Afghanistan's foreign assets remain frozen as people continue to suffer

It has been more almost two years since a special fund was created to disburse Afghanistan's foreign assets but disagreement over its use and persisting US concern over money laundering have hindered the release of $3.5 billion.

Officials directly involved in discussions say that it is essential to immediately release the money to stabilise Afghanistan’s faltering banking system, which is important to kickstart economic activity.

When Taliban fighters rode into Kabul in August 2021, Afghanistan had $7 billion in foreign currency reserves with the Federal Reserve Bank of New York. The assets, which belong to the people of Afghanistan, were frozen.

In 2022, around $3.5 billion was transferred to a Swiss-based Afghan Fund, which will decide on how to disburse the money to the Da Afghanistan Bank (DAB), Afghanistan’s central bank. The remaining amount is being held up in lawsuits against the Taliban brought by families of victims of the September 11, 2001, attacks in the United States.

The board of the fund includes Dr. Anwar ul-Haq Ahady, Dr. Shah Mehrabi, Dr. Jay Shambaugh, and Ambassador Alexandra Baumann. The US State Department picked the two Afghan nationals on the board.

“All four trustees have been in the office for over a year now and they very rarely have a unified vote on disbursing the funds. The four of them can only make decisions on that trust fund assets if there's a unanimous vote,” a source close to the discussions told TRT World.

“But one thing all four trustees agree on is that they do not want to touch the principal of the $3.5 billion and instead start discussing the use of the interest earnings and the trust principle. The trustees now want to see how they can use that interest to help them, the poorest of Afghanistan people.”

Accrued interest on the $3.5 billion is estimated to be around $200 million, which members say could be released immediately. But they still haven’t agreed on how to do that.

Afghanistan had roughly $9 billion in reserves held in banks across the US and Europe, which were immediately frozen when the Western-backed Afghan government fell to the Taliban.

About $500 million belonging to private account holders in Afghan banks was also frozen.

Managed by DAB, these foreign funds were traditionally used to maintain currency stability, finance imports, and ensure the banking system had enough cash to operate smoothly.

Concerns about DAB's leadership, money laundering and terror financing are at the heart of a standoff over the Taliban's demand for the return of Afghanistan’s foreign assets.

“The US government, specifically the Treasury Department, which controls those frozen assets, seems to have made a decision that they do need to return the funds and they'd like to do it as soon as possible. But their biggest problem is that they don't have a methodology that they're comfortable with which would ensure anti-money laundering and counter-terror financing (concerns are being taken care of)”, a source said.

A looming crisis

Afghanistan is facing a severe humanitarian and economic crisis, which some analysts believe has been exacerbated by the delay in release of foreign currency reserves, which Da Afghanistan Bank needs to carry out essential central banking functions like maintaining stable exchange rates and prices.

A CEO of a private bank in Afghanistan who wishes to remain anonymous told TRT World that members of private banks in the country are also in talks with the Afghan Fund's board of trustees, urging them to prioritise stabilising prices and ensuring adequate liquidity for banks, given the risk posed to the entire financial system due to diminishing foreign aid to Afghanistan.

“The first priority is the flow of physical cash transfer. The banking sector is now struggling to manage the liquidity in its day-to-day operations. I think this is the most important thing,” he told TRT World.

“And then the second priority is to provide revival funds to the individual banks. This is how this fund can really support the economy and the social situation.”

The delay in release of Afghanistan’s foreign assets exacerbates poor economic conditions in Afghanistan, analysts say.

Banks play a crucial role in lending money to businesses and individuals who want to invest in capital or trade. And this can be done only when there’s enough liquidity in the banking system.

Analysts also warn against spending Afghanistan's central bank assets directly on meeting humanitarian needs as that will quickly drain the reserves.

“Generally, most everyone acknowledges that Afghanistan’s humanitarian crisis is really an economic one, and that the best way to sustainably improve people’s lives is to improve the economy, not just feed and shelter them,” Paul Fishstein, a non-resident fellow at Center on International Cooperation at New York University, told TRT World.

“Unfortunately, the population’s needs are vast, and spending the reserves on consumption needs would quickly run down the Fund. The UN’s 2024 Afghanistan Humanitarian Needs and Response Plan comes in at over $3 billion, which is approaching half of the Fund’s assets. And given other world crises, it is unrealistic to think that western nations will not be cutting back their aid to Afghanistan as many did last year.”

The board's delay in agreeing on a mechanism to use the funds prompts questions about whether they are facing difficulties in reaching a consensus or if they are simply proceeding at an unacceptably slow pace, a concern shared by several observers.

The requirement for unanimous decision-making aims to prevent controversial choices, yet it also contributes to the sluggish progress, Fishstein said.

In a recent report, the Special Inspector General for Afghanistan Reconstruction (SIGAR), a US government watchdog, said Washington remains concerned about DAB independence from political influence.

DAB's top three officials are senior Taliban leaders under US and UN sanctions.

“The legal, intuitional structures do not exist to make clear decisions on the fund. In addition, given the Taliban-led DAB is under sanction, it is becoming ever more difficult to use the money inside Afghanistan for the benefit of the Afghan people,” Mohib Iqbal, an Afghan economist, told TRT World.

“Therefore, unless clear grounds for fund disposal are justified, it is a very complex international issue to spend this money. Even small disagreement can easily delegitimise the fund and its decisions including criticism by the Taliban.”