This article was first published by Investment Monitor on 4th October 2022.
There is a humanitarian crisis in Afghanistan and the US has the power to prevent it from worsening, it just chooses not to.
The humanitarian crisis that has unfolded in Afghanistan since the Taliban took control in mid-2021 is not the sole responsibility of the new authorities.
To understand the impact of ongoing Western sanctions on Afghan people, it is imperative to spell out the bleak economic picture that is Afghanistan’s economy today. Here are the basic numbers.
Although many billions of dollars were poured into the country between 2002 and 2021, half of the 38 million Afghans lived below the global poverty line, with 19 million people living on less than €1.50 ($1.48) a day during that period. To date, only the US has had the courage to put on record an analysis of the failure represented by the return of the Taliban to Kabul – after 20 years of massive military presence and financial support in the country. Other major donors need to follow the US example of transparency and report to their taxpayers on how their money was used in Afghanistan and how it led to the current disastrous situation.
Only a month after the regime change on 15 August 2021, the UN estimated that 97% of the Afghan population could be living in poverty by the end of 2022. Now, the International Committee of the Red Cross indicates that 70% of Afghan households can no longer meet their basic needs. Malnutrition has spread to large segments of the population with an estimated 22.8 million people facing severe to acute food insecurity. On 29 August, Martin Griffiths, emergency relief coordinator at the UN, declared that six million Afghans are at risk of starvation.
A politically orchestrated humanitarian crisis?
Several reasons are behind this dramatic situation. First, a recurrent drought over several years has undermined local agriculture. Second, the global increase in prices following the war in Ukraine. Last, the sudden halt in funding for international development aid after the Taliban’s takeover of Kabul. Aid had financed 75% of the Afghan government’s budget and represented 45% of the country’s gross domestic product. The abrupt ending of this aid upon the US withdrawal immediately led to a 40% contraction in the country’s economy and the sudden loss of employment for 500,000 people, a figure that is likely to rise to 900,000 in the second half of 2022.
However, the main cause of the current humanitarian catastrophe lies elsewhere. It is the combination of two decisions taken by the US and accepted by its allies. The first is the financial sanctions imposed on Afghanistan by Executive Order 13224 of the president of the US, dated 23 September 2001, which prohibits all financial transactions with persons and entities who are on the list of “specially designated nationals and blocked people”. The Taliban, as an entity, is on this list although not on the UN consolidated list, which includes only individuals belonging to the Taliban movement. The sanctions against the Taliban as an entity were not a problem before 15 August 2021, but since the Taliban now rules the country, any financial transactions with Afghanistan may be deemed to fall within the scope of Executive Order 13224 and therefore potentially breach US law.
In addition to these sanctions on financial transactions, US President Joe Biden, in his executive order 14064 of 11 February 2022, prohibited the Central Bank of Afghanistan from accessing its $7bn-worth of assets held in the US. Washington’s European allies have aligned themselves with the US on freezing Afghanistan’s central bank assets, with the $2.1bn reserves held in Europe also becoming inaccessible to the central bank.
Deprived of most of its reserves, the Central Bank of Afghanistan can no longer play its essential role of supporting the Afghan economy during this critical period where the economy is tanking. The central bank today has almost no means left to implement macroeconomic policies essential to the functioning of the Afghan economy, including the stabilisation of the local currency, the afghani, the stabilisation of prices and support for foreign trade.
The combination of sanctions on financial transactions and the freezing of central bank assets was intended to persuade the Taliban to accept the conditions set out in UN Security Council Resolution 2593 of 30 August 2021, but instead of persuading the Taliban to accept these conditions, this combination of financially targeted sanctions has brought the entire economy of the country to its knees, with the Afghan population as the victim.
The consequences of these sanctions appeared very quickly with inflation in the prices of commodities affecting a population already weakened by a high poverty rate and brutal mass unemployment. Over the past 12 months, the price of wheat flour has increased by up to 68%, cooking oil by 55%, fertiliser by 107% and diesel by 93%. The increase in poverty, food insecurity, the risk of famine and the collapse of the health system have become settled parts of the Afghan landscape.
Humanitarian aid is not a substitute for a functioning economy
Aware of the worsening humanitarian situation in Afghanistan, the UN launched an appeal for funds at the beginning of 2022, amounting to $4.4bn. It is one of the largest appeals ever launched. To date, commitments from donor countries cover just over 42% of the funds requested.
The countries contributing the bulk of humanitarian aid are the same as those applying the sanctions that prevent the Afghan economy from functioning normally, forcing Afghans to rely on aid. Humanitarian aid, even in massive quantities, cannot replace the proper functioning of a country’s economy. It is not logical, which is why, on 10 August 2022, more than 70 world-renowned economists, including Nobel Prize winner Joseph Stiglitz, called on President Biden to allow the Central Bank of Afghanistan to access its reserves.
Even the humanitarian aid financed by donor countries is itself hampered by the sanctions they have imposed. It is now almost impossible for a European humanitarian organisation to transfer funds for its programmes in Afghanistan using official bank transfers. Even if on paper the sanctions provide an exemption for financial transfers for humanitarian purposes, the international banking system will not take the risk of being accused of violating these sanctions and therefore refuses any bank transfer to Afghanistan.
