Afghanistan faces economic shock as sanctions replace aid

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As the Taliban attempt the precarious shift from insurgent movement to functioning government, Afghanistan is facing the heightened risk of a financial collapse after being propped up for the past two decades by foreign aid that now accounts for nearly half its legal economy.
The fate of the Afghan economy will be determined by decisions that the Biden administration and other countries must make on whether to recognize the Taliban as a legitimate government. In the meantime, the United States and the international community are already shutting the flow of money, leaving Afghanistan in the stranglehold of sanctions that were designed to cut the Taliban off from the global financial system. Analysts say the looming shock threatens to amplify a humanitarian crisis in a country that has already endured years of war.
Signs of strain were evident this week as the value of Afghanistan’s currency, the afghani, plunged to record lows; and the nation’s most recent central bank governor, Ajmal Ahmady, warned that inflation would likely send food prices soaring. The United States, which has poured about $1 trillion into Afghanistan over 20 years, moved to block the Taliban’s access to Afghanistan’s $9.4 billion in international reserves. And the International Monetary Fund suspended plans to distribute more than $400 million in emergency reserves to the country.
“In the short term, it’s potentially catastrophic,” said Justin Sandefur, a senior fellow at the Center for Global Development. “You’re looking at the possibility of the currency collapsing and a financial crisis that could inflict real pain on normal people.”
Afghanistan’s economy was facing severe challenges, and international support was starting to wane, even before the Taliban takeover.
The drawdown over the last year of U.S. forces and government contractors that contributed to Afghanistan’s tax base sapped revenue when the country, like much of the world, was coping with the coronavirus pandemic. The Congressional Research Service noted this year that 90% of Afghanistan’s population lived on less than $2 a day and warned that the loss of U.S. support would weaken one of the world’s smallest economies. In late 2020, foreign donors meeting in Geneva pledged $12 billion in aid to Afghanistan over the next four years, a 20% decline from the previous four years. Some of the aid agencies based new conditions for the money on human rights advances and progress with peace talks between the government and the Taliban.

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