More than a year after the fall of the Afghan government, the humanitarian and economic situation in the country remains difficult, and the new regime faces a wide array of internal and external challenges. In July 2022, the World Bank ranked Afghanistan as one of the seven countries (next to Eritrea, Mauritania, Somalia, Sudan, Tajikistan and Yemen) facing the immense risk of overlapping food and debt crises. According to the US Special Inspector General for Afghanistan Reconstruction, around 18.9 million Afghans will potentially experience life-threatening hunger, with up to six million people likely to endure near-famine conditions.
The exodus of highly qualified people from the country continues as many attempt to escape the dire economic conditions and human rights violations. At the same time, evidence from a World Bank survey suggests that the overall security situation has improved markedly, and the new rulers managed, at least initially, to curb corruption levels.
The financial sector of Afghanistan faces tremendous challenges due to the ongoing challenging economic environment and the uncertainty associated with the currently progressing transformation of the financial sector to Shariah compliance. The latter, however, also presents opportunities to increase access to finance. As the population of Afghanistan is almost entirely Muslim, an exclusively Shariah compliant financial system can potentially increase acceptance of formal financial products among the population.
Review of 2022
2022 was a challenging year for the Afghan economy and financial sector. The regime remains subject to significant international sanctions, creating severe limitations for the economy and the country’s financial institutions. Liquidity issues in the financial system persist, and foreign assets are frozen. Companies and individuals continue to experience severe restrictions on payments and transfers, and banks struggle to recover a large proportion of their loan portfolios.
These developments jeopardize the progress made in strengthening the formal financial sector over the last 20 years and leave it in a weakened state. Anecdotal evidence indicates low trust levels in the formal financial sector and an increasing reliance of market players on unregulated informal service providers (eg Hawala networks). While the financial system previously featured both conventional and Islamic financial services, the new regime appears determined to convert the entire financial sector to Shariah compliance.
However, the decision-making, technical capabilities and coordination among regulatory bodies require urgent improvements to overcome bottlenecks and frustration among financial sector stakeholders. At present, comprehensive regulations to guide business activities and the conversion of pre-existing conventional structures are still not in place.
Despite the numerous challenges and economic instability, the financial sector has been able to restart some of its activities (including lending) in the second half of 2022, albeit with low volumes and a limited range of financial products.
Preview of 2023
Future predictions are never certain, even more so in volatile environments such as Afghanistan.
Improvements in particular areas, such as the security situation, cannot hide the fact that the unprecedented humanitarian and economic crisis is unlikely to be resolved soon. And unless the regime lives up to its initial promises on human rights, international isolation will not end. The financial sector will likely continue to experience considerable stress, including the potential exit of some market players over the coming year.
The regime will need to facilitate the finalization of new banking laws, rules and regulations, as well as the guiding principles for converting current assets and liabilities to Shariah compliance. In addition, capacity issues must be addressed to ensure the financial sector will not be stuck in a state of limbo, potentially exacerbating an already-challenging situation.
Conclusion
Even if the regime resolves the highlighted challenges in the near future, the problems underpinning the Afghan economy will not vanish overnight. The international donor community must not forget about the fate of Afghanistan by ensuring continued relief and support, moving away from pure humanitarian assistance to building long-term resilience through initiatives that aim to stabilize and strengthen the financial and private sectors.
Decisive and coordinated donor action is immediately needed to prevent the further deterioration of the financial sector and avoid adverse repercussions for private businesses. Afghanistan’s population cannot survive without continued international support, including a continuation of the building of a stable and robust financial sector.
Bernd Leidner is CEO of the Afghan Credit Guarantee Foundation. He can be contacted at [email protected].