Aid Alone Will Not Solve the Humanitarian Crisis in Afghanistan: Exploring “All Options Available”

Last week, the United States announced a new commitment of $308 million in humanitarian assistance to Afghanistan. This is welcome news. These funds contribute to the UN’s new humanitarian appeal for Afghanistan (which, at $4.4 billion is the largest ever for a single country) and could help save millions of lives. They come not a moment too soon. With winter in full swing, the situation in Afghanistan is deteriorating quickly with half the population facing acute food shortages and nearly 9 million approaching starvation. UN officials estimate that a million children may die before the end of winter. The UN also warns that funding needs could double to $10 billion next year if situation is not adequately addressed now.

But aid alone will not resolve the humanitarian crisis in Afghanistan. Without a functioning financial system, many Afghans will remain unable to buy essential goods, including food and medicine. Humanitarian actors seeking to relieve the effects of these shortages will struggle to move money into and within the country to finance their operations. And the Afghan economy will slide more deeply into economic and political turmoil, perpetuating the crisis and undoubtably encouraging greater external displacement.

Despite its expressed commitment to supporting the Afghan people, the United States, to date, has not formally acknowledged the role of the financial crisis in perpetuating the humanitarian emergency. Behind the scenes engagement shows the US government understands the importance of the problem, but bolder action to help stabilize Afghanistan’s economy is potentially stymied by a fear that doing so might be seen as indirectly benefitting the Taliban. The severity of the crisis calls for a reassessment of these tradeoffs.

The White House’s announcement of the new funding commitment contained an encouraging—albeit vague—reference that hints at a potential shift in calculus: “The United States is committed to supporting the Afghan people and we continue to consider all options available to us” (emphasis added). If the United States is serious about addressing the “worst humanitarian disaster we’ve ever seen,” these options should include throwing US weight behind efforts to address Afghanistan’s financial crisis—while continuing to sideline the Taliban.

Afghanistan’s economic crisis and its consequences

Afghanistan is facing a major cash shortage. When the Taliban took over in August, financial flows into the country ground almost to a halt as aid was cut, private sector activity slowed, and financial institutions refused to process payments into the country for fear of inadvertently violating US sanctions against the Taliban. Lack of confidence in banks, plus Taliban-imposed restrictions on withdrawals, have led many Afghans and Afghan firms to hold cash outside of the banking system. UNDP leadership estimates that only around an eighth of afghanis in the economy are actually in circulation.

International sanctions not only limit Afghanistan’s access to funds, they also limit the Taliban-led government’s policy levers to ameliorate the cash crunch. The central bank (Da Afghanistan Bank, or DAB) can’t print new currency since it contracts with overseas firms to fulfill this function—firms that are now restricted from doing business with the Taliban. And the US government has frozen access to the roughly $7 billion-worth of Afghanistan’s foreign exchange reserves held in US financial institutions (another $1-2 billion in reserves are frozen in European and other financial institutions).

The consequences of the liquidity crisis are far reaching. Without access to dollars, DAB has been unable to conduct the dollar auctions it’s used in the past to support the value of the local currency, the afghani. The steep depreciation of the afghani—which has fallen 30 percent since the Taliban takeover—has resulted in sharply rising food and commodity prices. More broadly, the lack of dollars has left Afghan traders unable to pay for food, fuel, and intermediate input imports that the country relies on, depressing economic activity.

Lack of liquidity also impairs the humanitarian response since most Afghan banks cannot cover withdrawals by aid organizations, leaving many NGOs struggling to access the cash they need to finance their operations or pay salaries. As a stop gap, some humanitarian actors are using the informal hawala system to move funds; though many operators are legitimate, the informality of the system raises money laundering and terrorist financing risks. Hawalas are also reportedly struggling to meet NGOs’ cash needs, driving their rates up.  

These challenges point to three urgent needs. First, the afghani needs to be stabilized. Second, Afghans need to be able to finance imports of essential commodities and raw materials for domestic production to sustain the legitimate private sector activity on which Afghans’ lives and livelihoods depend. Third, NGOs and humanitarian organizations need to be able to access funds to finance their operations in Afghanistan. All three require restoring the willingness and ability of financial actors to process payments into and within Afghanistan.

Measures to support payments into and within Afghanistan: options for the United States

The United States has a particular responsibility to help meet these objectives. First, US sanctions are the principal source of uncertainty for financial institutions. The US dollar’s dominant role as a global medium of exchange means that banks and other financial institutions will remain reluctant to process payments into Afghanistan without greater clarity about the US sanctions regime and assurance that inadvertent violations will not be punished. Second, because the United States is the top shareholder in the international financial institutions—and led NATO efforts in Afghanistan over the last twenty years—other donors are looking to the United States for cues on how to proceed. Organizations like World Bank and IMF have financial resources and expertise that could be directed to strengthening Afghanistan’s financial sector, but these institutions will not act without the United States’ imprimatur.

Below we describe four categories of actions the United States government can take to help support financial flows into and within Afghanistan. Each option on its own is insufficient and none is perfect. But inaction is worse.

1. Call to action

Words, on their own, are only a partial solution. But they can help spur to action donors and financial institutions who are awaiting cues and seeking reassurance from the United States.

