COVID-19 adds to Afghanistan’s ailing financial condition a prospect of future misery

by Hamayun Khan 22 May 2020

The COVID-19 doubles the financial crises across the globe with its far-reaching effects. The director of the Fiscal Affairs Department of International Monetary Fund (IMF) said that the COVID-19 was hitting economies, much worse than the 2008-09 financial crises. The economic crises gained momentum when the worldwide impacts of the contagion intensified, which encouraged the investors to drive about $90bn out of emerging markets – the substantial outflow recorded. Major financial events that happened around the world during the pandemic include Russia–Saudi Arabia oil price war after failing to reach an OPEC+ agreement. This resulted in a fall in crude oil prices and a stock market crash in March 2020. The effects upon financial markets are part of the COVID-19 recession and among the severe impacts of several macro factors on inflicted countries, including Afghanistan. Being a foreign aid-dependent country, Afghanistan remains highly disastrous, particularly during the outbreak of the pandemic. The state bears the brunt of the epidemic and its financial stability is threatened by several macro factors such as Political deadlock, Trade disputes with neighboring Pakistan, and the war against the Taliban.

The Political impasse between the incumbent President Dr. Ashraf Ghani and his chief political rival Dr. Abdullah Abdullah over the results of the presidential Elections pushed and pulled Afghanistan’s economy into chaos. The US secretary of state, Mike Pompeo, during his visit to Kabul warned, a further $ 1bn aid cut from the annual aid package of total $4.5bn in 2021. Pompeo suggested the aid could be resumed if the two political rivals changed their minds. On the contrary, President Ghani, who downplayed the USA decision of its aid cut on Afghanistan, assured no negative impact. Because he claimed that the Afghan Government would try to fill the vacuum with the help of alternative sources. In an address to a press conference, President Ghani also expressed hope that the Afghan Government could try to satisfy the US “through talks and negotiations.”

Nonetheless, several international analysts projected a prospect of financial misery because the country’s ailing economy is not able to withstand such a financial blow amidst growing fears of COVID-19, as that aid would represent about 5% of Afghanistan’s GDP. Besides, Matt Dearing, an assistant professor at National Defense University in Washington, expressed that the aid cut will pose grave financial risks for Afghanistan. Finally, on May 17, 2020, the power-sharing deal broke the months-long deadlock, which raised a ray of hope for unity and peace in the country.

Besides, the geopolitical and strategic location cost Afghanistan an economic and financial battle against the neighbors. Being landlocked appears to be one of the most detrimental susceptibilities for a poor state, especially with a clumsy economy controlled by maritime trade. Paul Collier, a well-known economist at Oxford University, pointed out that being landlocked with dreadful neighbors is one of the four core factors why states with a total population of 1 billion are facing off poverty issues. With the rising number of positive cases of COVID-19 patients, on March 16, Pakistan closed all its borders with neighboring countries, including Afghanistan, for two weeks. Hence, deterred Afghanistan’s transit – caused a financial loss for the country’s customs and duties. As a result, around 2000 containers were beached in the Turkham and Wesh-Chaman harbors, while another 6000 Afghan containers carrying essential items (e.g., medicines, and disinfectants, etc.) were bumped in Karachi’s port of Pakistan. However, only 100 containers per day would be allowed, 50 transit and 50 bilateral trade containers. Since Afghanistan’s exports are not permitted given the COVID-19 crises, only 50 containers involved in bilateral trade include merely exports from Pakistan. On average, 50 transit containers per day ship through Turkham into Afghanistan would take around 120 days for 6,000 containers.

This is not the first time Afghanistan has experienced such a dire obstruction of trade and transit. History of troubled trade and transit relations with Pakistan is as old as the mercurial bilateral political ties between the two countries. Recent events are redolent of transit trade blockages in the 1950s when Afghanistan had an alternative for expensive and longer routes through the Soviet Union to avoid the numbness of its economy. Some hope for improvement appeared when the two countries happened to work on the Afghanistan Pakistan Transit Trade Agreement (APTTA) in early March 2016, which was initially signed in October 2010. In 2010, when the agreement was signed, at that time, Afghanistan relied on Pakistan because of its trade routes, with limited bargaining power. The memorandum of understanding, scanning of goods, articles, and charges were unfair and utterly favored Pakistan.

Further, Afghanistan has been suffering from socio-economic instability with a retroactive financial system. Tangled in intricated complications, Afghanistan’s paralyzed economy and suffered financial infrastructure pave the way for several other issues, such as extreme poverty. The World Bank data indicates that over 39 percent of Afghans live in absolute poverty line with an increased rate of unemployment, estimated to be at least 30 percent. This is going to be because of the inevitable corruption; as per the 2018 corruption index reported by Transparency, International Afghanistan is the 172 corrupt nation of 175 countries, meaning the country holds 3rd position among the most corrupt countries in the world. Administrative corruption has appeared to be symptomized by the mismanagement of financial resources. The funds flow into the country are primarily handled and managed by those with deep expertise or influential people linked with the mafia.

Besides, the decades-long conflicts have devastated Afghanistan’s muddled infrastructure, including the health sector. Despite numerous attempts at improvement, Afghanistan still ranks 130th out of 195 on the Global Health Security Index. Incapacity in the health sector is not the only issue. Severe additional health issues such as diabetes, high blood pressure, tuberculosis, and malnourishment, as well as pervasive drug addiction and lung infections, double the Afghans’ vulnerability amidst COVID-19. The aid provided by international donors is either misallocated or corruptly manipulated, making the Afghans more prone to the prevailing crises.
Afghanistan’s heavy dependency on foreign aid, primarily in the United States, further augments the country’s financial challenges. According to the official reports, approximately 66 percent of Afghanistan’s aid budget in 2017-2018 was funded through international donors bailout. A large portion of that budget is spent explicitly on war against the Taliban insurgency. Given the ongoing socio-economic crises, Afghanistan needs further billions in aid after the peace deal is signed, says the World Bank. As projected by financial analysts, Afghanistan’s $11 billion in public expenditure each year is very different from its ordinary revenues, which is expected to reach $2.5 billion hardly. The 75 percent difference is covered by grants from outsiders, the US in particular. A new World Bank report, entitled “Financing Peace,” warns about the financial repercussions for Afghanistan after a settlement with the Taliban. The report also highlights that the country would still need a financial bailout at near current levels, as much as $7 billion to sustain it for several years. On the other hand, Several financial practitioners argue that the grants from international donors flown to Afghanistan have facilitated administrative corruption – basically caused by the misappropriation of the funds.

To sum up, the mismanagement of funds could push Afghanistan into an economic disaster – still, there is a need for financial assistance from international donors. The Afghan Government should encourage its international partners to continue their support for several years – until the Afghan Government restores its stagnated financial system. The international donors can be prompted through continuous talks and mutual agreement of all the sides. With a lasting ceasefire or peace between the Afghan Government and the Taliban, the funds driven by investment in the fight against the Taliban would be saved by the Afghan Government. Because 40% of Afghanistan’s national budget is allotted to the military. According to the figures, in 2018, Afghanistan’s military annual budget was $204bn, and the USA’s cost was $975bn from 2001 to 2019. To save the funds being overspent, there is a need for a lasting ceasefire, accelerating foreign direct investments (FDIs) in resilient infrastructure, and strengthening financial and governance systems. Furthermore, enhancing regulatory frameworks for improving the fund’s safety and structure for debt sustainability is vital for Afghanistan’s financial stability.