Afghanistan’s financial system set to collapse in months as it recovers from worsening liquidity shortages and rising bad debts, a new report from the United Nations Program said on Monday. for development (UNDP).
The UN body called for urgent “swift and decisive” action, warning that the economic cost of a collapse and the resulting social fallout would be “colossal”.
Afghans have faced a serious cash shortage since the Taliban took control of Kabul in August, which led to international sanctions. The latter saw the country’s international reserves frozen and most foreign subsidies suspended. The liquidity crisis has forced the Taliban regime to cap weekly withdrawals from bank deposits.
Abdallah al Dardari, head of UNDP in Afghanistan, said the collapse of the financial system was slowing the rapidly declining economic activity in the country and could undermine international aid efforts, because âthe bank is also one of the most important connectors in the country for the outside world. “
“Without the banking sector, there is no humanitarian solution for Afghanistan,” he said in a statement. âDo we really want to see the Afghans completely isolated?
The banking system in “disarray”
Total banking system deposits in the country fell to 194 billion afghanis (1.8 billion euros, $ 2 billion) in September, from 268 billion afghanis at the end of 2020, according to the report. Deposits are expected to decline further to reach 165 billion afghanis by the end of 2021, a drop of around 40% from last year.
Bad debts have also increased in a relatively tight credit market. NPLs climbed to 57% in September, from around 30% at the end of 2020.
The current crisis has prompted banks to stop granting new loans, making the situation worse, especially for small businesses.
“In addition to declining economic activity, problems in the banking system will further reduce the likelihood of MSMEs surviving[Micro, Small & Medium Enterprises]which is essential for the Afghan economy and people, “the report says.[MicroSmall&MediumEnterprises)probabilityofsurvivalwhichiscriticalfortheAfghaneconomyandpeopleâthereportsaid[MicroSmall&MediumEnterprises)probabilityofsurvivalwhichiscriticalfortheAfghaneconomyandpeople”thereportsaid
The International Monetary Fund (IMF) expects the Afghan economy to contract by up to 30% this year.
Risking two decades of progress
The Afghan financial system, although still underdeveloped, had grown steadily since the ousting of the Taliban in 2001, when the banking sector practically collapsed.
The banking sector has 12 commercial lenders, including six private commercial banks, one private Islamic bank, three public banks and two branches of foreign banks. National private banks accounted for around two-thirds of all banking sector assets at the end of 2020.
The majority of the more than 400 bank branches are located in the capital Kabul, Herat and Mazar-e-Sharif.
The banking system is heavily dependent on the dollar, with around 60% of bank deposits made in foreign currencies.
As the Taliban ordered the banks to reopen after weeks of closure after the Taliban victory, lenders are struggling to find enough money to serve their customers as dollar inflows have stopped and fear Afghans will hide money for even worse times.
Al Dardari told Reuters news agency that of the $ 4 billion Afghanis in the economy, only around $ 500,000 is in circulation.
âThe rest are sitting under the mattress or under the pillow because people are afraid,â he said.
Prevent a collapse
Among the measures to prevent the collapse of the Afghan banking system, UNDP has proposed a deposit insurance system, adequate liquidity for the banking system to meet short and medium term needs and credit guarantees as well as options for late repayment of loans.
“The longer the delay in fully restoring the financial and banking systems, the longer the recovery period, due to the ensuing lack of confidence on the part of international markets,” the UNDP report said. “This erosion is difficult to repair and could take decades.”
Edited by Hardy Graupner