The Taliban Got Rid of the U.S., But Not the Dollar
(Bloomberg Opinion) -- The Taliban may have swept Afghanistan, but they haven’t yet conquered its financial system, big parts of which rest on support from outside the country. The U.S. has a heavy hand in the multilateral organizations that dictate the flow of international aid upon which this shaky economy relies. Americans may be evacuating, but the dollar’s influence will remain.
The International Monetary Fund, whose largest shareholder is the U.S., denied the Taliban access to reserve assets Wednesday, days before Afghanistan was set to receive almost $500 million. That came a day after a Biden administration official confirmed the U.S. froze nearly $9.5 billion belonging to the central bank and stopped shipments of cash to the nation. The IMF said the decision reflects the Taliban’s lack of international recognition, but it’s hard not see America's hand behind this refusal.
Afghanistan’s dire economic state thus gives the U.S. substantial leverage. At the end of 2020, a majority of bank deposits were in foreign currencies — even if those weren’t dollars, there’s a good chance any exchange would eventually require swapping into them. So while the Taliban might not be fully responsive to traditional financial diplomacy, few sources of cash are as reliable as ones tied to the U.S.
Afghans’ daily activity leans on a centuries-old, trust-based system of money transfers called Hawala. Opiates accounted for as much as 11% of gross domestic product in 2018. In a review the following year, the IMF found that illegal drugs represented “a significant source of funding for insurgent forces.” Yet the price of opium tumbled in 2019, and areas under poppy cultivation fell by 38% to the lowest since 2013, the World Bank estimated in an April report. Propping the economy atop a sector as unstable as the drug trade will never be a sustainable, or particularly advisable, approach.
The Taliban could also get money from China or Russia, assuming the latter would consider re-engaging after the Soviet Union's own military debacle there in the 1980s. Even Vladimir Putin acknowledges the buck is so key to global commerce that it’s tough to function without it. China, for its part, is already haunted by investment failures in Afghanistan, and is now fretting about the billions of dollars it has sunk into neighboring Pakistan.
The reality is, cash from international institutions and donors has underwritten Afghanistan’s financial system for decades. “Afghanistan’s economy is shaped by fragility and aid dependence,” the World Bank said in its April report. “Private sector development and diversification is constrained by insecurity, political instability, weak institutions, inadequate infrastructure, widespread corruption, and a difficult business environment.” Things weren't great when the U.S. was in charge, but it's easy to see a dramatic deterioration without at least some American muscle to shore up commerce. Let's hope the Taliban appreciate that.
The U.S. role at the IMF shouldn’t be underestimated. Over the decades, nothing of consequence has happened at the fund without nudging by the U.S. Treasury, or at the very least, the department's sign-off. Treasury's view tends to reflect broader administration priorities and policy goals. (The IMF is still credited — or blamed — by many in Indonesia for pulling the plug on three decades of army-backed rule by Suharto during the financial crisis of the 1990s.)
And while the IMF’s so-called special drawing rights, or SDRs, include other major world currencies, few seem anywhere close to overtaking the dollar, which accounts for roughly 60% of global central bank reserves. Almost 90% of foreign-exchange transactions are against the greenback. China's stop-start efforts to create a reserve currency, meanwhile, have little to show. The euro, whose notes and coins were introduced shortly after the U.S. swept Taliban from power in 2001, once had hopes of rivaling the dollar or chipping away at its supremacy. A series of political crisis within the euro region has put paid to that grand ambition.
Any Afghan government — especially return acts with an unflattering past — will come to realize that the U.S. is key to financial and economic security. Devastating tweets from the acting central banker, Ajmal Ahmady, describe the panic caused by halted dollar shipments as the Taliban’s rapid advance led to the collapse of the government.
As he was en route to his own escape, Ahmady’s tweets blasted outgoing Afghan leaders for a lack of planning. The Taliban are “going to be faced with issues going forward on how to mitigate the impact” of recent moves to halt cash flow, he said in a telephone interview, Bloomberg News's Saleha Mohsin reported. The Afghan currency slid to a record low.
How much any of this means to Afghanistan, or the degree of American will to test the extent of its monetary reach, remains to be seen. The broad point is that the U.S. is not without cards to play.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.
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