Malnourished children with withered arms have been arriving at clinics in Afghanistan for months now. Although the markets are full of food, too many people lack the money to buy it. Since U.S. forces withdrew and the Taliban seized control in August, prices have skyrocketed. Even those people lucky enough to have savings in the bank have to line up for hours to withdraw a small fraction of it. Banks are so low on cash that they have placed a limit on withdrawals.
Some of this is the inevitable result of the Taliban takeover. The Afghan government had been heavily dependent on foreign aid, which was largely cut off when the Taliban took power. International assistance made up 45 percent of Afghanistan’s gross national product and funded 75 percent of the government’s budget. Doctors, nurses, teachers and other essential government workers haven’t been paid in months, and it’s not clear when they will ever be. The Taliban remain on the U.S. sanctions list, so the international community has refused to give them money.
Targeted financial sanctions are an appropriate and powerful tool to punish bad actors and odious regimes. The mere threat of them can achieve results. But too often their cumulative effect over time is indistinguishable from collective punishment.
Right now the entire financial system in Afghanistan risks collapse. Ordinary people who have nothing to do with the Taliban have been largely cut off from the international banking system, simply because they live in Afghanistan. Even though U.S. Treasury Department officials say that the central bank of Afghanistan is not under sanctions, financial institutions around the world are treating it as if was. Foreign banks are refusing to wire money to Afghanistan, not only because they don’t want to deal with the reputational risk, but also because they fear that the long arm of the U.S. Treasury might one day punish them for it. Many banks say it is not worth the hassle. As a result, it has been difficult to get cash into the country.
Anwar Khan, president of Islamic Relief USA, a Virginia-based nonprofit organization that supports thousands of female-headed households in Afghanistan, among other projects, said his group was forced to halt cash payments to vulnerable families because of the difficulty getting money into the country. When the group tried to wire money to its account in Afghanistan, intermediary banks returned the funds. Mr. Khan said the group is distributing food instead, which has been easier to organize.
The International Rescue Committee, which has 1,700 staff members in Afghanistan, has been forced to rely on local money brokers who charge high fees. If the formal banking system in Afghanistan collapses, then the entire economy could be driven into the shadows, where illicit activities like kidnapping and drug trafficking would play an even bigger role than they do now. Entrepreneurs who could be a counterweight to the Taliban would struggle to survive.
The Biden administration was right to offer aid to stave off the immediate humanitarian crisis caused by hunger, drought and a harsh winter. The administration has also issued a flurry of licenses to allow personal remittances and humanitarian aid to pass through banks unmolested. But the very existence of those licenses implies that the rest of Afghanistan’s economy is off limits. That means shopkeepers can’t open lines of credit to import goods, and farmers can’t receive payment for their crops through international banks. Aid is not enough. Commercial activity is what feeds a nation.
“The economy is not just in free fall; it’s being strangled,” said David Miliband, president and chief executive of the International Rescue Committee. “We’re a humanitarian agency. But we want to say loud and clear that you can’t solve this problem of mass malnutrition only with a humanitarian effort.”
Lack of confidence in the Taliban has led many Afghans to take money out of the bank and hide it under the mattress or spirit it out of the country. But commercial activity is also being suppressed by fear of what the U.S. Treasury Department will do to Afghan banks. In August, the U.S. government froze roughly $7 billion that the Afghan central bank held in reserves in the United States; at issue is who is legally authorized to withdraw the money. (Roughly $2.5 billion more is said to be held in banks in Europe.) Since then, groups of victims of the Sept. 11, 2001, terrorist attacks have laid claim to the money that is being held in New York to enforce prior judgments they secured against the Taliban, complicating the issue of who can legally collect it. The U.S. government has been negotiating with the victims’ lawyers behind closed doors in an attempt to strike a deal that could lead to some of the money being donated to a humanitarian fund for the Afghan people. The U.S. government is slated to report its view of what should happen to those funds on Jan. 28.
But even a deal that funnels some money into a humanitarian trust fund for Afghanistan seems unlikely to shore up Afghanistan’s central bank, which needs foreign currency to perform its core functions. The bank, which is modeled on the New York Federal Reserve, sets monetary policy and the exchange rate and stabilizes prices by periodically auctioning off dollars to private banks. Longtime civil servants who remained in Kabul have continued to perform the bank’s core functions, conducting electronic auctions with the cash they have on hand, according to Shah Mehrabi, a member of the Afghan central bank’s governing board who is also an economics professor at Montgomery College in Maryland. But the bank could soon run out of foreign cash. The entire banking system could fall apart.
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Mr. Mehrabi has proposed that the Biden administration allow monthly transfers of small amounts of the frozen funds for the sole purpose of auctioning off dollars to private banks. Such auctions are easy to monitor and could be cut off if the money was used for any other purpose, he said. Such an arrangement would bolster the hand of technocrats who have continued to work under the Taliban. It could be conditioned on their independence from the Taliban or on hiring certain technical staff members. Refusing to release any portion of the funds as long as the Taliban are in power would remove the money as a source of leverage.
Given the Sept. 11 lawsuit, it may not be possible to free up the funds frozen in New York in time to stave off a crisis. It may be more realistic for funds to be released from the banks in Europe, which hold a smaller but still significant amount of the Afghanistan central bank’s money. Since commercial banks in Afghanistan are required to keep some reserves in the central bank, hundreds of millions of dollars in the frozen overseas accounts are part of the life savings of Afghan citizens, which should not be rendered inaccessible because the Taliban took over the country.
It would not cost American taxpayers a dime to issue letters of comfort to European banks to make it clear that they will not be punished for giving private Afghan citizens access to their money. If this doesn’t happen, the world will be treated to the spectacle of Americans and Europeans paying to mitigate a humanitarian disaster caused, in part, by the fact that many Afghans have been cut off from their own money.
There are other things the U.S. government can do on the margins to ease the liquidity crisis. Before the Taliban took over, the Afghan central bank inked a contract with a Polish company to print about $8.5 million worth of bank notes. One batch of notes has been delivered, but the rest remain in Poland. That contract should be fulfilled. In the medium term, international agencies are proposing to pay Afghan civil servants directly, bypassing the Taliban-led Ministries of Education and Health. Last month, the World Bank unfroze $280 million in Afghan reconstruction funds that could soon be used for this purpose.
Such efforts would certainly help. But they won’t make a dent in the human suffering if the banking system collapses. When banks splinter and fail, they exacerbate crises, as happened in Yemen, according to Dave Harden, an expert on the economies of countries in conflict.
Reasonable people can disagree about how much aid the United States should give Afghanistan after two heartbreaking decades of blood and treasure. It is tempting to walk away entirely. But self-interest dictates that Americans think clearly about long-term costs. Small efforts now could avoid big problems later — such as another mass migration in Europe. They could also preserve a toehold in the country. The war has been lost, but that doesn’t mean every institution that Americans worked with is destined to disappear. There’s still time to save Afghanistan’s central bank. ”