Part 3 of 3: What is real news?
…we have to give the Talibs a chance to strengthen their position and influence because thats what the Afghan people want, even after the Talibs shows that they are exactly the same extremists as 20 years ago.
10. Ajmal Ahmady, who served as the governor of Afghanistan's central bank from 2019 until he fled the country, has been using his Twitter account to explain the country's dire economic straits. A central bank can be said to have two main kinds of functions:
(a) macroeconomic when regulating inflation and price stability; and
(b) microeconomic when functioning as a lender of last resort.
But Da Afghanistan Bank is not able to effectively perform both roles, going forward — due to a lack of funds and competence at the helm. Given the direction the country is moving, the collapse of the Afghan economy is likely to occur as fast as the military collapse of Kabul — which is bad news.
11. Haji Mohammad Idris, the current Taliban acting governor of Da Afghanistan Bank (i.e. the Central Bank) issued a circular, advising banks to limit withdrawal to their individual customers to 2,000 Afghanis per week or about US$24 (at a conversion rate of 1 Afghanis to US$0.012). This cash-withdrawal restriction indicates that the Taliban regime is facing enormous financial constraints that will intensify; and the Taliban and their backers are responsible for it.
(a) Economists call this phenomenon a “liquidity trap” when uncertainty forces people to hoard cash bringing economies to a standstill. The Taliban’s extreme interpretation of Sharia Law has caused enormous unease among the population, especially women and it will wipe out entire industries in Afghanistan that were formerly viable.
(b) Thanks to the Taliban, the garment industry, the various fabric related industries and the carpet industry in Kabul, are destroyed overnight. Many media companies, including dozens of TV channels, have either closed or significantly downsized their operations. The majority of barber shops, women-run beauty salons, wedding halls, musical studios, film studios, and entertainment-industry businesses are on the verge of collapse. Businesses related to the ‘white goods’ retail industry will fail due to lack of funds to pay for imported goods. The result will be the loss of tens of thousands of jobs, ruining these people’s livelihoods.
(c) People have started bringing carpets to sell in Kabul’s Chaman-e Hozori neighbourhood. The area is full of refrigerators, cushions, fans, pillows, blankets, silverware, curtains, beds, mattresses, cookware and shelves that hundreds of others carried to sell. Each item amounts to a part of a life families built over the last 20 years in the Afghan capital. Now, they are all being sold at a pittance to feed those very households. “We bought these carpets for 48,000 Afghanis (about US$576), but now I can’t get more than 5,000 Afghanis (about US$60) for all of them,” Shukrullah says, as people rummage through the goods on display.
12. This "sudden stop" according to Atif Mian (Professor of Economics, Public Policy, and Finance at Princeton University),“…makes Taliban's second coming very different from their first in economic terms. The first time they came to power, Afghanistan was a subsistence economy with no particular reliance on foreign flows for local demand… So ordinary Afghans did not experience as large a negative decline as they are going to experience now. It seems like its going to be a much tougher road for the Taliban this time.” IMHO, all efforts to assist Afghans will remain meaningless unless the Afghan economy can be stabilised.
(a) Without macro-economic stability, the current conversion rate of 1 Afghanis to US$0.012 will not be sustained — the conversion rate of 1 Afghanis is more likely to be worth US$0.0012 by month end. This means that the 2,000 Afghanis (worth $24 dollars) withdrawn from the bank this week, will become valued at US$2.40 or less, next month (in the black market as US dollars become scarce relative to demand). No sane person will view the Afghanis currency as retaining its value for very long under Taliban rule without significant intervention from the Chinese central bank (known as PBOC) and the State Bank of Pakistan.
(b) "I don't want to say economic collapse, but I think it's going to be (an) extremely challenging or difficult economic situation," Ajmal Ahmady said, predicting GDP would shrink by 10 to 20%. Not only has the bank lost access to its reserves, he said, but shipments of physical U.S. currency, which the country's banking system relied on to satisfy customers' desire for a medium of exchange more stable than the government-issued afghani, have now been cut off. A scarcity of dollars will likely make the relative value of the afghani plunge, driving up prices for goods and services that may become more scarce themselves as international aid and trade flows are disrupted.
(c) To succeed, the Taliban must dissociate political government formation from economic management and assign economic experts to manage key institutions like Da Afghanistan Bank. Some have suggested that Pakistani policymakers can assist Afghanistan by letting Afghan importers pay in Afghanis for Pakistani imports, at least for essential items — which I think is not a workable solution, due to its rapidly declining value.
(d) In the absence of foreign money, like renminbi, the only way left for the Afghan economy to balance its imports is to shrink (i.e. GDP falls so demand falls, so imports fall) and the exchange rate devalues a lot too to cut imports. I have my doubts that PBOC will intervene to provide the Taliban with billions in renminbi, without extracting a ‘pound of flesh’ from the Taliban but that is another topic all together.
13. Even before the Taliban retook Kabul on 15 Aug 2021, an estimated 3.5 million people are currently internally displaced within the country. Afghans have also had to deal with a severe drought. UN Secretary-General Antonio Guterres said many Afghans could run out of food by the end of this month, while the World Food Programme (WFP) said 14 million people are on the brink of starvation. The Taliban face a host of additional economic issues that include:
(a) The inability to print domestic currency
(b) Stoppage of US$7 billion TAPI gas pipeline — the Taliban do not fully understand the complexities of the project. As a result of the sanctions regime and security concerns, European companies will not be able to provide equipment or the financing. They will certainly not be able to obtain insurance for the project.
(c) Taliban hopes to profit from the country’s mineral resources have to be scaled back — or abandoned. These need international financing, and insurance to further develop and the list includes:
(i) the Aynak copper mine, one of the largest untapped sources in the world, which the Metallurgical Corporation of China acquired rights to in 2008;
(ii) the Hajigak iron ore mine, a mine with world-class iron ore content, for which an Indian firm signed a contract;
(iii) the Amu-Darya oil basin, where the China National Petroleum Corporation has the rights to drill; and
(iv) unlikely that Pakistan can provide the level of financial support required for stability to replace these lost projects.
14. Now for some good news — Jean Claude Farah, Western Union’s president for Asia, Europe, the Middle East and Africa, said a push by the United States to facilitate humanitarian aid to the Afghan people had given the company confidence to restart its operations from 2 Sep 2021.
(a) “Much of our business involving Afghanistan is low-value family and support remittances that support basic needs of the people there, so that’s the grounding that we have and why we want to reopen our business,” Farah told Reuters. Afghanistan's central bank has ordered banks to pay out remittances in local currency only, the latest move to preserve scarce U.S. dollars.
(b) The flow of funds from migrant workers overseas is a key lifeline for many Afghans, and has helped the economy of one of the world’s poorest countries get through years of conflict and political and economic instability — 2020 remittances amount was estimated to be US$722.23 million.