UN warns of ‘colossal’ collapse of Afghan banking system | Investment News

UNITED NATIONS (Reuters) – The United Nations on Monday called for urgent action to support Afghan banks, warning that a rise in the number of people unable to repay their loans, a drop in deposits and a shortage of liquidity could lead to the collapse of the financial system in a few months.

In a three-page report on Afghanistan’s banking and financial system seen by Reuters, the United Nations Development Program (UNDP) said the economic cost of a banking system collapse – and the negative social impact would result – “would be colossal”.

A sharp withdrawal of most foreign development aid after the Taliban seized power on August 15 from the Western-backed Afghan government sent the economy into a tailspin, straining the banking system which has set weekly withdrawal limits to stop a run on deposits.

“Afghan’s financial and banking payment systems are in disarray. The problem of bank management must be resolved quickly to improve Afghanistan’s limited productive capacity and prevent the banking system from collapsing,” says the UNDP report.

Finding a way to avoid a collapse is complicated by international and unilateral sanctions against Taliban leaders.

“We have to find a way to make sure that if we support the banking sector, we don’t support the Taliban,” Abdallah al Dardari, head of UNDP in Afghanistan, told Reuters.

“We are in such a dire situation that we have to think of all possible options and we have to think outside the box,” he said. “What was unthinkable three months ago must become thinkable now.”

The Afghan banking system was already vulnerable before the Taliban came to power. But since then, development aid has dried up, billions of dollars in Afghan assets have been frozen overseas, and the United Nations and aid groups are now struggling to bring in enough money in the country.

The United States is working with the United Nations, UNDP and other international institutions and countries “to find ways to provide cash, to infuse, to ensure that the people of Afghanistan can benefit from international assistance in a way that doesn’t circulate in Taliban coffers,” State Department spokesman Ned Price said.

UNDP proposals to rescue the banking system include a deposit insurance scheme, measures to ensure adequate liquidity for short- and medium-term needs, as well as credit guarantees and loan repayment options.

“Coordination with international financial institutions, with their vast experience of the Afghan financial system, would be essential to this process,” the UNDP said in its report, referring to the World Bank and the International Monetary Fund.

The United Nations has repeatedly warned since the Taliban took power that the Afghan economy is on the verge of a collapse that would likely fuel further a refugee crisis. The UNDP said that if the banking system fails, rebuilding it could take decades.

The UNDP report indicates that with current trends and withdrawal restrictions, approximately 40% of Afghanistan’s deposit base will be lost by the end of the year. He said banks had stopped extending new credit and non-performing loans had nearly doubled to 57% in September from the end of 2020.

“If this rate of non-performing loans persists, banks may not have a chance to survive for the next six months. And I’m optimistic,” al Dardari said.

Liquidity has also been an issue. Afghan banks relied heavily on physical remittances of US dollars, which have ceased. Regarding the local Afghan currency, al Dardari said that while there are about 4 billion Afghan dollars in the economy, only about 500 million dollars are in circulation.

“The rest is sitting under the mattress or under the pillow because people are scared,” he said.

As the United Nations seeks to avert famine in Afghanistan, al Dardari also warned of the consequences of a bank collapse for trade finance.

“Last year, Afghanistan imported about $7 billion worth of goods, products and services, mostly food… If there is no trade finance, the disruption is huge,” he said. “Without the banking system, none of this can happen.”

(Reporting by Michelle Nichols, additional reporting by Simon Lewis; Editing by Mary Milliken and Daniel Wallis)

Copyright 2021 Thomson Reuters.

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