Biden administration faces big choices as economic calamity hangs over Afghanistan

The dangerous economic climate poses a major dilemma for the Biden administration as it tries to maintain leverage over the Taliban without exacerbating the severe economic conditions that threaten to immiserate millions of Afghan citizens. Biden administration officials are monitoring the situation closely and have said they will resume the flow of humanitarian aid, but they have not signaled how they plan to proceed.

Senior officials in Afghanistan's toppled government have warned in recent days that parts of the nation's economy are on the brink of devastation, given the country's high dependence on international funding. Acting central bank governor Ajmal Ahmady, who recently fled the country, said in an interview that the nation's economy faces severe strains as foreign capital and aid are choked off.

Similarly, Wahid Majrooh, the acting minister of public health in Afghanistan, told The Washington Post that he is "deeply, deeply concerned" about cuts in international aid and funding for the Afghan government's national health-care system. Majrooh said in an interview that he is already facing shortages of critical medical supplies such as bandages, sutures, syringes, catheters and other "basic supplies for emergency rooms." He said he is pleading with international officials to maintain public health funding for Afghanistan, despite the Taliban takeover, but has largely not yet received a clear response.

The threat to the broader economy also appears serious. Exports and imports are reported to have cratered as major borders close to traffic. A half-dozen people in communication with Afghan residents reported dramatic price increases and shortages in grocery stores. Fears are also mounting about the impact of a failure for the Afghan government to pay its workforce - the largest employer in the country - when paychecks are due this month.

"The situation will be dire," Majrooh said.

Ahmady, the former central banker fled in recent days, warned of a surge of refugees if the economic devastation is prolonged. "There will be a restructuring of the economy, with the currency depreciating, inflation rising, and real incomes declining. It's going to cause a significant economic impact," he said.

The warnings come as the Biden administration faces critical decisions over how to maintain leverage over the Taliban without allowing the country to tip into an economic disaster that would likely hurt everyday Afghans.

President Joe Biden vowed in his public address earlier this week that aid to the Afghan people would continue, despite the U.S. withdrawal from the country. That pledge may prove difficult to keep in practice, given the prospect of the Taliban standing between international donors and the intended recipients of the money. The U.S. is also not expected to want to lift financial restrictions on the Afghan government until the White House sees how the Taliban governs the country, posing a further logistical hurdle.

On Sunday, the U.S. Treasury Department froze Afghan central bank assets kept in the U.S. The move will prevent the Taliban from accessing the bulk of the $9 billion in central bank reserves held by the Afghan government, but could exacerbate the financial crisis feared by many experts.

The administration is also grappling with how to handle existing sanctions on the Taliban that may chill the flow of international aid and funds into the country. Roughly 80 percent of the Afghan government's budget comes from international grants and aid, according to PGIM Fixed Income, a global income manager. Billions of dollars in existing congressional appropriations to Afghanistan - primarily in the form of military support - are expected to cease flowing.

The International Monetary Fund also announced this week that Afghanistan would not have access to hundreds of millions of dollars in emergency funds that were scheduled to be disbursed to the country next week. IMF spokesman Gerry Rice in a statement said the payments could not be made due to the "lack of clarity within the international community regarding recognition of a government in Afghanistan."

While Biden administration officials and other international groups faced pressure to cut off the international funds after the Taliban took power, the economic consequences of doing so on Afghanistan's population could be difficult to unravel, experts said.

"The last thing the Afghan people need right now is an economic crisis on top of a political and security crisis. The challenge for Washington is squaring that increasingly urgent need for cash and access to international reserves with the desire to not empower the Taliban," said Elizabeth Threlkeld, senior fellow and deputy director of the South Asia Program at The Stimson Center, a foreign policy think tank. "That's the fundamental tension."

White House National Security adviser Jake Sullivan reiterated to reporters on Tuesday that the U.S. has means of delivering aid to those in need in a way that bypasses other governments.

"I don't want to get into hypotheticals, but I would point out that there are a range of different diplomatic relationships the United States has with countries around the world, including some in very difficult or nonexistent relationships with governments where we still provide forms of aid to people," Sullivan said. "And I will leave it at that, because we're not at a point yet where we can speak directly to how things will play out in Afghanistan."

White House and State Department officials say the U.S. will continue to provide aid to Afghanistan as it has in other countries where it has strained relations, such as Venezuela or Yemen. "Whatever course we take will not prevent humanitarian aid," said a senior administration official.

But in those countries, the U.S. provides funding to aid organizations working there rather than payments directly to the government. In the case of Afghanistan, Congress appropriates billions of dollars in direct government aid.