Humanitarian organisations are therefore reduced to using alternative solutions presenting both physical and legal risks. The first is to transfer funds in cash with their expatriates who travel to Afghanistan. Admittedly, this only concerns relatively modest sums, but such a practice presents obvious security risks. The second solution is to use the hawala system. Dating from the 8th century in South Asia, it is now widespread throughout the world, particularly within Muslim communities. Money is transferred without being physically moved.
The money is given to a hawaladar in one country and is collected (minus a commission) in another. The system is widely used by migrant workers from South Asia in the Gulf countries to send money to their families. This system, based on trust between the client and the hawaladar, seems perfect, except that it is illegal in the US and Europe. Indeed, it is also used by traffickers, and even for the financing of terrorist activities.
Such a situation confronts the European humanitarian organisations intervening in Afghanistan with a real dilemma: transferring the money necessary for their programmes using the hawala system with a fiduciary risk or simply stopping their programmes. Some European donors are yet to give their consent for the use of the hawala system, thus jeopardising the humanitarian programmes they finance. This ambiguous attitude illustrates the current paradox and contradictions of European institutional donors who, on the one hand, finance European non-governmental organisations (NGOs), and on the other, turn a blind eye to the use by these same NGOs of the hawala system.
Poor use of European public funds and counterproductive sanctions
With indiscriminate sanctions destroying the Afghan economy and causing a major humanitarian crisis, trying to mitigate the effects by funding humanitarian programmes seems a poor use of European taxpayers’ money. Hundreds of millions of euros from the European budget and the national budgets of member states of the EU are allocated to humanitarian programmes in Afghanistan – but they cannot replace a functioning economy.
The sanctions have also proved counterproductive, if measured against the objectives of UN resolution 2593 of 30 August 2021, which called for the establishment of an “inclusive political agreement” with “the full, equal and meaningful participation of women” and recognised “the importance of combating terrorism in Afghanistan”.
The unprecedented humanitarian crisis primarily affects women (and girls). They are the first victims of the lack of food at the household level because men and boys will typically be served first. They are the main victims of the collapse of the health system, of increased levels of domestic violence due to the disastrous economic situation, and it is the girls who are married at an increasingly young age, because the dowries will temporarily allow their families to survive.
While there was a brief opportunity, after the takeover in August 2021, for dialogue between the West and the Taliban, the imposition of sanctions quickly reinforced the most radical elements within the Taliban movement who seized on the pretext of these sanctions to impose their views. This situation persists today as the obstinacy of a small conservative group defies the world by preventing girls from accessing secondary education.
As all counterterrorism experts would attest, a country whose population is miserable, ostracised from the international community, is a country where frustration and anger lead young people without hope, without a future, towards extremist or even terrorist movements. Today, a predominantly young population (63.7% under 25), where anti-Western sentiment is widely present in some communities, is a fertile ground for recruitment by terrorist organisations.
The privatisation of the Central Bank of Afghanistan’s reserves
Following months of internal discussions, on 14 September, the US announced the creation of a trust fund in the form of a foundation in Switzerland, the ‘Afghan Fund’, endowed with the $3.5bn from the reserves of the Central Bank of Afghanistan not ‘sequestered’ by Biden’s executive order of 11 February 2022, thus putting these funds, in theory, beyond the reach of US justice. This Afghan Fund has an account at the Bank of International Settlements and is managed by a board of directors made up of a US diplomat, a Swiss senior official and two Afghan personalities. There are ongoing discussions with other partners, in particular the Europeans, to join the board.
The statement from the US State Department indicates that the funds should be used, in the short term, to promote monetary and macroeconomic stability. In the long term, unused funds will be preserved to be returned to the Central Bank of Afghanistan. However, the US (and Switzerland) place three conditions on the central bank for the return of these funds: first, its independence; second, adequate anti-money laundering and countering-the-financing-of-terrorism controls; and third, take onboard a reputable third-party monitor.
The urgency of a gradual unfreezing of Afghanistan’s reserves
The current isolation of Afghanistan is due, in part, to a crisis of confidence in the international banking system. This could be overcome if donor countries, the US first, using the new Afghan Fund, agree to a pilot initiative authorising the Central Bank of Afghanistan to access part of its reserves in exchange for a strict control of their use by an independent and external third party, as has been proposed on earlier occasions. If the experience is positive with this pilot phase, further reserves could be released, still under external and independent oversight.
Such a gradual approach would, hopefully, restore confidence in the central bank, which should reduce the reluctance of the international banking system to work with Afghanistan. This is an essential first step towards allowing the Afghan economy to emerge from the current crisis and to create jobs for the millions of people who are currently victims of geopolitical posturing.
In the 20 years of Western involvement in Afghanistan, donor countries spent billions of dollars and euros of which significant portions were diverted into private pockets. Today, the same countries must allow the country’s central bank to access part of its reserves. The Afghan people will not be able to play their role of influencing the policies of the current authorities if their daily concern is simply to survive. Failure to quickly unfreeze the assets of the Central Bank is morally reprehensible and politically irresponsible.
Jean-François Cautain is a former senior official of the EU. He was ambassador to Cambodia and recently to Pakistan. He worked in Afghanistan as a humanitarian worker during several periods between 1986 and 1999 and for the EU between 2001 and 2005. He currently lives in Kabul.
Editing by Sebastian Shehadi, political editor at Investment Monitor.