For Peace in Afghanistan, Economy Is Key

Via The Diplomat, commentary on Afghanistan’s economy:

The role of a well-functioning and growing economy cannot be underestimated in contributing to the stability of a country. For the continued prosperity and stability of a nation, its economy must be constantly monitored, carefully managed, and creatively developed for sustainability, further growth, and ensuring prosperity.

In Afghanistan, the ongoing peace negotiations and upcoming presidential elections have been the focus of the government and drawn the attention of donors. Attention to economic matters has waned. Rising poverty, a sluggish economy and lack of economic opportunities in an already fragile country will challenge the successful implementation of any peace agreement with the Taliban. Addressing current institutional problems in the economic sector will not only revive the economy but will prepare the ground for new post-peace agreement aid critical for stability and success of the agreement.

Not all those fighting against the Afghan government have religious motives or follow a specific religious ideologies. The Afghan war has a significant economic element to it. War, for many, has become a source of income and livelihood. A lack of economic opportunities and poverty are the seeds of the increased number and strength of the anti-government insurgencies. Despite billions of aid dollars, Afghans continue to suffer from poverty and hunger. According to the July 2019 World Bank report Hunger Before the Drought: Food Insecurity in Afghanistan, over half of the Afghan population, approximately 16 million people, lives below the poverty line, a sharp increase over the last decade. Rural poverty, in areas where the insurgencies are more active, remains consistently higher than urban poverty. The report further states that the high poverty rates represent the combined effect of stagnating economic growth, increasing demographic pressures, and a deteriorating security situation in the context of an already impoverished economy and society where human capital and livelihoods have been eroded by decades of conflict and instability.

While economic growth has been sluggish since 2014, it has deteriorated further due to negligence on the part of an Afghan government more focused on political activities and the ongoing negotiations.  Some Afghan officials are concerned about the unknown future after a peace agreement and others are focused on the upcoming elections. Economic sector departments, including the central bank that is responsible for the monetary policy of the country and regulating banks have become bases for political activism, ignoring their main responsibilities of managing and promoting the economy. Appointment of key economic sector officials are either held back or made based on political and self-serving considerations rather than merit or need. As a result, financial and economic institutions, including the central bank, are nearly non-functional. Little attention is given to the concerns of traders and the business community entangled with the unstable political environment and facing uncertain conditions. The conditions for a failing economy are ripe. This is happening simultaneously with reduced international aid and development projects.

A peace agreement between the Taliban and the United States and then with the Afghan government will not result in stability unless a robust economic program that raises people from poverty is implemented simultaneously with the agreement between the warring groups. In the absence of economic opportunities, Afghans in rural areas may simply transfer their allegiance IS-K and the war will continue. The World Bank’s announcement of preparing to provide assistance after the peace agreement is signed and implemented is encouraging news. It is important that other donors follow the World Bank and assist the Afghan population to raise from poverty. However, all post-peace aid in Afghanistan must be channeled through a coordinated program to achieve results on the ground.

Afghan financial and economic institutions can provide such a coordinating framework for effective utilization of aid. It is essential that the Afghan government addresses the current deficiencies in financial and economic sector governance, not only to reverse the current economic downturn, but to prepare them to be valuable counterparts to donors in the effective utilization of post-peace agreement development efforts. While preparing and implementing a full economic reform program will be essential for the long-term and continued growth of the country, the following few “quick fixes” will lead to economic revival and strong financial institutions resulting in growth and countering root causes of insurgency.

Da Afghanistan Bank (Central Bank)

There is no example of a modern economy developing successfully without a functioning financial/banking sector. The financial sector, which in the case of Afghanistan is the banking sector, is essential for allocating and mobilizing financial resources. Without a functioning banking sector, investment activity will also stop and there will be no development in Afghanistan. Thus, the impact of actions, whether driven by political or international purposes, on the banking sector is critical to the economy of Afghanistan.  

The Afghan banking sector, engine of the economy, is currently in a state of crisis and negatively affected by the uncertain political environment and poor leadership. With every new piece of information about elections, U.S. troops withdrawal, peace negotiations, and absence of a governor, the crisis of confidence in the banking sector continues to grow. As a result, depreciating currency, declining deposits, capital departure, low or almost no lending, closure of several international bank branches has put the Afghan banking sector on the brink of failure. Banking and finance are based on confidence and if this disappears, so does the financial sector.  

In a typical financial crisis, there is a freezing of liquidity, as the public and others withdraw money from the institution or stop depositing their money because they no longer have confidence in these institutions. The withdrawal of funds or a gradual reduction in deposits unless countered will spread because of the public’s uncertainty of exactly how bad the problems are, and which institutions are at risk. In the case of doubt, it is prudent to hold only cash or gold. This is currently happening in Afghanistan and, tragically, leadership at the central bank, which is essential and necessary, has disappeared.

In such circumstances, banks can only focus on survival, and anything else is extra. That means that credit extension, loans, and other functions of the banking sector will be shortchanged. As banks lose deposits, this puts pressure on their assets, and just as the general economic conditions worsen, banks come under pressure to liquidate assets, to obtain cash.

Certainly, there are real and serious problems in the banking sector, but the only prudent and rational way of dealing with them is to halt the crisis of confidence and to sort out the problems after confidence has started to rebuild. The public policy option, in this case, is clear: The government of Afghanistan, from the highest level, must take a firm step forward to take charge of the situation by rapidly taking measures to assure the public that it will support the banking sector even as the various political events continue. The Afghan government must urgently appoint a qualified and experienced bank governor without political considerations. Certainly, this will not be easy, and all the next steps are not clear, but only having a strong leadership at the central bank that pursues a monetary policy without political influence and interference will lead to the revival and growth of the economy and Afghanistan will have a real chance of moving forward to economic self-reliance.  

Economic Sector

Afghanistan has natural resources in abundance, a great geographical location for trade, a young educated population equipped with technical skills needed to manage their country, a weak but extant administrative structure, and several other ingredients required for economic growth. What’s missing is a coordinated and well-managed effort to bring all the ingredients together and to put the country on path to economic growth and sustainability.

The Afghan government must begin to give preference to professionalism over political considerations when economic and financial sector decisions and appointments are made. For immediate impact, a short-term plan of action that focuses on encouraging investment and presenting Afghanistan as a new land of opportunities will attract foreign investment and prevent capital outflow. The plan should include an investment policy that covers taxation, tariff, custom duty, easy access to finance, providing of land and other facilities. Investment security, safety of capital and no political risk for businesses should be at the center of the policy and plan.    

The importance of a functioning economy cannot be understated in any circumstance, including conflict conditions, and its direct relationship with conflict prevention and growing stability. A functioning and growing economy will work as a stabilizing force once a peace agreement is signed and implemented. The Afghan government must act immediately to address banking sector challenges, reform and redirect the attention of economic ministries from politics to economics to incite growth and prepare the country for the effective utilization of a post-peace agreement aid to Afghanistan.



This entry was posted on Thursday, September 5th, 2019 at 12:26 pm and is filed under Afghanistan.  You can follow any responses to this entry through the RSS 2.0 feed.  You can leave a response, or trackback from your own site. 

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