For all the focus on the humanitarian crisis unfolding at an unprecedented pace in Afghanistan, many are forgetting that an even worse economic disaster awaits the “Islamic Emirate” of Afghanistan now that the Taliban are in charge.
One person who saw it coming – in addition to the president of course who promptly fled as soon as the first Taliban batallion entered Kabul – was the now former head of the country’s central bank, Ajmal Ahmady – a Harvard MBA – who on Monday tweeted that he had departed Afghanistan (having seen a military jet at the airport before the Taliban took over and “somehow, my close colleagues pushed me on board”) although he didn’t say where to. Ahmady said he tried to calm banks and traders (he failed) and in typical fashion slammed the former president, saying Ghani “had great ideas but poor execution,” adding “If I contributed to that, I take my share of the blame.” Said “blame taking” will take place somewhere far away, however.
13/It did not have to end this way. I am disgusted by the lack of any planning by Afghan leadership. Saw at airport them leave without informing others.
I asked the palace if there was an evacuation plan/charter flights. After 7 years of service, I was met with silence https://t.co/lBu3YksfWO
— Ajmal Ahmady (@aahmady) August 16, 2021
In a thread, he also said the central bank was able to stabilize volatility in the currency and other indicators until last Thursday. However, on Friday the bank was told there would be no dollar shipments and that by Saturday it had to supply less currency to markets which led to more panic.
“Currency spiked from a stable 81 to almost 100 then back to 86,” the central banker wrote. “I held meetings on Saturday to reassure banks and money exchangers to calm them down.” Alas, Ahmady’s reassurances ended abruptly on Sunday, when the governor left the central bank and rushed to the airport where he saw other government leaders. More than 300 passengers were packed into his flight, though it had no fuel or pilot, he wrote. Eventually a pilot emerged and the central banker hightailed it out of the country, pulling a page out of Biden’s playbook, writing that “It did not have to end this way. I am disgusted by the lack of any planning by Afghan leadership.”
Few noticed his dire warnings about the state of the financial system, but fast forward to this week when all hell has broken loose, as what was left of local commerce realized that the monetary system was basically frozen, with the local currency – the Afghani – falling as much as 4.6% on Tuesday to 86.0625 per dollar, a fourth day of decline, according to data compiled by Bloomberg.
Eventually, the local residents woke up to the dire new reality and scrambled to pull their money from of local banks, but many would leave empty-handed. And yes, bitcoin fixes this.
So with markets in Afghanistan now non-existent, the chaos quickly spilled over into markets in Pakistan, where sovereign dollar bonds due 2031 for Pakistan dropped 1.8 cents on Monday, the biggest decline since the government priced the notes in March. Pakistani dollar bonds were the biggest losers in Asia on Monday, according to a Bloomberg Barclays index. The notes rose 0.4 cents on the dollar on Tuesday to 100.9 cents.
Investors are concerned over any impact on law and order in Pakistan, and whether “global forces will try to isolate Pakistan” due to its alleged support of the Taliban, said Abdul Kadir Hussain, the head of fixed-income asset management at Dubai-based Arqaam Capital.
Sooner or later, however, attention will shift back to the crater left of Afghanistan’s financial system – one which China will be happy to restore while laying claim to the trillions in mineral riches located within the country: “Major regional powers in the region like China, Iran and Pakistan have all showed a willingness to work with the new setup in Afghanistan and help maintain peace,” AKD Securities Ltd analysts said.
Until then, here is what analysts and economists are saying, courtesy of Bloomberg:
Samiullah Tariq, head of research at Kuwait Investment Company Pvt
- The future of the Afghan currency would depend upon the future economic direction, monetary policy and fiscal policy
- “One thing is clear that with a favorable regime in Afghanistan, Pakistan will benefit economically and diplomatically”
Piotr Matys, senior FX analyst at InTouch Capital Markets Ltd.
- “A broader contagion from the latest dramatic developments in Afghanistan should be relatively limited”
- Afghan assets could prove attractive to opportunistic foreign investors who may assume that Afghanistan could potentially become a far more stable country going forward
- Nation may also benefit from China expressing interest to rebuild it and potentially include it in its “One Belt, One Road” initiative
- “Democracy is not often the top priority for international investors who appreciate stability and predictability in politics, even if provided by authoritarian regimes”
A. A. H. Soomro, managing director at KASB Securities Pvt
- There could be some pressure on the Pakistani rupee if a drop in Afghanistan’s currency prompted the wealthy part of its populace to try get U.S. dollars from Pakistan
- “Of course, it’s too early to predict any economic policy of Taliban at the moment”
Charles Robertson, chief economist at Renaissance Capital
- “The market has been selling Pakistan Eurobonds and equities, due to spillover risk. But I suspect the trade should be the reverse”
- “The Taliban victory now makes Pakistan the most helpful interlocutor for the U.S. in Afghanistan”
Jehanzaib Zafar, Hamza Kamal, analysts at AKD Securities Ltd
- “Major regional powers in the region like China, Iran and Pakistan have all showed a willingness to work with the new setup in Afghanistan and help maintain peace”
- “The integrated economic interests of major powers in the region will help bring these players closer and work together and potentially bring peace and economic prosperity”
- “The fall of Kabul in the hands of Taliban may not turn out to be as negative as feared earlier”
- “Though still early at this point, a stable and peaceful Afghanistan will have positive spillover effects for Pakistan and the region at large”