The United Nations on Monday warned that urgent action is needed to prop up Afghanistan’s banks, highlighting that an increase in people unable to repay loans, lower deposits, and a cash liquidity crunch could lead to the collapse of the financial system within months.
The UN Development Programme (UNDP) issued a three-page report on Afghanistan’s banking and financial system which states that the economic cost of a banking system collapse and the resultant negative social impact “would be colossal.”
Ever since the Taliban took control on Aug 15, an abrupt withdrawal of most foreign development support sent the economy of the country into freefall with mounting strain on the banking system which set weekly withdrawal limits to stop a run on deposits. The report states, “Afghanistan’s financial and bank payment systems are in disarray. The bank-run problem must be resolved quickly to improve Afghanistan’s limited production capacity and prevent the banking system from collapsing”.
Head of UNDP in Afghanistan, Abdallah al Dardari told Reuters, “We need to find a way to make sure that if we support the banking sector, we are not supporting Taliban”.
He added, “We are in such a dire situation that we need to think of all possible options and we have to think outside the box”.
Dardari said, “What used to be three months ago unthinkable has to become thinkable now.”
Even before the Taliban came into power, Afghanistan’s banking system was vulnerable but now the development aid has dried up while billions of dollars in Afghan assets remain frozen abroad, and as a result, the United Nations and aid groups are struggling to get sufficient cash into the country.
‘Under the pillow’
The UNDP’s proposals to save the banking system comprise a deposit insurance scheme, steps to ensure sufficient liquidity for short- and medium-term requirements, as well as credit guarantees and loan repayment delay options.
Referring to the International Monetary Fund (IMF) and the World Bank (WB), the UNDP says in the report, “Coordination with the International Financial Institutions, with their extensive experience of the Afghan financial system, would be critical to this process”.
Since the power shift in the country, the United Nations has repeatedly warned that Afghanistan’s economy is on the brink of a collapse that would lead to a refugee crisis.
The UNDP states that if the banking system fails, it could take decades to rebuild.
The report said that with the existing trends and withdrawal restrictions, around 40 percent of the war-torn country’s deposit base will be lost towards the end of the year.
It states that banks have stopped extending new credit and that non-performing loans had nearly doubled to 57pc in September from the end of last year.
Al-Dardari said, “If this rate continues of non-performing loans, the banks may not have a chance to survive in the next six months. And I am being optimistic”.
Liquidity is also a problem. Afghan banks relied heavily on physical shipments of US dollars, which have halted. Talking about the local afghani currency, al Dardari said that while there is around $4 billion worth of afghanis in the economy, only around $500,000 worth is in circulation.
He added, “The rest is sitting under the mattress or under the pillow because people are afraid”.
As the UN seeks to prevent a famine in Afghanistan, al Dardari also warned about the consequences of a banking collapse for trade finance.
He said, “Afghanistan last year imported about $7 billion worth of goods and products and services, mostly foodstuff … If there is no trade finance the interruption is huge”.
Al-Dardari added, “Without the banking system, none of this can happen.”
