The UN has warned of a “colossal” catastrophe in Afghanistan’s banking system

Author: Michelle Nichols

UNITED NATIONS (Reuters) – The United Nations on Monday called for urgent action to boost banks in Afghanistan, warning that a rise in people unable to repay loans could lead to a collapse in the financial system within a month.

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

The sudden withdrawal of foreign development aid from the Taliban on August 15 by the Taliban has led to a free fall in the economy and put a strain on the banking system as it sets weekly withdrawal limits to stop the leakage of deposits.

“Afghanistan’s financial and banking payment systems are in turmoil. The problem managed by banks needs to be resolved quickly to improve Afghanistan’s limited production capacity and prevent the banking system from collapsing,” the UNDP report said.

Finding a way to prevent the collapse is hampered by international and unilateral sanctions against Taliban leaders.

“We need to find a way to ensure that if we help the banking sector, we will not support the Taliban,” Afghan UNDP leader Abdallah al Dardari told Reuters.

“We’re in such a dire situation where we have to think about all the options and think from the outside,” he said. “What was unthinkable three months ago must now become unthinkable.”

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

The United States is working with the United Nations, UNDP and other international organizations and countries to “provide liquidity, to integrate, to find ways for the people of Afghanistan to take advantage of international aid. To enter the Taliban coffers,” said State Department spokesman Ned Price.

‘Under the mattress’

UNDP’s proposals to save the banking system include measures to ensure an adequate liquidity scheme for deposits, short- and medium-term needs, as well as options for securing credit guarantees and repaying loans.

“Coordination with the International Financial Institutions, with extensive experience in the financial system in Afghanistan, would be key 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 that since the Taliban assumed that the Afghan economy is on the verge of collapse, it is likely to push the refugee crisis even further. The UNDP said that if the banking system fails, it would take several decades to rebuild.

The UNDP report said that with current trends and withdrawal restrictions, about 40% of Afghanistan’s deposit base will be lost by the end of the year. He said the banks had stopped giving new credit, and that fatless loans had almost doubled in September, from the end of 2020 to 57%.

“If that rate continues to be in non-performing loans, banks may not be able to survive for the next six months. And I’m optimistic,” Al Dardari said.

Liquidity has also been an issue. Banks in Afghanistan relied on physical shipments of U.S. dollars, which were halted. As for the local Afghan currency, al Dardari said that although the economy is worth about $ 4 billion to Afghans, there are only about $ 500 billion in circulation.

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

As the United Nations seeks to prevent famine in Afghanistan, al Dardari also warned of the consequences of the collapse of banks for trade financing.

“Afghanistan last year imported about $ 7 billion worth of goods and products and services, mostly food … If there is no trade financing, there is a big disruption,” he said. “Without a banking system, this cannot happen.”