Afghanistan (Washington Insider Magazine) -Monday’s United Nations call for urgent action to support Afghanistan’s banks. They warn that an increase in Afghans who cannot repay loans, lower deposits, and a cash liquidity crisis could lead to the financial system collapsing within months.
The U.N. Development Programme stated, in a report of three pages on Afghanistan’s financial system and banking, that “the economic impact of a collapsed banking system – and the consequent negative social effect – would be “colossal.”
The abrupt withdrawal of all foreign development assistance after the Taliban took power in Afghanistan on August 15th from the Western-backed government has caused the economy to plunge into chaos. This has put a strain on the banking system, which established weekly withdrawal limits to prevent a bank run.
Afghanistan’s banking and financial systems are in total chaos. To improve Afghanistan’s limited production capabilities and to prevent the bank system from collapsing, the bank-run issue must be addressed quickly.
International sanctions against Taliban leaders make it difficult to find a way to avoid a collapse.
“We must find a way that we can ensure that if support the banking sector, we do not support the Taliban,” Abdallah al Dardari (head of UNDP in Afghanistan), told Reuters.
He said, “We are in such dire circumstances that we need to consider all options and we must think outside of the box.” “What was three months ago impossible has become possible now.”
Before the Taliban took power, Afghanistan’s banking system had been already in danger. However, development aid has dried up and billions of dollars worth of assets in Afghanistan and have been frozen overseas. The United Nations and other aid groups are now struggling for cash to enter the country.
The UNDP proposes to save the banking sector by creating a deposit insurance program. This program will work to provide liquidity to meet short- and long-term financial needs. Credit guarantees are also included.
UNDP stated in its report that coordination with the International Financial Institutions (with their vast experience of Afghanistan’s financial system) would be crucial to this process.
Since the Taliban took control, the United Nations has warned up to the fact that Afghanistan’s economy was at risk of collapse. This would likely fuel the refugee crisis. UNDP stated that it could take many decades to rebuild the banking system if it fails.
According to the UNDP, “40% of Afghanistan’s deposit stock will disappear by the end of this year due to withdrawal restrictions and current trends.” According to the UNDP report, banks stopped issuing new credit and non-performing loans nearly doubled to 57% by September 2020.”
“Banks may not be able to survive if the rate of non-performing loans continues,” al Dardari said. And I am being optimistic,” al Dardari said.