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Afghan Economy on the Brink of Collapse After Taliban Takeover

economía afgana

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The situation is uncertain for the future of the Afghan economy. The situation is uncertain for the future of the Afghan economy, with the loss of millions in international aid and inflation plaguing it in the short term, while in the long term Afghans may face even deeper problems under Taliban rule.

In response to the Taliban takeover, the United States has frozen the accounts of the Central Bank of Afghanistan and the Afghan government at the Federal Reserve and American commercial banks. For its part, the IMF cut off the Muslim country’s $450 million emergency reserve. In short, Afghanistan lost access to $9.5 billion in international reserves.

Since the Taliban are classified as terrorists, they will no longer have access to the international aid that the Government of the Islamic Republic of Afghanistan was counting on, which consisted of almost 80% of the State budget.

According to the former head of the Central Bank of Afghanistan, Ajmal Ahmady, the Taliban will try to refinance themselves by seeking direct aid from Pakistan and China. However, Rand Corporation political analyst Jonah Blank is of the opinion that neither Pakistan, much less China, will want to invest a lot of money in Afghanistan.

Blank explains that, for example, China had the opportunity for almost 20 years to invest in Afghanistan, a country crucial for trade with the Middle East by road, and rich in minerals such as gold, copper, iron and zinc. However, China did not want to invest in Afghanistan, even though the U.S. was providing security in the country, so Blank sees it as unlikely that China would risk investing in a government as unstable as the Taliban.

afghan economy
With the fall of the Islamic Republic, Afghanistan loses millions of dollars in international aid. (Image: EFE)

The Afghan economy will not have a substitute for the foreign aid it was receiving

The Taliban is not a pyramidal organization and its decisions depend on many leaders as a whole, reflecting the decentralized nature of Afghanistan. Within the Taliban sect itself there are dissident organizations that fight among themselves to impose their vision of Sharia.

In addition to their own dissidents, the Taliban still face resistance in the Panjshir Valley from former commanders of the defunct government of Ashraf Ghani, who, according to the Russian Embassy, fled the country with four cars and a helicopter loaded with money.

Without the dollars, the Afghan economy will not be able to pay its foreign debts, the trade and spending deficit will also widen. With a shortage of dollars, the Afghani will begin to devalue, so inflation could skyrocket in Afghanistan, as is already being seen in several provinces.

There is also uncertainty about the permanence of foreign investment in Afghanistan. During the American intervention, several foreign companies set their sights on Afghanistan, as is the case of the construction company Siemens, which, in 2020, began to develop electric power generation projects.

Afghan economy
As the government fell, Afghans experienced growing inflation due to the closure of businesses and the scarce circulation of dollars. (Image: EFE)

Also in question is the completion of the TAPI line, a gas pipeline passing through Turkmenistan, Afghanistan, Pakistan and India, which would bring gas from Turkmenistan to India and could be a source of steady income to Afghanistan. According to the Taliban, they will allow the completion of the construction of the TAPI line in Afghanistan.

And like other valuable assets, more than $1.5 billion in foreign direct investment stock is at risk of being lost in Afghanistan. The ability to establish investment projects in Afghanistan will depend to a large extent on the Taliban’s ability to provide both physical and legal security in the country.

Flight of human capital and loss of women’s rights, major long-term risks to Afghan economy

Afghanistan’s economy also faces long-term challenges from the Taliban government, which appears to be failing to retain hundreds of thousands of educated Afghans who are desperate to flee Afghanistan.

Many of these Afghans were educated in the West, or with the help of Western institutions, the Taliban simply do not have the infrastructure or personnel to replace the thousands of educated Afghans who now want to leave their country.

On the other hand, the strict Sharia laws deprive women from working and receiving a formal education, so the Taliban regime, if it were to exercise the strict laws of its last government, would potentially deprive half of the economically active population of economic activity, which would mean more poverty.

Afghanistan risks not only losing its small formal economy, but succumbing completely to the illicit economy that has traditionally financed the Taliban and provides them with more than $1600 million a year.

These sources of funding include, for example, the collection of tolls from transporters, extortion fees from mining projects, a 10% tax on all businesses, the kidnapping and trafficking of women and children, and of course, drug trafficking.

Economist, writer and liberal. With a focus on finance, the war on drugs, history, and geopolitics // Economista, escritor y liberal. Con enfoque en finanzas, guerra contra las drogas, historia y geopolítica

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