U.N. warns of ‘colossal’ collapse of Afghan banking system

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In a three-page report on Afghanistan’s banking and financial system seen by Reuters, the United Nations Development Program (UNDP) said the economic cost of a banking system collapse – and the resulting negative social impact – “would be enormous.”

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The sudden withdrawal of most foreign development support from Afghanistan’s western-backed government after the Taliban seized power on August 15 has sent the economy into freefall, putting a severe strain on the banking system, which has caused a run on deposits. To stop the weekly withdrawal limit is set.

“Afghanistan’s financial and bank payment systems are in disarray. Bank-driven problems must be resolved quickly to improve Afghanistan’s limited production capacity and avoid collapse of the banking system,” the UNDP report said.

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Finding a way to prevent a collapse is complicated by international and unilateral sanctions on Taliban leaders.

“We need to find a way to make sure that if we support the banking sector, we are not backing the Taliban,” Abdullah al-Dardari, UNDP chief in Afghanistan, told Reuters.

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“We are in such a dire situation that we need to think of all possible options and we have to think out-of-the-box,” he said. “What used to be unimaginable three months ago is now worth thinking about.”

Afghanistan’s banking system was weak even before the Taliban came to power. But development aid has since ended, Afghanistan has billions of dollars in assets overseas, and the United Nations and aid groups are now struggling to get enough cash into the country.

‘under the mattress’

UNDP’s proposals to insulate the banking system include a deposit insurance scheme, measures to ensure adequate liquidity for short- and medium-term needs, as well as credit guarantees and loan repayment delay options.

“Coordination with international financial institutions, with their extensive experience of the Afghan financial system, will be critical to this process,” the UNDP said in its report, citing the World Bank and the International Monetary Fund.

Since the Taliban took power, the United Nations has repeatedly warned that Afghanistan’s economy is on the verge of collapse, which could exacerbate the refugee crisis. UNDP said that if the banking system fails, it could take decades to rebuild.

The UNDP report states that with current trends and withdrawal restrictions, about 40% of Afghanistan’s deposit base will be exhausted by the end of the year. It said banks had stopped making new loans, and that non-performing loans had nearly doubled from the end of 2020 to 57% in September.

“If this rate of non-performing loans continues, banks may not have a chance to survive in the next six months. And I am optimistic,” Al Dardari said.

The Taliban are sitting on $1 trillion worth of minerals the world desperately needs

Liquidity has also been a problem. Afghan banks relied heavily on physical shipments of US dollars, which have stalled. When it comes to the local Afghani currency, al-Dardari said that there are approximately $4 billion worth of Afghans in the economy, while only $500 million are in circulation.

“The rest are sitting under mattresses or under pillows because people are scared,” he said.

As the United Nations seeks to avert famine in Afghanistan, al-Dardari also warned of the consequences of a banking collapse for trade finance.

“Afghanistan imported nearly $7 billion worth of goods and products and services last year, mostly food items … If there is no trade finance the blockage is huge,” he said. “Without the banking system, it cannot be anything.”

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Credit : www.cnn.com

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