Afghanistan’s Coming Economic Collapse — and What It Could Mean

Not even heroin, opium, and methamphetamine will be able to solve the problem.

No government — particularly one with only a shaky claim to legitimacy, none of it democratic — will ever enjoy a sudden drop in its country’s standard of living. That is something the Taliban may shortly discover as they try to consolidate their hold over a society famously fragmented along ethnic lines. Terror reinforced by purloined American weaponry may work, at least for a while. And yes, the universalist pretensions of the Taliban’s Islamism will win over some hearts and minds, as will the order, however harsh, that their form of Sharia brings with it. Nevertheless, if the Taliban, a movement still strongest in its Pashtun heartland, come into too abrasive a conflict with the traditional loyalties of other Afghans to their kith, kin, and tribe, they may struggle.

Now throw in the rural–urban divide as another potential stumbling block for the Taliban in certain places — notably greater Kabul, an urban agglomeration that is home to over 4 million people, up from 2.5 million when the Taliban were driven out of power in 2001. That said, Kabul may, culturally, be less “urban” than those millions suggest. Many only moved there — often from the countryside — fairly recently (or are the children of such arrivals). Meanwhile, only 25 percent of Kabul’s population is Pashtun, and a large percentage of the city’s inhabitants (Afghanistan’s population skews very young) spent their formative years in the freer atmosphere that developed after the Taliban had been routed. Many will be too young to make a difference (41 percent of Afghans are 14 and under), and young enough to be reprogrammed. But there are plenty, too, in their late teens and twenties, who will remember what life was like before August 15.

That is not to say that the now-lost era was a paradise. It was anything but. As the Financial Times’s Martin Sandbu, in a critical account of the decades after the Taliban’s no-longer-final defeat, explained, corruption flourished — an affront, incidentally, often cited by those prepared to go along with the Taliban’s return. That corruption, naturally, will be back before long, albeit paid into different, pious hands. Demonstratively ascetic totalitarian regimes are like that.

Since 2012, GDP per capita has stagnated at around $600 — a dismal number, even if adjusted for purchasing power. It did, however, more than double in the ten years before that. The failure to maintain that growth will have inflicted immense political damage: disappointed expectations can be far more dangerous than unchanging poverty.

It would have been astonishing if personal income had been evenly distributed throughout Afghanistan’s different regions: The cities — especially, Kabul, I imagine — are likely to have fared quite a bit better, meaning that if the economy implodes under the Taliban the pain, if only relatively, will be felt more sharply there. That pain may be more muted for the around 74 percent of Afghans still based in the countryside. Presumably they have less to lose; although, if food supplies start to fall below a certain level, those in the cities — who will probably be closer to sources of humanitarian relief — may find themselves better placed to cope than those in the hinterland, or at least those in the hinterland who are not self-sufficient.

Income distribution does not, however, tell the full story.

Also from the Financial Times, Valentina Romei:

Despite the patchy overall economic performance, many Afghans’ day-to-day lives notably improved. Healthcare and education became more widespread, mortality rates declined and technology use became common.

About 60 children aged under 5 died in 2019 per 1,000 born, according to the World Bank — that figure has halved since the turn of the century, the fastest reduction in child mortality across all low-income countries. The proportion of children underweight more than halved in the same period, and Afghanistan logged a similar reduction in the risk of maternal death. Healthcare also improved across a range of measures, and nearly half the population have access to sanitation, up from a quarter in the early 2000s.

Educational performance also improved significantly. There are about 8.2m more children in school than in 2001, and the proportion of children enrolled in secondary education jumped from 12 per cent in 2001 to 55 per cent in 2018 . . .

Women’s lives improved across a swath of indicators. Girls’ enrolment in education has jumped, adolescent fertility rates plummeted and many more women are in work.

It is not only city-dwellers who will suffer if the advances of the last 20 years go into reverse.

There’s also this:

Women also entered the workforce in much larger numbers than previously. Last year [2020], about one-fifth of Afghan civil servants were women and one in four parliamentary seats were held by women — up from zero in 2001.

In an earlier article on the economy that the Taliban will be taking over — and its likely prospects (bad) — I highlighted the difficulties that the Taliban will face in gaining access to Afghanistan’s hard-currency reserves of around $9 billion. Remember, these are difficulties that will be compounded by the fact that Western assistance, a critical element in the country’s rickety finances, will dry up. As I noted in that article, on August 18, Ajmal Ahmady, the now-former governor of the Afghanistan’s central bank (he has prudently decamped abroad) projected this as his base case:

– Treasury freezes assets

– Taliban have to implement capital controls and limit dollar access

– Currency will depreciate


– Inflation will rise as currency pass through is very high

– This will hurt the poor as food prices increase

That seems all too plausible.

