The economic implications of the Taliban takeover

While there has already been significant fallout for Afghanistan’s economy after the Taliban’s August 15 overthrow of the previous US-backed government, there will be other serious ramifications that will affect the Afghan people going forward.

Earlier this week, under pressure from the Biden administration, the International Monetary Fund announced it will withhold US$450 million in emergency funds that were scheduled to be provided to Afghanistan due to a “lack of clarity” regarding whether the Taliban should be recognised as the official government in Kabul.

Additionally, on August 18 the Biden administration froze US$9.5 billion in assets belonging to Da Afghanistan Bank, with most of those funds being held by the Federal Reserve Bank of New York , thereby blocking the Taliban from accessing the money. The Taliban’s designation by the US as being on the list of “Specially Designated Nationals” places it under financial sanctions, making it ineligible to acquire the funds. 

Although the denial of the US$450 million and US$9.5 billion to the Taliban is the right policy move, it will undoubtedly set back Afghanistan’s economy and affect Afghan citizens severely. According to Ajmal Ahmady, Afghanistan’s former central bank governor who fled the country in recent days, the blocking of these funds will contribute to poverty, severe inflation and a possible collapse of the afghani, the country’s currency.

The agricultural sector will also suffer damage resulting from the Taliban takeover. World Bank figures show that approximately 70 per cent of Afghan nationals live and are employed on farms and 61 per cent of all families work in agriculture. However, water insecurity has deprived many of the opportunity to provide for their families in farming and this had led to scores of young men joining the Taliban to make ends meet. 

Compounding the problem, the Taliban are likely to continue their history of abusing Afghanistan’s informal water management institutions, the “mirabs”, by redirecting water from farms towards the growing of poppy, the plant species from which opium is produced. This has resulted in a reduced production of food, contributing to food insecurity, while also allowing for bumper opium harvests that have turned Afghanistan into a drug trafficking center and the world’s largest producer of opium.

One area that holds promise for Afghanistan’s economy is the country’s estimated US$3 trillion in mineral wealth. Afghanistan sits on vast untapped mineral deposits of uranium, sulphur, gold, coal, lead, gemstones, bauxite, chromium, talc, oil, natural gas, zinc, marble, travertine, gypsum, iron ore and copper.

The country also has significant reserves of lithium, the rare earth element used in the production of renewable batteries for the world’s burgeoning electric vehicle industry. 

Analysts assert that China will seek to engage the Taliban with mining investments to extract these mineral resources. As part of this collaboration, Beijing would provide the Taliban with capital for badly needed infrastructure projects under the auspices of China’s Belt and Road Initiative infrastructure development strategy.

Yet, despite the promise of its considerable mineral wealth reserves, Afghanistan’s economic prospects are likely to be held back and beset with problems relating to its endemic corruption. Over a period of twenty years following the Taliban’s fall in 2001, the Afghan government was hindered by rampant corruption as well as by an economy plagued by bribes and extortion in which the political elite always seemed to take their cut on foreign-funded infrastructure projects and aid. In 2020, Transparency International ranked Afghanistan 165thout of 179 countries in their annual Corruption Perceptions Index. 

As of now, there is no indication that the Taliban will make efforts towards weeding out this corruption.

Yet, perhaps the biggest crisis to befall Afghanistan’s economy will be the prospect of a sharp reduction in foreign aid in the coming months and beyond.

Three-quarters of Afghanistan’s national budget comes from overseas donations, and last year international donors had pledged US$12 billion to Afghanistan. This civilian aid will likely be reduced now that the Taliban have taken over the country.

The first indication of this came from Berlin. On August 12, German Foreign Minister Heiko Mass announced that Germany would cease giving aid to Afghanistan now that the Taliban have overtaken the country by force.

Finnish and Swedish government representatives later made similar announcements about the suspension of aid.

These cancellations and suspensions of international aid are ominous developments for Afghanistan’s economy given its heavy reliance on overseas funding.

Over the medium to longer term, a potential saving grace for the Afghan economy may be direct assistance from China in the form of aid and construction. To this effect, on August 19 Taliban spokesman Suhail Shaheen told Chinese state media that Beijing can “play a very big role in the rebuilding, rehabilitation, reconstruction of Afghanistan".

As with most violent overthrows of governments, it will be ordinary people, households and the poor who will bear the worst of the financial fallout from the recent Taliban takeover. Tragically, based on what we know now, the Afghan people are in a worse spot today and many will suffer severe economic hardships for the foreseeable future.

Ted Gover, Ph.D. (@TedGover), is a member of the faculty at Claremont Graduate University in Los Angeles. He contributed this article to The Jordan Times