As the Taliban seizes control of Afghanistan, the macroeconomic outlook for the country is rapidly worsening.
On Tuesday, the USD/AFN exchange rate increased rapidly from 80 to 86, after briefly touching 100. However, the outlook for Afghanistan’s Afghani (AFN) is much worse than even those numbers show.
The Central Bank of Afghanistan (or Da Afghanistan Bank – DAB) holds about $10.0 billion in international reserves. This includes foreign currency, U.S. treasuries and gold.
These reserves previously helped stabilize the value of a country’s currency, just like gold did in the past.
However, much of these reserves are now inaccessible to the new regime. As Ajmal Ahmady, the acting governor of DAB explains, these reserves are not in Afghanistan.
In fact, most of that money is held in foreign accounts — including $7 billion held with the Federal Reserve.
As the Taliban are still designated as a terror organization, it is unlikely it will get that money back.
He estimates that the Taliban have access to only about 0.1-0.2% of Afghanistan’s total international reserves.
But that is not all. The International Monetary Fund (IMF) recently approved a $650 billion allocation in Special Drawing Rights (SDR), the IMF’s reserve currency. That amounted to $340 million.
Many questioned whether the IMF would honor the agreement. Soon, the IMF confirmed the speculation and stated that it will not allow the Taliban to access the SDRs.
From an IMF spokesperson on Afghanistan: pic.twitter.com/BRsUfAeKGa
— Sarah Ewall-Wice (@EwallWice) August 18, 2021
Total Dependence On Foreign Aid
This will lead to even more dire consequences for the economy since Afghanistan was heavily dependent on U.S. aid.
About 75% of government spending is financed by other governments and international organizations, according to World Bank.
This unsustainable model was supported by the U.S. taxpayers with the U.S. “investing” billions in the country.
It is unlikely that these grants will continue now that the Taliban is in charge. The Taliban will have to cut spending or find another way to create money.
Going The Way Of Zimbabwe?
That’s where new problems begin. If the new regime decides to print money to pay for salaries of government employees, a currency crisis is inevitable.
Without international reserves to back it up, the currency will fall rapidly. Prices will skyrocket, hurting the people the most.
As a result, many Afghans will want to convert the local currency to U.S. dollars. This will likely prompt the Taliban to implement capital controls to limit the inflow of dollars.
These methods won’t work, as the example of Zimbabwe shows.
Like Zimbabwe, Afghanistan will likely be heading for hyperinflation.