Frozen dollar flow: Afghan economy in free fall post-Taliban takeover

It has been a week since the Taliban seized the Afghan capital Kabul after taking over large swathes of the country. Since then, the insurgent group has been trying to transform itself from a decades-old fighting force to a legitimate governing body. 

However, as the days pass, the country’s already fragile economy that heavily relies on foreign aid and external sources is facing an existential question under the Taliban rule. Much of the dollar inflow has been choked by the Western partners, including the IMF, of the former Afghan regime.  

"I am totally lost, I don't know what should I think about first, my safety and survival or feeding my kids and family," said a former policeman, now in hiding who has lost the $260 a month salary that he used to support his wife and four children. 

Similarly, many lower-level government employees, who have often served for long periods without being paid, have not received their salaries for the past two months.

Ever since the US invaded Afghanistan in 2001, the war-stressed country’s fragile economy has been heavily reliant on the flow of dollars from outside. Much of the government spending has been covered by Western aid, most of which has already been cut after the Taliban takeover. 

"Everything is because of the dollar situation. There are some food shops open but the bazaars are empty," said one former government employee now in hiding for fear of reprisal by the Taliban.

The devastating impact of the declining economy is already felt on the streets of Kabul. As the banks are still closed, many Afghans are unable to withdraw money from their accounts. 

They are also unable to receive financial help from overseas and diaspora because Western Union has shut down its operations following the Taliban seizure. Remittances are critically important for Afghan families to survive. The World Bank estimated that remittances reached $789 million in 2020, around 4 percent of GDP. 

About two-thirds of the population live below the poverty line, on less than $1.90 per day, according to the Asian Development Bank. That's up from 55 percent in 2017.

Most recently, The International Monetary Fund suspended Afghanistan's access to IMF resources, including around $440 million in new monetary reserves, due to a lack of clarity over the country's government.

As the Taliban tries to prove that it can lead a country, the lack of a significant amount of money - Kabul received  $4.2 billion as development assistance in 2019- will mean the group will face severe challenges to fulfil its promises to the Afghans.  

One of the challenges is the fact that Afghanistan is technically a cash economy. According to the 2018 World Bank report, only 10 percent of the adult population has a bank account. The local currency, the Afghani has been backed up by the bulk shipments of the US dollars sent from abroad to Afghanistan’s central bank. 

Now that the stream of dollars has been shut down and Afghanistan's hard-currency reserves parked in the US and with the IMF are out of the Taliban's reach, the local currency does not have any chances to stand. 

Fitch Solutions, the analysis and research arm of Fitch Group, warned that Afghanistan's economy could shrink by as much as 20 percent this year and its currency may slide further than it already has following the Taliban's takeover.