Pakistani-American Economist Atif Mian took to Twitter to talk about the economic situation in Afghanistan.
He started by calling the situation in Pakistan’s Western neighbor as “the mother of all ‘sudden stops’”, explaining how the economic collapse resulting from a sudden stop of foreign money that was financing a large trade deficit.
He said that the government was financing a trade deficit of around 25 per cent of GDP.
Dr. Mian then went on to explain what he meant by 25 per cent of GDP. He said, “It is about 3 times as large as the largest sudden stops in recent history such as East Asia, Southern Europe, Mexico etc.”
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He explained that around USD 9 billion of the reserves have been frozen. This is in line with the reports that all the Afghan Central Bank’s reserves were in the banks in New York and have been frozen. Dr. Mian wrote that this was the only credit line for the country.
Sudden stop and consequences
Atif Mian explained what happens when there is a sudden stop.
Afghanistan is experiencing the mother of all "sudden stops"
i.e. economic collapse resulting from a sudden stop of foreign money that was financing a large trade deficit
Afghanistan was financing a trade deficit of ~ 25% of GDP
— Atif Mian (@AtifRMian) September 2, 2021
He said, “in the absence of foreign money, the only way left for the economy to balance its imports is to contract, i.e. GDP falls so demand falls, so imports fall, and exchange rate devalues a lot too to cut imports.”
He added, “It is a very painful process,” commenting that it is this sudden stop that makes the Taliban’s second ascend to power very different from the first one.
It is worth mentioning that when the group came to power first, more than two decades ago, Afghanistan’s economy was self-subsisting without any particular reliance of foreign inflows to create local demand.
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This means that “ordinary Afghans did not experience as large a negative decline as they are going to experience now”, Dr. Mian said.
He lastly said that it is going to be a much tougher road for the Taliban this time. He is non alone in talking about Afghanistan’s Economic troubles.
Afghanistan’s economic status quo
With the international aid from IMF and World Bank paused, the government’s foreign assets in New York rendered accessible, the economic situation in the country is not going to get any better without support.
Similarly, the Leaders of the G7 said they would judge the Taliban by “their actions, not words.
Hans-Jakob Schindler, a German former diplomat who previously worked on Taliban-related sanctions said the economy in Afghanistan, told NBC on 25th August that there may be weeks or a “couple of months” before economic failure. He said: “Then the economy is in deep trouble.”
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Former Governor of the Central Bank Ajmal Ahmady said, “They never once talked about … what their economic policy (will be), what their macroeconomic stance is,” he said. “Those types of questions were never asked and … never considered.”
He added, “I’ve never heard of an economist on their team.”
Afghanistan in turmoil, with international aid money, which accounted for approximately 75% of public spending in the country, has dried up, including a $440 million installment due last week from the IMF. But that is far from the only challenge facing the country.
Another major source of funds, remittances from Afghans living and working abroad, amounted to an average of nearly $800 million per year before the Taliban took over. However, the two largest money transmitters operating in the country, Western Union and MoneyGram International, have both suspended operations in Afghanistan, cutting off that source of funds as well.
Similarly, many contractors such as International NGOs and various Intergovernmental Organizations in Afghanistan which employed many Afghans and were part of the economy as consumers have fled the country, leaving the country in economic despair as the sources which were drawing foreign inflows deplete.
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As Banks resume their operations, the citizens are fast to convert the fragile local currency into the US dollars, further devaluing the Afghani, which was being kept stable by the central bank by regular USD auctions.
All eyes currently are on Taliban’s formation of new government, which is expected soon, and if that government is inclusive as the group representatives have been claiming, there is a good chance that the government gains international legitimacy, and foreign aid resumes for the war-torn country.