Now that a designated terrorist group is in charge of the government, U.S. officials are prohibited from transferring funds to the Afghan government in the absence of a new U.S. license. Given the Biden administration's profound disagreements with the Taliban it has to determine what aid it is willing to continue. However, the administration has been explicit that it does not yet recognize the Taliban as the official government of Afghanistan, which may mean the sanctions do not yet affect funding for the Afghan government.

It has stressed the importance of unifying its approach with other world powers and international institutions. That is likely to prove at least as difficult as getting world powers on the same page for simply recognizing the Taliban diplomatically.

China and Russia have both issued warm statements about the Taliban in recent days but have stopped short of formally recognizing its rule. Canadian Prime Minister Justin Trudeau said his government had "no plans" to recognize Taliban rule.

The European Union's top diplomat, Josep Borrell, said the trade bloc would open a channel of communication with the Taliban but stop short of recognition. "The Taliban have won the war, so we will have to talk with them," he said.

On Wednesday, Deputy Secretary of State Wendy Sherman said "each country, of course, makes its own decisions," but said Secretary of State Antony Blinken had begun talks with his Chinese and Russian counterparts "try to all head in the same direction."

The State Department has said the manner in which the Taliban governs the country will be the central factor in determining recognition. But even if the Taliban rules as inclusively as it says it will, untangling aid-limiting terrorism sanctions on the militant group will require an international effort as many are enshrined in resolutions approved by the United Nations Security Council resolutions, said experts.

The U.S. may continue to provide aid to Afghanistan without going through the Taliban through organizations that continue a presence in the country despite the fighting. The United Nations High Commissioner for Refugees remains operational in about two-thirds of the districts in the country with a staff of about 200, said Chris Boian, a spokesman with the organization. He says his organization will stay as long as it safely can, but the need is great.

"Violence and insecurity have prompted the displacement of more than half a million Afghan civilians this year," Boian said. "Many of them are women and girls."

The impact of the withdrawal on Afghanistan's economy may be mitigated by a few factors. The country has a relative lack of dependence on the international financial system, as most Afghanis do not have a bank account and largely operate outside the traditional economy.

Jehanzaib Zafar and Hamza Kamal, analysts at AKD Securities Ltd, told Bloomberg that other regional powers such as China, Iran, and Pakistan could help the Afghan economy and maintain peace.

"The integrated economic interests of major powers in the region will help bring these players closer and work together and potentially bring peace and economic prosperity," they said.

But signs of danger are mounting. Afghan's currency, the Afghani, fell dramatically this week, with its value dropping by about 5 percent to 86 per dollar, according to Bloomberg. Germany has suspended approximately $300 million in aid budgeted for Afghanistan.

Majrooh, the health minister, said Afghanistan's two major health care systems - one funded by international donors, the other by the Afghan central government - are now both under threat. He said they are already in need of oxygen, oil, fuel, and food for patients.

"Economically, this is likely to be a disaster unless they can figure out a way to keep the development aid going and the international support going," said Matthias Luecke, senior researcher at the Kiel Institute for the World Economy and a former official at the International Monetary Fund. "It will be close to complete breakdown of the state and the economy. It is scary."

On Sunday, security personnel at banks around the country fired at the "literally hundreds and hundreds of people even at the minor branches of minor banks" seeking to withdraw cash, said Zuhra Bahman, Afghanistan country director at Search for Common Ground, an international NGO. Afghans have been unable to purchase phone cards to enable them to make calls. International organizations and local NGOs have shut down as they decide whether to work in a country controlled by the Taliban, Bahman said, and layoffs have been reported in the transportation and service industries, among other sectors.

"The economy is collapsing. We need help," said Bahman, who is currently based out of Dubai but in contact with numerous people inside Afghanistan. "We need the international community to meaningfully engage with the Taliban to ensure the already fragile economy does not further deteriorate."

The Taliban's likely loss of access to international disbursements to the military and Afghan government budget will amount to a loss of $750 million per month, said Alex Zerden, who led the U.S. Treasury Department's office in Kabul from 2018 to 2019. That will immediately hamper the Taliban's ability to pay government and military salaries, a destabilizing outcome in a country with a weak private sector.

"A lot of people are reliant on government salaries. One salary can feed a large family in some places so there's a multiplier effect," Zerden said.

Halema Wali, 30, co-founder of Afghans For A Better Tomorrow, said her relatives in Afghanistan in recent days have told her about dramatic increases in the price of rice, flour, oil, and other basic goods. She said more affluent Afghans have stockpiled cash and food, but ATMs were quickly emptied and others fear their ability to access financial help.

"Much of the economy was propped up by U.S. and international aid. That is a major concern of my family in Kabul, who are worried the economy might crash completely due to the pull out and the uncertainty of it at all," Wali said. "Folks are incredibly worried."