Two Years into Taliban Rule, New Shocks Weaken Afghan Economy

Looking Back at Two Years of Taliban Economic Management

Taliban macroeconomic management has been better than expected, as evidenced by the stable exchange rate, low inflation, effective revenue collection and rising exports. There is no comparison at all with their non-management of the economy during the Taliban’s previous 1996-2001 rule. That regime had no control over the afghani currency and there was hyperinflation; government revenue was negligible; the Afghan economy was largely moribund, especially after the Taliban’s first opium ban in the year 2000; people’s incomes were less than $200 average per-capita; and social indicators such as maternal and child mortality were terrible.

This time around, the Taliban have benefited from learning while facing adversity during their nearly 20 years as an insurgency. For example, they collected significant revenue in competition with the previous government, provided transporters tax receipts to prevent multiple taxation at their various road checkpoints, and issued mining and other permits.

With their unexpectedly rapid takeover, the Taliban inherited functioning government macroeconomic management institutions, namely the Ministry of Finance and the central bank (Da Afghanistan Bank, or DAB). This contrasts sharply with the 1990s, when government institutions had been largely destroyed by years of destructive civil war. Moreover, the Taliban have tried to maintain some capacity in agencies whose work is seen as beneficial for the regime (for example, revenue and budget), while discarding others like justice institutions and the Ministry of Women’s Affairs.

By all indications, the magnitude of corruption has been reduced, particularly in customs where there has been a crackdown on smuggling and bribery, as well as abolition of the separate trade levies previously imposed by the Taliban insurgency. More generally, the stoppage of most aid after August 2021 removed large amounts of money that had been vulnerable to corruption.

Relatedly, they have clamped down on the rampant capital flight that occurred under the Islamic Republic (as much as $5 billion per year or even more), by means of strict enforcement of rules against export of cash as well as tougher regulation of the hawala informal money market. As a result, the Taliban must have built up modest reserves in DAB, and they have held foreign currency auctions to stabilize the afghani.

The Taliban faced enormous macroeconomic problems when they took power. The abrupt cut-off of nearly all aid, amounting to some $8 billion per year (equivalent to around 40 percent of GDP) precipitated a huge economic shock that no country in the world could have managed without severe consequences. The shock was exacerbated by the stoppage of international financial transactions, ongoing collapse of the banking system, existing U.S. and U.N. sanctions against Taliban leaders, and the freezing of Afghanistan’s some $9 billion of foreign exchange reserves. Especially considering the headwinds and problems they faced, Taliban economic management has exceeded expectations.

Afghanistan’s GDP is hard to measure, but it is estimated to have dropped by around 20 percent in the aftermath of August 2021, further increasing hunger and privation in an already very poor country.

After a few months of free-fall, the economy showed signs of stabilizing at a lower level of activity, reflecting in part U.N. cash shipments to pay for humanitarian assistance averaging some $40 million per week that started at the end of 2021, but also Afghan government restrictions against smuggled imports and capital flight, limits on banking transactions to prevent banks from collapsing, tight macroeconomic management, and some adjustment away from the aid- and service-dominated economy.

Most recently there have been some signs of modest economic revival, most notably the 36 percent increase in imports in the first five months of 2023, suggesting that there may be some recovery of demand in the economy. However, the current equilibrium remains fragile, precarious and subject to severe downside risks. Moreover, it is a “famine equilibrium” that leaves most Afghans falling short of their subsistence needs, necessitating large amounts of humanitarian assistance to prevent an actual famine from materializing. U.N. cash shipments, which fund humanitarian programs in the country, reached $1 billion in the first half of 2023, compared to $1.8 billion in all of 2022.

An Authoritarian Regime Making Some Missteps

It must be recognized that the Taliban are focused on regime survival and strengthening, not the welfare of ordinary Afghans. This is not surprising since they came into power through their persistence as an insurgency and their military victory over the previous government — not because of their popularity with the Afghan people. There has been minimal attention to social service delivery or to providing a social safety net for the poor; these areas of governance have been largely ceded to international humanitarian assistance.

