UN warns of ‘colossal’ collapse of Afghan banking system

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

An abrupt withdrawal of most foreign development support after the Taliban seized power on August 15 from the Western-backed Afghan government has pushed the economy into free fall, putting heavy pressure on the banking system it established. weekly withdrawal limits to stop a deposit run.

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

Finding a way to avoid a collapse is complicated by international and unilateral sanctions against the Taliban leaders.

“We need to find a way to make sure that if we support the banking sector, we will not support the Taliban,” Abdallah al Dardari, UNDP head in Afghanistan, told Reuters.

“We are in such a desperate situation that we have to think of all possible options and we have to think outside the box,” he said. “What used to be unthinkable three months ago has to become thinkable now.”

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Afghanistan’s banking system was already vulnerable before the Taliban came to power. But since then development aid has dried up, billions of dollars in Afghan assets have been frozen abroad, and the United Nations and aid groups are now scrambling to get enough cash at home.

‘Under the mattress’

UNDP proposals to save 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 options for late payment of loans.

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

The United Nations has repeatedly warned since the Taliban took over that Afghanistan’s economy is on the brink of collapse that would likely further fuel a refugee crisis. The UNDP said that if the banking system fails, it could take decades to rebuild.

The UNDP report said that with current trends and withdrawal restrictions, about 40% of Afghanistan’s deposit base will be lost by the end of the year. He said banks had stopped providing new credit and delinquent loans had nearly doubled to 57% in September since the end of 2020.

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

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Liquidity has also been a problem. Afghan banks relied heavily on physical shipments of US dollars, which have been halted. When it comes to Afghan local currency, al Dardari said that while there is around $ 4 billion in Afghanis in the economy, there is only around $ 500 million in circulation.

“The rest are sitting under the mattress or under the pillow because people are scared,” he said.

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

“Afghanistan imported about $ 7 billion in goods and products and services last year, mainly food … If there is no trade financing, the disruption is huge,” he said. “Without the banking system, none of this can happen.”


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