Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

U.N. warns of 'colossal' collapse of Afghan banking system

EconomyNov 22, 2021 20:36
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
3/3 © Reuters. FILE PHOTO: Afghan money exchange dealers wait for customers at a money exchange market, following banks and markets reopening after the Taliban took over in Kabul, Afghanistan, September 4, 2021. REUTERS/Stringer/File Photo 2/3

By Michelle Nichols

UNITED NATIONS (Reuters) -The United Nations on Monday pushed for urgent action to prop up Afghanistan's banks, warning that a spike in people unable to repay loans, lower deposits and a cash liquidity crunch could cause the financial system to collapse within months.

In a three-page report on Afghanistan's banking and financial system seen by Reuters, the U.N. Development Programme (UNDP) said the economic cost of a banking system collapse - and consequent negative social impact - "would be colossal."

An abrupt withdrawal of most foreign development support after the Taliban seized power on Aug. 15 from Afghanistan's Western-backed government has sent the economy into freefall, putting a severe 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-run 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 on Taliban leaders.

"We need to find a way to make sure that if we support the banking sector, we are not supporting Taliban," Abdallah al Dardari, head of UNDP in Afghanistan, told Reuters.

"We are in such a dire situation that we need to think of all possible options and we have to think outside the box," he said. "What used to be three months ago unthinkable has to become thinkable now."

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 United Nations and aid groups are now struggling to get enough cash into the country.

The United States is working with the United Nations, UNDP and other international institutions and countries "to find ways to offer liquidity, to infuse, to see to it that the people of Afghanistan can take advantage of international support in ways that don't flow into the coffers of the Taliban," said State Department spokesman Ned Price.

'UNDER THE MATTRESS'

The UNDP's proposals to save 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 loan repayment delay options.

"Coordination with the International Financial Institutions, with their extensive experience of the Afghan financial system, would be critical to this process," UNDP said in its report, referring to the World Bank and International Monetary Fund.

The United Nations has repeatedly warned since the Taliban took over that Afghanistan's economy is on the brink of a collapse that would likely further fuel 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% of Afghanistan's deposit base will be lost by the end of the year. It said banks have stopped extending new credit, and that non-performing loans had almost doubled to 57% in September from the end of 2020.

"If this rate continues of non-performing loans, the banks may not have a chance to survive in the next six months. And I am being optimistic," al Dardari said.

Liquidity has also been a problem. Afghan banks heavily relied on physical shipments of U.S. dollars, which have stopped. When it comes to the local afghani currency, al Dardari said that while there is about $4 billion worth of afghanis in the economy, only about $500 million worth is in circulation.

"The rest is sitting under the mattress or under the pillow because people are afraid," he said.

As the United Nations seeks to avert famine in Afghanistan, al Dardari also warned about the consequences of a banking collapse for trade finance.

"Afghanistan last year imported about $7 billion worth of goods and products and services, mostly foodstuff ... If there is no trade finance the interruption is huge," he said. "Without the banking system, none of this can happen."

U.N. warns of 'colossal' collapse of Afghan banking system
 

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email