UN warns of colossal collapse of Afghan banking system

Afghan stockbrokers wait for customers in a foreign exchange market, after banks and markets reopened after the Taliban took control in Kabul on September 4. Photo: REUTERS / FILE


Afghan stockbrokers wait for customers in a foreign exchange market, after banks and markets reopened after the Taliban took control in Kabul on September 4. Photo: REUTERS / FILE

The United Nations on Monday called for urgent action to support Afghan banks, warning that a spike in people unable to repay loans, falling deposits and a shortage of liquidity could cause the financial system to collapse within months.

In a three-page report on the Afghan 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 that would result – “would be colossal”.

A sharp withdrawal of most foreign development aid after the Taliban seized power on August 15 from the West-backed Afghan government sent the economy into free fall, straining the banking system which set prices weekly withdrawal limits to stop a race for deposits.

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

Finding a way to avoid a collapse is complicated by international and unilateral sanctions against the Taliban leadership. “We have to find a way to make sure that if we are supporting the banking sector, we are not supporting the Taliban,” Abdallah al Dardari, head of UNDP in Afghanistan, told Reuters. “We are in such a dire situation that we have to think about all the 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 abroad, and the United Nations and aid groups are now struggling to bring in enough. money in the country.

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

“Coordination with international financial institutions, with their vast experience of the Afghan financial system, would be essential to this process,” 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 brink of collapse that would likely fuel further a refugee crisis.

UNDP has said that if the banking system fails, reconstruction could take decades.

The UNDP report says that with current trends and withdrawal restrictions, around 40 percent of Afghanistan’s deposit base will be lost by the end of the year.

He said banks had stopped providing new credit and non-performing loans nearly doubled to 57% in September from the end of 2020.

“If this rate of non-performing loans persists, the banks may have no chance of surviving for the next six months. And I am optimistic,” al Dardari said.

Liquidity has also been an issue. Afghan banks have relied heavily on physical shipments of US dollars, which have ceased.

Regarding the local Afghan currency, al Dardari said that while there are about $ 4 billion Afghans in the economy, only about $ 500,000 is in circulation.

“The rest are sitting under the mattress or under the pillow because people are afraid,” 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.”

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