Afghans face economic ruin as prices rise and cash runs low | Afghanistan

Afghanistan is facing a potentially catastrophic perfect storm of bank closures and shortages of hard currency on top of the suspension of money transfers by companies that sustain the key flow of remittances to Afghans from abroad by family members.

With ATMs in cities emptied, and banks and the main Sarai Shahzada financial exchange in Kabul still closed, the country has faced a series of economic shocks since the Taliban seized power a week ago.

Without access to $9bn (£6.6bn) in frozen central bank reserves, which are held in the US, and with a crucial delivery of dollars cancelled as the former government collapsed, ordinary Afghans are already confronted with rising prices for basic goods as the value of the afghani has dropped even as they have started to run low on cash.

Salaries for government workers, many of whom are in hiding since the Taliban takeover, are unpaid, while queues formed at banks to withdraw savings during the former government’s collapse. Experts are warning of the risk of hyperinflation and increased hardship in the already impoverished country.

Among those warning of the risk of soaring inflation was Ajmal Ahmady, the country’s former central banker, who fled last week. He suggested that inflation could soon hit double digits.

Explaining the crisis, Graeme Smith, a researcher with the Overseas Development Institute, said: “The afghani has been defended by literally planeloads of US dollars landing in Kabul on a very regular basis, sometimes weekly.

“If the Taliban don’t get cash infusions soon to defend the afghani, I think there’s a real risk of a currency devaluation that makes it hard to buy bread on the streets of Kabul for ordinary people.”

Ed Dolan of a Washington thinktank, the Niskanen Center, echoed that view last week.

“The flow of dollars into the country through foreign aid and private remittances appears largely to have ceased.

“People who hold savings in the form of the local currency, the afghani, will rush to exchange them for dollars. If they can’t find dollars, they will try to exchange their afghanis for goods. Prices will be pushed up further.”

Justin Sandefur, a senior fellow at the Center for Global Development, told the New York Times: “In the short term it’s potentially catastrophic. You’re looking at the possibility of the currency collapsing and a financial crisis that could inflict real pain on normal people.”

The decision by Western Union and MoneyGram last week to suspend their services is also expected to have a profound effect, with the country one of the world’s most dependent on remittances by family members from abroad.

According to the World Bank, remittances account for 4% of Afghanistan’s GDP or $800m a year.

Announcing the move last week, Western Union acknowledged the impact the suspension would have.

“We recognise that our services provide a vital channel for our customers to support their loved ones, and we will continue to closely monitor this rapidly developing situation and keep our customers and associates apprised of any developments,” it said.

Less obvious, but equally critical, appears to have been the impact on the less formal Islamic hawala system for transferring money from abroad, which relies on hard currency to underpin its operations and which is more widely used by people in rural areas, who are also the country’s poorest.

The shortages of cash are likely to have far-reaching implications unless the Taliban can find a way to get Afghanistan’s economy working again.

Reports have already emerged of Afghans in cities being unable to meet rent payments while some have complained about being unable to find food and fuel.

“For now I want food for my 3 children,” tweeted a member of the Hear Afghan Women account. “We had bread today with sweet tea. Gas is too expensive, all banks closed, other foodstuff shortage in Kabul stores, can’t find mobile top-up – and also afraid for our lives.”

Even before the Taliban’s takeover, the price of staples such as bread had been rising sharply because of the impact of the pandemic.

And the mobile phone top-up issue is also important. Many remittance services use text messages to tell users they have been sent money from abroad.

The value of the afghani has also decreased since the Taliban’s takeover, with reports this weekend that street exchanges that had reopened were exchanging a dollar for 86 afghanis, up from about 80 before Kabul fell.

The bleak outlook was underlined by a prediction by forecaster Fitch Solutions on Friday that Afghanistan’s economy could shrink by as much as 20% this year and its currency may slide even further.

“It is likely that the economy will contract sharply this year,” said Anwita Basu, its head of Asia country risk.

“Countries facing similar circumstances, like Myanmar and Syria, have seen their GDPs collapse by around 10-20%, which can’t be ruled out for Afghanistan too.”

Basu said the afghani which has already weakened more than 7% this month against the US dollar, may fall more because most of the state’s foreign-held assets have been frozen to stop the Taliban from gaining access. She added that hyperinflation could not be ruled out.

The Congressional Research Service noted this year that 90% of Afghanistan’s population lived on less than $2 a day and warned that the loss of American support would weaken one of the world’s smallest economies.