The United Nations warns of a “huge” collapse of the 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 Programme (UNDP) stated that the economic costs of the banking system’s collapse — and the negative social impact that followed — “will Is huge”.

After the Taliban seized power from the Western-backed Afghan government on August 15th, most foreign development support suddenly withdrew, causing the economy to fall into free fall and putting severe pressure on the banking system. The banking system set a weekly withdrawal limit. To prevent a run on deposits.

“Afghanistan’s financial and bank payment systems are in a state of chaos. The bank run problem must be resolved quickly to improve Afghanistan’s limited production capacity and prevent the banking system from collapsing,” the United Nations Development Program report said.

With international and unilateral sanctions on Taliban leaders, finding ways to avoid collapse has become complicated.

“We need to find a way to ensure that if we support the banking industry, we will not support the Taliban,” Abdallah al Dardari, head of the United Nations Development Programme in Afghanistan, told Reuters.

“We are in such a terrible situation, we need to consider all possible options, we have to think outside the box,” he said. “Things that were unimaginable three months ago are now imaginable.”

The former Governor of the Central Bank of Afghanistan predicts that the Taliban will face a bleak economic era in the future

Before the Taliban came to power, Afghanistan’s banking system was already very fragile. But since then, development aid has dried up, billions of dollars of Afghan assets have been frozen abroad, and the United Nations and aid groups are now struggling to obtain enough cash from the country.

‘Under the mattress’

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

When referring to the World Bank and the International Monetary Fund in its report, UNDP said: “Coordination with international financial institutions and their extensive experience in the Afghan financial system are critical to this process.”

Since the Taliban took over, the United Nations has repeatedly warned that the Afghan economy is on the verge of collapse, which may further exacerbate the refugee crisis. UNDP stated that if the banking system fails, it may take decades to rebuild.

According to the UNDP report, in accordance with current trends and withdrawal restrictions, Afghanistan will lose about 40% of its deposit base by the end of this year. It stated that banks have stopped providing new credit, and starting from the end of 2020, non-performing loans have almost doubled in September to 57%.

“If this non-performing loan rate continues, banks may not have a chance of survival in the next six months. I am optimistic,” al Dardari said.

The Taliban hold $1 trillion worth of minerals that the world badly needs

Liquidity is also an issue. Afghan banks rely heavily on the stopped physical transportation of U.S. dollars. When talking about the local currency of Afghanistan, Al Daddari said that although there are about US$4 billion worth of Afghanis in the economy, only about US$500 million is in circulation.

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

While the United Nations sought to avoid a famine in Afghanistan, Aldadari also warned about the consequences of the collapse of the banking industry on trade finance.

“Afghanistan imported about 7 billion U.S. dollars worth of goods, products and services last year, mainly food… Without trade financing, the disruption would be huge,” he said. “Without a banking system, none of this would happen.”

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