Afghanistan is about to provide us with a macabre economic experiment. What happens when you take over a country, have no access to your own international reserves, are shunned by the world community and start running out of cash?
As previous central bank governor Ajmal Ahmady told Euromoney recently – and told the world in a series of tweets on August 18 as he fled the country – the Taliban are not going to get their hands on the country’s reserves, as those reserves are not in Afghanistan to be found.
“I am writing this because I have been told Taliban are asking DAB [Da Afghanistan Bank] staff about location of assets,” he wrote on August 18. “If this is true – it is clear they urgently need to add an economist on their team.”
The week beforehand, DAB reserves stood at $9 billion, most of them held in liquid assets such as Treasuries and gold. DAB’s accounts were held at the Federal Reserve, Bank for International Settlements and other similar accounts, with monitoring conducted through programmes with the IMF and the US Treasury.
Additionally, the IMF was due to receive $340 million on August 23 from a SDR650 billion special drawings rights allocation; that didn’t happen, and nor will any further allocations.
Even before the US withdrawal and Taliban takeover, Afghanistan had a large current account deficit… reliant on physical shipments of cash every few weeks
So what next? Even before the US withdrawal and Taliban takeover, Afghanistan had a large current account deficit, and Ahmady has said the country was reliant on physical shipments of cash every few weeks. Dollar shipments are no longer coming – none have arrived since mid-August – and so now, pretty much the only available dollars are those already circulating in the economy.
Already, the local Afghan currency is weakening, and will remain under pressure. Prices of food staples have risen by over one third and are still heading up. This cycle of weakening currency and rapid inflation will be exceptionally difficult to arrest.
The man responsible for trying is Mohammad Idris, the head of the Taliban’s economic commission, who has been appointed acting central bank governor. Little is known about him. One suspects he will be reaching out to Russia and China for assistance.
He has plenty of short-term worries to deal with. But as Charles Robertson at Renaissance Capital points out, there is a longer-term systemic issue to consider: women.
“The big difference between the fall of Saigon in 1975 and Kabul in 2021 is that Vietnamese communists believed in female education,” he writes.
As a result, he says, Vietnam had the adult literacy to industrialize in the 1980s and by the 2010s was exporting more per capita than China. Whereas if the Taliban maintain their attitude towards female education, “Afghanistan by contrast will be stuck in poverty forever.”
