"The economy needs to be stabilised"

Three years after the Taliban came to power, Afghanistan is teetering on the brink. The rights of children and women are being violated: the latter have become virtually invisible in public spaces – sports facilities, hammams, beauty salons and parks are off-limits for them. Their education ends with primary school, and there is strict gender segregation at work places. Media and opposition forces are being repressed. One-half of the population now live in poverty and 90 per cent can no longer meet their basic food needs.

"The economic situation is extremely precarious, mainly because of restrictions on the banking sector, the disruption of trade and commerce, the weakening and isolation of public institutions, and the virtual absence of foreign investment and financial support from foreign donors in sectors such as agriculture and manufacturing", the United Nations warned earlier this year.

Meanwhile, millions of dollars being managed from Geneva by the Fund for the Afghan People (Afghan Fund) remain unused. The Fund was set up two years ago to manage the foreign currency reserves of the Afghan Central Bank (DAB); those reserves were frozen when the Taliban took power in August 2021. At the time, the Federal Reserve Bank in New York was holding 7 billion USD of these reserves. Another 2.1 billion USD are now in Europe and other countries. To prevent the money deposited in the USA from being frozen by the victims of September 11, President Biden suggested that half that amount should be placed abroad. The sum of 3.5 billion USD was therefore deposited in an account with the Bank for International Settlements located in Basel, and a foundation for managing the funds was created in Geneva, namely, the Afghan Fund (see also here). Its purpose is to manage the monies and to return some of it to the DAB in accordance with strict specifications. At the end of June 2024, the assets, including interest, were worth 3.84 billion USD.

Nine per cent deflation

Now, two years on, not a single cent has been repaid. Why is this? "First, there is some misunderstanding of the rules, in that this money is not meant for humanitarian purposes, but to stabilise the financial system", says Shah Mehrabi, one of the two Afghan Co-Chairs of the Board of the Fund, speaking by phone from the USA. The professor at Montgomery College in Maryland points first to macroeconomic aspects: currency reserves are assets held by central banks in foreign currency for the purpose of ensuring a country's solvency and influencing its monetary policy. The aim is to protect central banks from a rapid devaluation of the national currency. These reserves play a key role in stabilising the exchange rate, boosting the trust of citizens, providing liquidity for the banking system, and meeting import costs.

"The DAB has now announced a contraction of the money supply, i.e., the amount of money in circulation", he adds. "Why is that? The freezing of the reserves is one contributing factor. When there is less money in circulation, people have less purchasing power, economic activity declines, and this in turn impacts prices and exchange rates. This is precisely what we are witnessing in Afghanistan: enterprises cannot raise funds to invest, which leads to dwindling demand for goods and services. They therefore continue to lower prices so as to incite people to buy. The result is deflation, which is just as harmful to an economy as inflation".

Solid structure built

"We have accomplished a lot", he continues. But what exactly? Regarding the governance of the Fund, he confirms that a solid structure has been created: statutes have been adopted and a Board of Trustees appointed, which will report transparently on the management of the assets. He himself forms part of the Board, along with Anwar-ul-Haq Ahady, former DAB Director and Ex-Finance Minister of Afghanistan, Jay Shambaugh, a representative of the US Treasury Department, and Ambassador Alexandra Baumann, Head, Prosperity and Sustainability Division of the FDFA. Decisions are made unanimously, which implies that each member has de facto veto power.

The Board of Trustee members elaborated a proactive investment strategy and tasked a consulting firm with working out compliance and audit measures. This is designed to prevent money laundering and the funding of terrorism. The post of Executive Secretary was created, a communications strategy was drawn up and an international advisory panel established.

"Targeted disbursements possible"

"The measures we took were part of the requirements that have to be fulfilled before any disbursement", Shah Mehrabi continues. "My view is that the conditions now exist for targeted disbursements to stabilise the exchange rate, print banknotes and pay for imports. They should be made in small tranches however, as injecting too much money would cause inflation."

He adds that, despite significant challenges, the Afghani has remained stable, particularly against the U.S. dollar, thanks to the DAB sound monetary policies. These include foreign exchange auctions, tighter controls on smuggling, increased exports, humanitarian aid inflows, and remittances. “However, this stability has also led to deflation due to global price drops and the Afghani's appreciation. Currently, the deflation rate stands at -9.2%, slightly better than the previous -9.7%. To further ease deflation, the Central Bank may need to reduce dollar auctions and increase the circulation of Afghani banknotes”, he concludes.

Taliban not recognised by the international community

The political situation is rather complex, however. The international community does not recognise the present regime. Legal and diplomatic resources are limited, which diminishes the Fund's ability to negotiate. Yet there are no international sanctions on the DAB. The Taliban, for their part, do not recognize the Afghan Fund. They want their money back. At any rate, says the economist, something is being done with a portion of the assets frozen by the USA – in stark contrast to the 2.1 billion USD frozen by the EU.
"We cannot let the Afghan people suffer. It is now in the interests of everyone to proceed actively with these disbursements. Humanitarian aid alone will not solve the problem. Long-term development is the key. We must act", concludes Mehrabi, whose mandate for the Afghan Fund was extended in September for a further two years, as was that of the other members of the Board.

SDC returns to Kabul

Like most countries, Switzerland, too, has no current plans to relaunch long-term development cooperation in Afghanistan, but is at least returning to the country. "The SDC (Swiss Agency for Development and Cooperation) will open a humanitarian office in Kabul in the autumn of 2024", its spokesman Alain Clivaz confirms. "It will be housed in the premises of the former cooperation office, which was closed in 2021. The humanitarian office there will comprise four members of the Swiss Humanitarian Aid Unit (SHA). The SDC Team is responsible for implementing, supporting and monitoring projects funded by the SDC."

The FDFA Spokesperson points out that the security situation in Afghanistan is still a complex one and entails considerable risks to all activities in that country. He affirms nonetheless that the SDC is closely monitoring developments in the situation and has a widely-supported security arrangement for its staff, which is making this return to Kabul possible.

"At the technical level, the SDC Office contacts Taliban representatives whenever this is necessary to project implementation", he concludes.

Alliance Sud views a presence in Afghanistan as important, even though humanitarian aid alone cannot replace a functioning economy. Switzerland must ensure that the monies being managed by the Afghan Fund are repaid to the DAB with all due care. This must be done so that the Afghan people are not penalised several times over: on the one hand, by a repressive regime and sanctions, and on the other, by being ostracised by the international community.