UN warns of collapse of Afghan banks

The UN is pushing for too swift action to support Afghanistan’s banks and warns that the country’s financial system could collapse within months.

In a three-page report on Afghanistan’s banking and financial system, the UN Development Program said the economic costs of a banking system collapse – and the consequent negative social consequences – “would be colossal.”

A sharp withdrawal of most of foreign development aid after the Taliban seized power on August 15 has sent the economy into free fall, putting a heavy strain on the banking system, which set weekly withdrawal limits to stop a run on deposits.

“Afghanistan’s financial and bank payment systems are in disarray. The bank – driven problem must be resolved quickly to improve Afghanistan’s limited production capacity and prevent the banking system from collapsing,” the UNDP report said.

Finding a way to avert a collapse is complicated by international and unilateral sanctions against Taliban leaders.

“We need to find a way to ensure that if we support the banking sector, then we do not support the Taliban,” Abdallah al Dardari, head of UNDP in Afghanistan, told Reuters.

Afghanistan’s banking system was already vulnerable before the Taliban came to power. But since then, development aid has dried up, billions of dollars in Afghan assets have been frozen abroad, and the UN and aid groups are now struggling to get enough money into the country.

UNDP’s proposals to rescue the banking system include a deposit insurance scheme, measures to ensure adequate liquidity for short- and medium-term needs, as well as credit guarantees and options to delay loan repayments.

The UN has repeatedly warned since the Taliban took over that Afghanistan’s economy is on the brink of a collapse that is likely to boost a refugee crisis. UNDP said that if the banking system fails, it could take decades to rebuild.

The UNDP report said that with current trends and withdrawal restrictions, about 40 percent of Afghanistan’s deposit base will be lost by the end of the year. It said banks have stopped granting new credit and that non-performing loans had almost doubled to 57 percent in September from the end of 2020.

“If this rate continues with defaulted loans, the banks may not have a chance of surviving in the next six months. And I am optimistic,” al Dardari said.

Liquidity has also been an issue. Afghan banks were heavily dependent on physical shipments of US dollars, which have stopped. When it comes to the local Afghan currency, al Dardari said that even though there are Afghans for about $ 4 billion in the economy, there are only about $ 500,000 worth in circulation.

“The rest sit under the mattress or under the pillow because people are scared,” he said.

As the UN seeks to avert famine in Afghanistan, al Dardari also warned of the consequences of a bank collapse for trade finance.

“Afghanistan last year imported goods and products and services worth about $ 7 billion, mostly food … If there is no trade financing, the disruption is huge,” he said. “Without the banking system, none of this can happen.”

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