A local expert provides his thoughts on the Afghan crisis, which will have investors rapidly reviewing their entry and exit plans.
Taliban fighters stand outside the Interior Ministry in Kabul. Photo: Reuters
That Afghanistan was one of the highest-risk countries globally was well known.
The democratic transition and the stability provided by foreign assistance saw its risks gradually subside until 2014. Strong economic growth supported by agricultural-sector productivity and overseas aid improved the picture, until the foreign troop withdrawal.
Growth slowed initially, before political uncertainty, insecurity and Covid-19 precipitated an economic decline, sending poverty soaring.
Corruption – one of the many low-scoring political risk factors for Afghanistan in Euromoney’s survey – caused much foreign aid to be diverted and less government investment in infrastructure.
This will negatively impact the citizens’ trust in banks and their sustainability in the future- Zia Shefaie, Kateb University
Domestically, Afghans who could invest did so in Turkey and the UAE, while foreign investors shied away.
Consequently, on a total risk score of 30.9 out of a possible 100 points, Afghanistan was languishing in tier five (the highest risk category), ranking 149th out of 174 countries on Euromoney’s global risk scoreboard.
Nestled between Cambodia and Congo Republic – among the world’s gravest risks – the country’s abject rating was justified in the advent of the events that led to the government ceding control of Kabul to the Taliban.
The question now is what’s next?
Euromoney survey contributor Zia Shefaie is the vice-chancellor at Kateb University in Kabul. Under difficult working conditions, and at considerable personal risk, he provided his thoughts on how the crisis will affect investors in Afghanistan and neighbouring countries.
Shefaie pointed out that the economy has been propped-up to date by the banking sector, but with a run on deposits ensuing during the crisis, the banks have run out of liquidity, which also means they have stopped providing services.
The currency was also heavily devalued even before the Taliban occupied the country.
“This will negatively impact the citizens’ trust in banks and their sustainability in the future,” he says. “If banks open their branches shortly, again bank runs will occur.”
Much of it is also conventional banking, whereas the Taliban will want Islamic banking products provided. This will take time, with one problem being the lack of experts to run key systems now that the brain drain is only increasing.
Unsurprisingly, scores for all of Afghanistan’s economic risk indicators were extremely low in the advent of the takeover. Not one risk factor was scoring more than 3.5 out of 10 and they were all downgraded in the first half of this year.
This even took account of the prospect of economic growth this year, with the IMF predicting a 4% real-terms rise for GDP, which will now be scratched.
Part of the problem in any event had stemmed from economic policies that relied on imports and foreign aid. The country had simply run out of money and could not pay government employees for the past four months.
It is no wonder under-fed soldiers with no foreign backing were so unprepared to fight.
The situation is unlikely to improve, according to Shefaie. The Taliban are largely illiterate fighters without the skills to run the government administration, worsened by what will be a decline in the participation of women.
With no fiscal space, the country will remain dependent on foreign aid, although its backers will undoubtedly change, with the west unprepared to provide any more funding.
The IMF has just announced it will suspend the $370 million of special economic recovery assistance it was due to disburse on Monday, with access to special drawing rights also blocked. The Taliban may well resort again to the cultivation of illicit opium crops, contributing to the heroin trade.
The currency will moreover continue to lose value. This will boost the prices of imported products and therefore contribute to an inflation problem that has seen average rates rising from 0.6% in 2018, to 2.3% in 2019 and 5.6% in 2020, but will worsen without regulation.
More experts will flee the country by whatever means possible, while hidden unemployment will rise as government employees will fear going into offices, thus receiving salaries without engaging in any productive work.
Shefaie does not expect the internal strife to have any impact on Pakistan, ranking 119th in Euromoney’s risk survey, which has registered some improvement this year and on a 10-year trend basis.
Pakistan is a high, but not highest-risk, tier-four option on a par with Sri Lanka and Tunisia, and he does not expect the Afghan crisis to have any effect on the country’s involvement in China’s Belt and Road Initiative.
China is concerned about insurgent groups in Afghanistan. It will maintain relations with Pakistan and in turn it is expected to have a cordial relationship with the Taliban after only last month inviting the Taliban’s representatives to China.
China will almost certainly utilize the opportunity to increase its influence in the region, says Shefaie.
By contrast, India cooperated with the civilian government in Afghanistan and invested in the infrastructure. It will be concerned by the Taliban taking over and empowered by Pakistan, despite still attempting to have some relations.
In the meantime, whatever happens, Shefaie is hunkering down. He is also looking to find a way out. Euromoney can only wish him the best.