How will Taliban manage the Afghanistan Economy?

Despite the inevitable political instability caused by Taliban’s hostile takeover, the future of the Afghanistan economy remains surrounded by question marks. Taliban has always been transparent about legislation, but its economic ideology remains relatively unknown.

Managing an already fragile and precarious economy remains one of the major tasks in Talban’s plan of action. Having taken over the political scenario of the country,Taliban, due to obscured political legitimacy, lacks access to the funds previously allocated to Afghanistan. Their previous reign saw an economically dilapidated Afghanistan, marked by stagnant trade and negligible domestic manufacturing. The present Afghanistan economy is about triple the size and much more urbanized.

Taliban governed Afghanistan with an iron hand from 1996-2001. Enforcement of harsh Islamic and several years of civil war brought the economy to the brink of destruction. Infrastructure was ravaged, cities were war torn and the central bank remained inactive for the most part. Any profits gained from economic activity was invested in illicit activities like narcotics and military buildup. The proper functioning of the economy was heavily dependent upon funding by the World Bank. Post 2002, the influx of international aid helped sustain rapid economic growth and improve social indicators. The agricultural sector became the key player in the annual growth. Social and Economic growth, however, were incongruent, impeding growth. The World Bank also gradually decreased its funding: from around 100 per cent of GDP in 2009 to 42.9 per cent of GDP in 2020.

As compared to 1996, Afghanistan now boats a remarkably better situation with approximately $9 billion in foreign exchange reserves. In spite of the lower funding, the economy is still largely depended on aid. The private sector barely contributes to employment or Gross Domestic Product. Weak institutions and property rights constrain financial inclusion and access to finance, with credit to the private sector equal to only 3 per cent of the GDP.

Gaining access to the large international funds has been denied since the views of the IMF are guided by the international community, which largely remains in opposition to the Talibani Government. An 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.

Afghanistan has just over 37 million, which is equivalent to about $52.5m, according to the latest SDR exchange rate. Monday’s allocation, however, will boost that number to 323.8 million SDRs, or just under $460m, according to the IMF.

Da Afghanistan Bank (DAB) – the country’s central bank – listed 784.6 billion afghanis ($10bn) in assets for the period ending June 21, according to its bank statement (PDF), including 102.7 billion ($1.3bn) in gold and 28.7 billion ($366m) in foreign currency cash reserves.

Like many developing countries, Afghanistan holds some of its assets overseas, including in the US, where the Taliban is the subject of economic sanctions.

For example, the country had more than 101 billion afghanis ($1.3bn) worth of gold stored at the Federal Reserve Bank of New York at the end of 2020, according to an independent auditor’s report (PDF) prepared at the end of last year.

DAB’s acting governor, Ajmal Ahmady, tweeted a breakdown Wednesday of where the bank’s major reserves are held, confirming $7bn are with the US Federal Reserve, including $1.2bn in gold.

DAB’s foreign currency cash holding worth around $362 million are almost entirely US dollars and were held at the bank’s head offices and branchesa as well as the presidential palace, which is now in the hands of Taliban.

The DAB’s year-end statement also detailed that just under $160 million worth of gold bars and silver coins were held at the bank’s vault at the presidential palace. The Afghan central bank’s vaults also contain a hoard of 2,000 year old gold jewellery, ornaments, and coins known as the Bactrian Treasure, according to UNESCO.

The UN Security Council reports estimated that Taliban has an annual income of between $300 million and $1.6 billion annually. The UN noted that “external financial support, including donations from wealthy individuals and a network of non-governmental charitable foundations, also account for a significant part of Taliban income.”

The group has also sought to exploit Afghanistan’s mineral wealth, and the UN reports that “profits from the mining sector earned the Taliban approximately $464 million” in 2020.

More than 47 percent of the country already lived below the poverty line in 2020, according to data from the Asian Development Bank, and 34.3 percent of people with jobs live on less than $1.90 per day.

Most households rely on the low-productivity agriculture sector for their income, and security issues, corruption and political instability have all held back private-sector development, leading Afghanistan to rank 173rd out of 190 countries in the World Bank’s 2020 Doing Business Survey.

Unemployment stood at 11.7 percent in 2020 pre-Taliban rule, before people began fleeing the country and some women were dismissed from their jobs.

Ahmady summarised the grim picture in a tweet Wednesday, predicting depreciating currency, surging inflation and rising food prices.

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