balance could reverse now that Afghanistan itself is experiencing shortages of foreign currency. Furthermore, trade in border regions could shift to the Pakistani rupee and Iranian rial.

Source: Asia Nikkei