Ahmady has now been replaced by Mohammad Idris, who headed the Taliban’s economic commission.

Bloomberg:

The Taliban appointed an obscure official as acting central bank governor as signs emerge of a financial crunch in Afghanistan, with ATMs running out of cash and prices of essential goods spiraling.

Idris’s job, said a Taliban spokesman, will be to “address the looming banking issues and the problems of the people”.

Encouraging.

More from Bloomberg:

Little is known about Idris, including his education background and professional qualifications in dealing with monetary, currency and banking policy.

The Taliban’s economic commission has operated in the shadows over the last 20 years, with the United Nations Security Council saying its activities included collecting illegal taxes from businesses and farmers to fund the militant group’s insurgency.

Prices of food essentials like flour and oil have risen by as much as 35% over the last week in Kabul, according to residents. Streets in the capital are largely empty as most banks, pharmacies and drugstores have closed, in contrast to the chaotic scenes at the international airport as the U.S. and other nations race to evacuate citizens and vulnerable Afghans . . .

Banks shut down soon after the militants took control and ATMs have been steadily running out of cash since then. The Afghani hit a record low last week.

With no cash at hand — and aid no longer flowing in — can the country pay for what it needs out of the money it makes from exports? In a word, no, and not even heroin, opium, and methamphetamine can fill the gap.

Writing in the Financial Times on Tuesday, Ajmal Ahmady:

Some have minimised the economic issue by writing that Taliban revenues from illegal mining, opium production or trade routes are large… Taliban revenues from such sources could be considered relatively large when only running an insurgency campaign. They are wholly inadequate to operate a functional government . . .

Alan Cole for Full Stack Economics:

Trade will be a particular source of difficulty. The last IMF report on the country prior to the collapse of the government counted imports at about $7 billion annually, a huge fraction of Afghanistan’s $19 billion GDP. Imports exceeded exports by about a factor of five. While that high level of imports was sustainable under the unusual circumstances of the U.S. presence, it won’t be sustainable going forward.

So on top of its other problems, Afghanistan will need to balance its trade deficit, a deeply painful process that will, one way or another, reduce the number of imports available to Afghan civilians. Given that its currency reserves have been frozen to prevent the Taliban from accessing them, it will need to balance its trade deficit quickly, without any adjustment period.

This will mean significant hardship for ordinary Afghans. Afghanistan has never been an especially wealthy country, but its citizens will now face severe shortages of imported products, from smartphones to medicines. The country is also heavily dependent on imported electricity and may have to drastically cut back its energy use . . .

Few if any high-tech products are manufactured domestically. Afghanistan’s limited digital infrastructure uses devices manufactured abroad, like smartphones or laptops. While most adults in Afghanistan report some ability to access a phone, and many have some ability to access the internet, these are very expensive investments for a typical Afghan⁠, whose money doesn’t go far internationally. However, Internet access is so useful that Afghans still invest in devices, and they are innovative at getting around slow connection speeds.

Another important import for Afghanistan is electricity. The mountainous country can produce electricity through a series of hydroelectric dams, and plenty of hydroelectric capacity remains untapped. However, the demand for electricity increased rapidly over the last fifteen years, and production has yet to catch up. Instead, it relies heavily on imported electricity from neighbors like Uzbekistan.

Finally, Afghanistan imports most of its medicine and medical supplies. Last year, Afghanistan’s public health minister, Ahmad Jawad Osmani, reportedly said that Afghanistan imports $400 to $600 million worth of medicine each year. For years, experts have lamented Afghanistan’s failure to develop its domestic capacity to manufacture pharmaceuticals. Now the nation could be forced to drastically scale back its use of medicine . . .

A major crunch is coming very soon. There are any many more people to look after than the last time the Taliban was running the country. Then the population stood at a little under 21 million. Now it is over 39 million.

As I mentioned in my earlier article:

Historical precedent, however, from early Soviet Russia to North Korea, would suggest that the West will help out in the event of a profound humanitarian crisis, even if the inescapable consequence will be to keep a despotism in power.

Even if help does arrive it may come too late to allow the Taliban to avoid serious trouble. That’s one reason why they will be eyeing those $9 billion in reserves as a quick way of heading off such problems for now.

And it won’t have escaped their notice that one of the most valuable bargaining chips that they currently hold are those thousands of Westerners — not to speak of the Afghans who have helped the NATO effort over the years. They are trapped in different locations all over Afghanistan with fewer and fewer options of getting out as every day goes by.