Much of what the Taliban have done is understandable as “good practice” for an authoritarian regime. However, the Taliban have made some significant missteps in their management of the economy:

• The bans on female education and prohibitions against Afghan women working in NGOs and the U.N. will be extremely damaging to Afghanistan’s longer-term economic and social development.
• They will also accelerate the “brain drain” of educated women and men — that Afghanistan can ill-afford to lose — leaving the country.
• These restrictions have reduced donors’ appetite to provide continuing humanitarian aid let alone other assistance, probably accelerating declines in aid that were already expected.
• The Taliban’s effectively implemented opium poppy cultivation ban has resulted in a roughly $1 billion per year loss of income for Afghan rural households.
• Though effective in the short run, the Taliban’s aggressive revenue collection efforts risk dampening private sector incentives, thereby hindering economic recovery in the future.

Back to Humanitarian Crisis Mode?

The current low-level macroeconomic equilibrium is gravely threatened by two shocks:

1. Declining humanitarian assistance, which in 2023 is expected to fall by at least $1 billion from last year’s level of $3 billion; and
2. The Taliban’s successful opium poppy cultivation ban — resulting in something like an 80 percent reduction in acreage, which is depriving rural Afghans of $1 billion in incomes (though trade in opium continues, with associated incomes to large landowners, drug traders, processors and exporters).

These twin economic shocks — likely amounting to a double-digit loss for GDP if the opium ban continues to be enforced — will further worsen poverty and hunger. So, after two winters when humanitarian aid helped prevent the worst-case outcome of widespread famine, Afghanistan looks to be heading into another difficult winter.

As other coping mechanisms for poorer and mid-level households (selling remaining assets, eating less and lower-quality food, eschewing needed health care, in extremis marrying off underage daughters, etc.) become increasingly exhausted, outmigration will remain as the most viable if not the only option for those who can afford its modest costs. In some cases, this will involve entire households, but even more lone males who can seek work in Europe and elsewhere and send back remittances to their families.

International Policy Dilemmas and Options

What can other countries and international agencies do?

• First, total aid (currently dominated by humanitarian support) should not fall precipitously but rather decline gradually along a predictable glide-path. This will limit further harm to Afghans and avoid another major macroeconomic shock, even though lower aid will have some adverse effects. Beyond slowing reductions in humanitarian aid, World Bank (including Afghanistan Reconstruction Trust Fund) and Asian Development Bank funds could be deployed to help limit and smooth the decline in total aid.
• Second, there needs to be a move away from humanitarian business as usual — using increasingly limited resources more effectively and in a cost-effective manner. Examples include reducing the size of administrative overheads and the multiplicity of overheads, making more use of the Afghan private sector to deliver aid, cutting back high-cost programs (for example, the cost per life saved of de-mining tends to be much higher than that of basic health and food assistance).
• Third and related, there needs to be a shift in the composition of aid away from purely humanitarian support in favor of aid that promotes livelihoods and economic activities. There is some flexibility in what specific programs can be implemented under the “humanitarian” label, and such flexibility should be exploited if some donors are reluctant to provide aid except under that label. This money can be given directly to recipients rather than through the Taliban government or their budget.
• Fourth and also related, aid needs to be better coordinated; a multilateral organization like the World Bank could help in this regard.
• Fifth, more international engagement on the economy and private sector is needed. This would not entail financial support to the Afghan government but rather things like various forms of assistance to vetted private businesses, third-party monitoring of financial transactions to assess money-laundering risks, discussions on economic policy and macroeconomic management, and the like.
• Finally, there are no good options for the international response to the Taliban’s opium ban. Particularly if the ban is maintained and at least somewhat seriously enforced for a second year as seems likely, it will grievously harm the Afghan economy, worsen poverty and hunger, not reduce drug use in other countries, perhaps weaken the Taliban (as happened after their 2000 opium ban), and lead to more outmigration. It is also clear that fully offsetting the adverse economic and humanitarian impacts of the ban, requiring an increase in aid of well over $1 billion given the extra costs and overheads associated with aid delivery, would be impossible. Whatever assistance is provided in response to the opium ban must not be for standalone alternative livelihoods projects. Instead, sound rural development aid is needed, even though it will make only a modest difference at best in the short run