Jan 10, 2022

US and international sanctions are strangulating the Afghan economy leading to mass starvation

For many years the Taliban have been under US, EU and UN-Security Council sanctions to quell their insurgency and squeeze their finances. On August 15, 2021, the day Kabul fell, these sanctions on a militant insurgency became sanctions applicable to the Afghan government and Afghan economy. The most damaging sanctions are the ones imposed by the US Treasury’s Office of Foreign Assets Control (OFAC) as they threaten trading partners and foreign banks that engage with Afghanistan.

Sanctions on the Banking System

Since August 15, the US has blocked Da Afghanistan Bank, Afghanistan’s central bank, from obtaining credentials to access the international financial system and has frozen its assets, i.e. currency reserves . It is no longer capable to administer currency swaps and settle transactions. Prior to August 15th the Afghan economy was heavily dollarized and import dependent. On a near weekly basis USD notes were being flown into Afghanistan and then sold by the Afghan central bank in exchange for Afghanis to, e.g., enable importing goods .

Today, as a result of these blanket sanctions, there is not enough liquidity in circulation. The Afghan currency, the Afghani, was not printed in Afghanistan but in Europe. The recent US-sanctions prohibit any interaction with the Afghan central bank, including printing new Afghan currency, which contributes to the liquidity shortage.

Afghan owned private banks’ overseas assets are also frozen. As there is not enough cash in the banking system in Afghanistan at the moment, the only policy option to avoid an immediate financial collapse was to impose capital controls by limiting withdrawals. Limits on withdrawals for private citizens and businesses further hurt the Afghan economy, as demand for goods beyond what is needed for immediate survival, e.g. home repairs, travel, has collapsed and investing in businesses becomes impossible

Implications for trade and food security

Regular trade in or with Afghanistan is deeply affected by the OFAC sanctions. Regular trading presupposes a number of givens to work; some of which include the following: first, traders rely on a functioning banking system to pay for imports; second, the indiscriminate nature of the sanctions has a chilling effect on their international partners’ willingness to engage in trade with Afghanistan. For instance, a cellphone company could not import spare parts to repair cellphone towers, as their trade partners feared running afoul of OFAC sanctions. Furthermore, currently paying customs to the Taliban can be construed as a violation of OFAC sanctions.

The collapse of trade directly impacts food security in Afghanistan: In the last 20 years international donors have enabled extraordinary levels of import and aid dependency. In 2020 Afghanistan was projected to run a current account deficit of US $6.29 Billion, largely financed by international

  1. https://www.hrw.org/news/2021/11/11/afghanistan-facing-famine
  2. https://www.crisisgroup.org/asia/south-asia/afghanistan/317-beyond-emergency-relief-averting-afghanistans-humanitarian-catastrophe

grants . Donors permitted the growth of an economic system in which Afghanistan cannot feed itself. Agriculture within Afghanistan does not produce enough calories for the people in Afghanistan. In 2021, this mismatch is exacerbated by the massive draught hitting Afghanistan. The rising food prices in the markets all across Afghanistan are a direct consequence of the impediments to trade posed by international sanctions.

Sanctions on Aid and Development Assistance

So far, the US Treasury only permits humanitarian aid to enter Afghanistan. Even getting humanitarian aid inside Afghanistan has proven difficult. Although in September and October of 2021, the US Treasury issued two waivers allowing purely humanitarian assistance to enter Afghanistan, international banks are still reluctant to engage in any transactions with Afghanistan. They fear running afoul of OFAC sanctions as it is difficult to ensure that none of the aid money sent to Afghanistan will not end up in the hands of the Taliban government. Therefore it is essential that the US Treasury provides Comfort Letters to international banks guaranteeing they will not be held liable for assisting aid efforts in Afghanistan .

Given the severity of the economic crisis unfolding in Afghanistan, some donors want to reengage and provide some development assistance to Afghanistan. However, they find their efforts thwarted by the US sanctions. Whereas humanitarian assistance consists mostly of food aid and medical treatment, development aid is usually provided in collaboration with a nation’s government. A prime example is support for the education sector, in particular paying teachers’ salaries. So far, European donors and UNDP have expressed willingness to support teachers, but as they are civil servants employed by the government, supporting them can be construed as a violation of US sanctions. In a recent discussion on whether some of the US$ 1.5 Billion sitting in the Afghanistan Reconstruction Trust Fund unspent could be disbursed for education, the US position was that “not even a school janitor” should receive any money .

The Islamic Republic of Afghanistan was the most aid dependent country in the world. 43% of GDP and roughly 75% of government expenditures were directly provided by international donors, most of all the United States. In addition, donors covered nearly all of the spending for security forces. When all donor funding was frozen on August 15th this resulted in an economic shock that is unprecedented in recent economic history . GDP is expected to collapse by 30%-40%.

  1. https://adamtooze.substack.com/p/chartbook-35-its-not-the-fall-that?te=1&nl=the-interpreter&emc=edit_int_20211111
  2. https://www.usip.org/events/averting-fiscal-and-humanitarian-disaster-afghanistan
  3. https://www.crisisgroup.org/asia/south-asia/afghanistan/317-beyond-emergency-relief-averting-afghanistans-humanitarian-catastrophe
  4. https://www.usip.org/events/averting-fiscal-and-humanitarian-disaster-afghanistan
References:

International Crisis Group: Beyond Emergency Relief: Averting Afghanistan’s Humanitarian Catastrophe. https://www.crisisgroup.org/asia/south-asia/afghanistan/317-beyond-emergency-relief-averting-afghanistans-humanitarian-catastrophe

Human Rights Watch: Afghanistan Facing Famine.

https://www.hrw.org/news/2021/11/11/afghanistan-facing-famine

Afghan Analysts’ Network: Killing the Goose that Laid the Golden Egg: Afghanistan’s economic distress post-15 August. https://www.afghanistan-analysts.org/en/reports/economy-development-environment/killing-the-goose-that-laid-the-golden-egg-afghanistans-economic-distress-post-15-august/

https://adamtooze.substack.com/p/chartbook-35-its-not-the-fall-that?te=1&nl=the-interpreter&emc=edit_int_20211111

US Institute for Peace Panel Discussion: https://www.usip.org/events/averting-fiscal-and-humanitarian-disaster-afghanistan

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US and international sanctions are strangulating the Afghan economy leading to mass starvation