UN urges urgent action to prop up Afghanistan’s banks

Nov 22, 2021: According to a report by Reuters, the United Nations (UN) on Monday called for immediate action to support Afghanistan’s banks, warning that failure to repay loans, low deposits and a lack of liquidity in cash could destroy the financial system within months.

In a three-page report on Afghanistan’s banking and financial system,  the United Nations Development Program (UNDP) said the economic cost of dismantling the banking system – and the consequent negative social impact – would be colossal.

The sudden withdrawal of most foreign development aid from Afghanistan’s Western-backed government since the Taliban took power on August 15 has put the economy in a precarious position, putting severe pressure on the banking system that has led to a collapse of deposits, putting a severe strain on the banking system which set weekly withdrawal limits to stop a run on deposits.

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

Finding a way out of the catastrophe is complicated by international and unilateral sanctions on Taliban leaders.

Afghanistan’s banking system was weak before the Taliban came to power. But since then, development aid has stalled, billions of dollars of Afghan assets abroad have been frozen, and the United Nations and aid groups are now struggling to raise enough money in the country.

UNDP’s proposals to protect 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.

Since the Taliban took power, the United Nations has repeatedly warned that Afghanistan’s economy is on the brink of collapse, which could exacerbate the refugee crisis. The UNDP said that if the banking system fails, it could take decades to rebuild. With current trends and withdrawal restrictions, about 40 percent of Afghanistan’s deposit base will be gone by the end of the year, the UNDP report said. It says banks have stopped extending new credit, and non-performing loans have almost doubled to 57% since the end of 2020 in September.

Liquidity has also been a problem. Afghan banks heavily relied on physical shipments of US dollars, which have stopped. When it comes to the local afghani currency, al Dardari said that while there is about $4 billion worth of afghanis in the economy, only about $500,000 worth is in circulation.

According to Abdallah al Dardari, head of UNDP in Afghanistan, “Afghanistan last year imported about $7 billion worth of goods and products and services, mostly foodstuff … If there is no trade finance the interruption is huge,” he said. “Without the banking system, none of this can happen.”

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