OIC and Afghan economy

Posted on January 9, 2022
Muhammad Arif : Chairman Centre of Advisory Services for Islamic Banking and Finance (CAIF), Former Head of FSCD SBP, Former Head of Research ArifHabib Investments and Member IFSB Task Force for development of Islamic Money Market, Former Member of Access to Justice Fund Supreme Court of Pakistan

The Organization of Islamic Cooperation (OIC) has pledged to set up a humanitarian trust fund for Afghanistan as millions face hunger and poverty.

The crisis is causing alarm with billions of dollars in aid and assets frozen by the international community after the Taliban takeover of the country in August this year.

 “Unless action is taken immediately, Afghanistan is heading for chaos,” Prime Minister Imran Khan, of Pakistan – which is holding the summit, told a meeting of foreign ministers from the OIC.

“Any government when it can’t pay its salaries for its public servants, hospitals, doctors, nurses, any government is going to collapse but chaos suits no one, it certainly does not suit the United States.”

An OIC resolution released after the meeting said the Islamic Development Bank would lead the effort to free up assistance by the first quarter of 2022.

It also urged Afghanistan’s rulers to abide by “obligations under international human rights covenants, especially with regards to the rights of women, children, youth, elderly and people with special needs”.

The OIC meeting did not give the new Taliban government any formal international recognition and Afghan Foreign Minister Amir Khan Muttaqi was excluded from the official photograph taken during the event.

Muttaqi said his government “has the right to be officially recognized”.

“The current Afghanistan government is cooperating with every foreign organization,” he told reporters, adding that sanctions “must be removed”.

In a speech to delegates, he said the US freezing of assets “is a clear violation of the human rights of Afghans, and can be interpreted as enmity with an entire nation”.

Economy in ‘free fall’-While some countries and organizations have begun delivering aid, a near-collapse of the country’s banking system has complicated their work.

United Nations’ Undersecretary-General on Humanitarian Affairs Martin Griffiths was also present at the OIC meeting and warned that Afghanistan’s economy was “now in free fall”.

“If we don’t act decisively and with compassion, I fear this fall will pull the entire population with it,” he said in his remarks.

“Twenty-three million people are already facing hunger; health facilities are overflowing with malnourished children; some 70 percent of teachers are not getting paid and millions of children, Afghanistan’s future are out of school.”

Pakistan’s Foreign Minister Shah Mahmood Qureshi said unlocking financial and banking channels was essential “because the economy can’t function and people can’t be helped without a banking system”.

Saudi Arabia’s Minister of Foreign Affairs Prince Faisal bin Farhan Al Saud, left, speaks to delegates during the opening of a special meeting of the 57-member OIC in Islamabad

Beyond immediate aid, Afghanistan needs help ensuring longer-term economic stability.

Much will depend on whether Washington is willing to unfreeze billions of dollars in central bank reserves and lift sanctions that have caused many institutions and governments to shy away from direct dealings with the Taliban.

Muttaqi reiterated the Taliban would not allow Afghanistan to be used as a base for attacks on other countries and he said no reprisals would be carried out against officials of the former government.

However, the Taliban has faced heavy criticism for keeping women and girls out of employment and education and excluding broad sections of Afghan society from government.

They have also been accused of trampling on human rights and, despite their promise of amnesty, targeting officials of the former administration.

Already one of the poorest countries in the world, Afghans and their economy will now have to deal with the fall-out from the fall of Kabul. Several immediate challenges include:

  • The previous Afghan government and its core institutions are in disarray, and suffering from a severe “brain drain” of experienced top managers as well as qualified technical and professional staff, many of whom have fled the country or are trying to do so;
  • Already dealing with a large displacement crisis, there is risk of widespread dislocation and refugee flight;
  • The disruption to Afghan government revenue and aid means that the coffers are empty, and the Finance Ministry will be facing problems in meeting basic expenses such as salaries of government employees (including teachers who are civil servants);
  • Basic social services — a success story over the past two decades — are consequently in danger, even before potential Taliban restrictions;
  • Though the Taliban’s rhetoric generally has been pro-private sector, the uncertainty associated with their takeover will further depress already extremely low private investment, and will stall major projects at least for a time;
  • Such uncertainty extends to the financial sector, including not least what kind of “Islamic banking” approach the Taliban regime may take; and
  • The dissolution of the Afghan national security forces will impose a significant economic shock since hundreds of thousands of army and police personnel are losing their incomes, affecting many more people in their households.

If the Taliban decides to impose sudden, harsh changes in urban areas — which have had a very different ethos and way of life for the past 20 years — it will further stimulate panic and flight of people and would exacerbate the shock to Afghanistan’s already reeling urban economy. Stopping women from working, either by formal edict or by Taliban actions on the ground, would harm livelihoods or increase poverty. Wholesale changes to the government administration similarly could be disruptive and destabilizing. Basic social services, already at risk due to lack of funding, could be devastated by Taliban actions including formal or de facto restrictions on girls’ education. And haphazard or irresponsible macroeconomic management in the current situation easily could precipitate hyperinflation and supply shortages, with knock-on effects on the economy and poverty.

Beyond what the Taliban may or may not do, the U.S. government, other donor countries and some international agencies have been making decisions that could risk rendering an already very bad situation even worse, potentially precipitating or at least exacerbating a looming economic and humanitarian catastrophe. These include:

  • The U.S. Federal Reserve has “frozen” all of Afghanistan’s foreign exchange reserves in its hands, amounting to some $7 billion. While intended to block misuse of these funds by the Taliban, this action also means that Afghanistan’s central bank has no ability to manage the exchange rate by trading its dollar and other reserves for the local currency, potentially leading to a collapse of the afghani, a plunging exchange rate and hyperinflation.
  • The International Monetary Fund (IMF) has similarly frozen the Afghan government’s access to IMF resources (its so-called Special Drawing Rights, or SDR), which otherwise could have been deployed to help manage both the balance of payments and the government finances. The SDRs include Afghanistan’s $450 million share from the global IMF quota increase in response to COVID, which countries are supposed to have access to automatically.
  • Along with other donors such as Germany, the World Bank has stopped all disbursements of its own resources and donor-contributed Afghanistan Reconstruction Trust Fund money to Afghanistan — including both direct support to the Afghan budget and high-priority development projects such as basic public health and rural development. The Asian Development Bank also has suspended disbursements.

The complete loss of aid is triggering a fiscal collapse, including inability to pay civil servants’ salaries. There is the potential for Afghanistan’s private banks to experience severe collateral damage, even though they are not Taliban-owned and some have received Western support and endorsement in the past. Their access to foreign currency assets appears to be in jeopardy, as risk-averse foreign correspondent banks and other banks cut off financial transactions with the rest of the world. And Kabul and other Afghan cities will go dark if there is no foreign exchange to pay for continuing electricity supplies from neighboring countries.

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