The Biden Administration should issue a clear statement about the importance of stabilizing Afghanistan’s economy. So far, while the White House has acknowledged the importance of meeting the Afghan people’s basic human needs, they have not publicly emphasized the point that stabilizing the Afghan economy is central to resolving the humanitarian crisis.

The Biden administration should direct international financial institutions to take actions to stabilize Afghanistan’s economy. Going a step further, the Biden administration should make clear its expectation that the World Bank and IMF should play a central role in helping to resolve the financial crisis.

2. Expand sanctions reassurance and relief

The Treasury Department’s Office of Foreign Assets Control (OFAC) has issued six general licenses that permit engagement with the Taliban for certain types of transactions (e.g., for personal remittances or specific categories of humanitarian or development objectives). OFAC has further sought to emphasize that “there are no…sanctions that prohibit…moving or sending money into and out of Afghanistan…provided that such transactions…do not involve sanctioned individuals [or] entities….” But these measures haven’t gone far enough to alleviate financial institutions’ concerns.

The US Treasury should take a clear, public stance on reassurance around risk. Even with permission to conduct transactions in Afghanistan, banks are likely to continue to avoid doing so out of fear of reprisals for inadvertently processing payments that involve Taliban actors. We saw this dynamic play out before in the context of sanctions on Iran. To help reassure financial institutions, former US Treasury official Adam Smith has called for the Treasury to expand its use of “comfort letters” that assure institutions that they won’t be prosecuted for inadvertent violations. The United States Institute of Peace’s William Byrd takes this further suggesting that “comfort letters” be made public to enable a shared understanding of permissions.

The US Treasury should explore expanding licenses to include private commercial transactions. None of the current OFAC licenses cover general commercial transactions unless they are related to financing for efforts to meet basic human needs. So, a further step could be to specifically exempt commercial transactions from the existing sanctions regime. William Byrd notes that such an expansion would be unlikely to directly benefit the Taliban and that the cost of this risk is far less than the cost of prolonged economic crisis.  

3. Support the design and implementation of payment settlement mechanisms that bypass Taliban-run government structures

As lawyer Adam Smith noted, the US government may need to move beyond a stance of simply “not prohibiting” financial transactions in Afghanistan to actively promoting low risk ways to process payments. There are several politically sensible proposals on the table that seek to accomplish this.

Adam Smith and the Center for a New American Security’s Alex Zerden have proposed developing special financial corridors that would grant permissions to private financial institutions to conduct an expanded range of activities accompanied by higher levels of scrutiny. Both proposals also call for shifting some of DAB’s responsibilities to a trusted private Afghan bank, including the operation of dollar auctions.    

The World Bank is reportedly close to launching a humanitarian-afghani swap mechanism in which private stores of afghanis held outside the banking system would be exchanged for US dollars held in humanitarian actors’ bank accounts—a plan the State Department has pledged to support. Former Afghan finance officials, Gul Maqsood Sabit and Khan Afzal Hadawal have proposed a similar arrangement, calling for the creation of a new temporary institution, based in a third country, to provide a payment settlement platform for Afghan traders seeking dollars to finance imports and humanitarian NGOs seeking afghanis to finance their operations. These arrangements could give Afghan firms access to the dollars they need to finance imports, while providing humanitarian actors with the local currency they need to pay salaries and distribute cash.

There is also some discussion around the use of closed loop, mobile money voucher systems to facilitate humanitarian transactions, based on models like Save the Children’s Fintech for International Development (F4ID) collaboration with Barclays and Standard Chartered. Under such a system, individuals approved for assistance would receive mobile vouchers to use with an approved set of local suppliers whose provision of goods and services is supported with aid funds. While setting up a such a payments architecture would take too long to respond to the current crisis, over the longer term developing a closed-loop and fully traceable payments system could give banks greater confidence to process aid payments into Afghanistan by substantially reducing the risks of money laundering or terrorist financing.

The United States government should examine proposed options for payment solutions and lend its support to the development and implementation of promising options. None of these options would be straightforward. As a starting point, they would require acceptance by the Taliban. Even if that were achieved, it would take time to legally establish these entities and set up audit and monitoring mechanisms. There are also policy tradeoffs to weigh. Reliance on private banks for dollar auctions would de-link those actions from DAB’s monetary policy making role. And shifting functions away from DAB could, over the longer term, risk losses to the remaining technocratic capacity that the central bank has so far managed to preserve under Taliban rule. In the medium term, the international community will need to consider how it might re-engage with the DAB. But, in the meantime, one or more of these options—or some variation of them—could play a critical role in encouraging and facilitating financial transactions.

4. Allow limited, monitored release of frozen foreign exchange reserves

In addition to making it easier for financial institutions to process payments into Afghanistan, the US could drastically ease the liquidity crisis by allowing limited and monitored release of Afghanistan’s frozen foreign exchange reserves. As we have discussed earlier, and as others like DAB board member Shah Mehrabi (not affiliated with the Taliban) have proposed, the release of these funds could start small and be conditioned on specific uses (e.g., essential imports and support for dollar auctions) that could be independently monitored and audited with an option to terminate in the event of misuse.\

Conclusion

As CGD president Masood Ahmed has argued, now is the time for difficult decisions. The US government and international community need to be clear-eyed about what’s at stake. The risks of indirectly benefiting the Taliban can only be evaluated against the risks of inaction and the consequences—and human costs—of a dysfunctional Afghan economy and financial sector.

Thanks to Sue Eckert for helpful comments.