The Taliban Takeover

15th August, 2021: The Taliban fighters, who took the capital city of Kabul on Sunday in a stunningly swift end to Afghanistan’s 20-year war, are now facing a downward spiraling economy. They have shown their dominance over the political scenario of the country, but are left with the hefty task of managing a fragile and dependent country on the economic front.

Why is the country claimed to be one of the world’s poorest?

To look at the state of affairs just before the Taliban takeover, 75% of the public spending was funded by grants. 40% of the employment comes from the agricultural sector, where only 60% earn some income. Further, their private sector is so narrow that only 3% of the total GDP is available to them as credit. Even with such a low debt to GDP ratio, they are deemed at high risk of default, given its dependency on grants and concessional borrowings.

The picture above very well summarizes the situation of Afghanistan, where 90% of the population lives on less than $2 a day.

In such a chaos, global donors halting their support towards the Taliban can achieve nothing but worsen the condition.

Canadian Prime Minister Justin Trudeau announced that his country has “no plans" to recognize the Taliban. Germany announced the suspension of its development aid along with Berlin, which was going to provide $503.1 million in aid this year, including $292.5 million for development.

The cherry on the cake is the fact that the US has frozen all the reserves of Da Afghanistan Bank (DAB). The above mentioned statement can be justified with the following picture -

As we see the western community cutting its ties with Afghanistan on one hand, there are a group of countries trying to fill the void on the other.

With the retreat of the US, how can we not talk about China trying to seize a golden opportunity?

China has its own strategic interests for which it wants to maintain a ‘friendly’ relation with the Taliban. Beijing can offer what Kabul needs by getting what it prizes the most – political impartiality and economic investment in return for opportunities in infrastructure and investments in industrial metals and minerals. $1 trillion worth of untapped mineral deposits including critical industrial metals such as lithium, iron, copper and cobalt has got China very much interested. Alongside, China’s plan to extend its Belt-and-Road Initiative to Afghanistan with, for example, a Peshawar-to-Kabul motorway, would open up a shorter land route to gain access to markets in the Middle East.

Due to the Taliban’s historical links with extremists, fear of terror attacks from Xinjiang’s minority group of Uyghur Muslims called the East Turkestan Islamic Movement is prevalent. The Taliban's presence in the neighbourhood may seem like a haven to the above-mentioned group, therefore calling for the authorities to build connections with the Taliban. Thus, many analysts are calling China’s decision to engage in a cooperative association with the Taliban a ‘pragmatic move’.

Other possible allies of the Taliban and thus friends to support financially could be Pakistan, Russia and Iran. Given the political disturbances between Russia (and Pakistan) with the USA (and India), it was obvious for Pakistan and Russia to openly support the Taliban. 

The Eurasia Group Analytics have suggested that Pakistan held a significant amount of leverage and influence over the Taliban and are also one of the few countries that consider the Taliban as a legitimate government. However, the analysts also believe that Islamabad, which shares its borders with Afghanistan, is under the threat of terrorism because the return of Taliban could encourage the terror groups of Pakistan including the Pakistani Taliban. This, and the urge to keep India out of Afghanistan with the help of China and Russia has led Pakistan to construct a healthy relationship with the Taliban.

Just like China, Russia has also kept its embassy in Kabul open but has evacuated some of its personnel. The only issue that Russia has with the coming back of Taliban in power is the repercussions in Central Asia caused because of the extremist ideologies of the Taliban. Experts believe that the priority of Russia immediately would be to stop the spillover fighting or the movement of organized extremist groups into the Central Asian States along Afghanistan’s Northern Border by maintaining good relations with the Taliban. 

Now, how does all this mayhem impact India?

Post 9/11 and the US Army ruling over Afghanistan, India has invested heavily in the development of Afghanistan. Afghanistan was the focus of the strategic interests of India in South Asia and thus India helped in building roads, schools, hospitals, transport, military equipment, dams and many other crucial infrastructures in Afghanistan. 

In the above picture we can see that India gifted Afghanistan the Afghan Parliament Building which cost nearly $90 million. The total investment of India in Afghan Infrastructure has been nearly $3 Billion. But, with the Taliban in power, India’s friendly ties with Afghanistan and thus, its strategic investments could be disrupted.

India has been engaged in constant trade with Afghanistan and they had also signed the India-Afghanistan Strategic Partnership Agreement in 2011 to enhance trade relations. The above picture shows the dynamics of imports and exports between the two countries vividly. However, the Taliban have stopped all the imports and exports with India as soon as they took over Kabul. This will affect a lot of industries in India like dry fruits, gum and onions. 

The result of the cease in trade has already been seen in India. The prices of dry fruits imported from Afghanistan such as Mamra Almonds, Kabul Black Grapes, pine nuts, etc have risen by nearly 60-80%. However, India’s help can be considered necessary for gaining political legitimacy and economic developments. Thus, the DG of the Federation of Import Export Organization propounded that the current ball game is not going to last long. 

What lies ahead?

None of the countries have yet recognised the Taliban as a legitimate government. Thus, its fate depends a lot on the other countries’ decisions. Meanwhile, let’s have a look at the risks posed by the Taliban takeover from the standpoint of global economics –

There are further threats to the currency, as it may depreciate because of further blockage of funds.

  • Concerns about food insecurity, a looming drought and a declining trade are likely to send price levels high. In such a case, the possibility of hyperinflation cannot be ruled out.

  • Currency trading stopped on Sunday when the Taliban took control of Kabul. There is a likelihood of the Afghan money exchange market getting shattered, provided it happens again.

  • Lastly, movements in financial markets depend heavily on the level of uncertainty and investors’ expectations. We have already seen some cautiousness from investors’ side, keenly watching to see how the world leaders would react to the situation.

Fitch Solutions opine that Afghanistan's economy could shrink by 20% due to the Taliban takeover.

However, the endgame is not obvious here - most economies want the Taliban to take action against terrorism and the rights of women in order to be regarded as a legitimate government. It basically leads to a question for them to answer: Economy or Ideology?

That’s all for this week! We hope you liked it and would love to know your thoughts in the comment section. This article is written and curated by Vaibhav Agarwal and Kashish Agarwal.

Vaibhav Agarwal is a 2nd year student pursuing BCom(H) at St. Xavier’s College (Autonomous), Kolkata and a Junior Associate of the Xavier’s Finance Community.)

(Kashish Agarwal is a 2nd year student pursuing B.Sc Economics(H) at St. Xavier’s College (Autonomous), Kolkata and a Junior Associate of the Xavier’s Finance Community.)