Afghan Economy Crumbles Since Taliban Takeover
By Margherita Stancati, July 17, 2022, WSJ

KABUL—Until a few months ago, Mohammed Wahid Haykalyar owned a busy restaurant in the heart of Kabul, where people came from all over the city for steaming plates of saffron rice and braised lamb. His monthly earnings of $3,000 were more than enough to
pay for his children’s English-language lessons and after-school soccer practice.

These days, he doesn’t even have money to buy food for his family.

“I never imagined I would find myself here. I feel ashamed,” said Mr. Haykalyar while he queued at a United Nations food distribution center to collect a sack of rice, beans and a bottle of sunflower oil. “I used to give food to poor people, now I
am begging for food myself.”

Mr. Haykalyar’s restaurant started losing money right after the Taliban took over Afghanistan in August, when many of his clients left the country and others could no longer afford to eat out. He shut down his business two months later and is now
trying to make a living as a casual laborer, earning $10 on a good day.

The government’s ability to manage the economy has largely broken down. The inexperienced Taliban leadership, which overthrew the republic when U.S.-led troops left the country, is isolated and under sanctions, and knows little about running a state.

The international financial assistance that had covered the majority of the government’s public spending for years has been cut off. The central bank’s $9 billion in foreign assets are frozen abroad, blocking its ability to mitigate the crushing
inflation that hit 15.5% in April, and day-to-day operations of the banking system for individuals barely function. Even the country’s paper money is disintegrating, since no new afghani notes, which are manufactured abroad, have been sent to
Afghanistan since the Taliban takeover. Some are now so damaged money exchangers won’t accept them.

The private sector is struggling to do what it can. Yet traders and manufacturers say that, with the banking sector largely paralyzed, importing goods and raw materials has become a huge challenge. Restrictions imposed by Afghan banks on cash withdrawals
to avoid a bank run have made it difficult for businesses to pay for goods and services or even pay wages.

Afghanistan’s gross domestic product is expected to decline by around 34% by the end of 2022 compared to 2020, the last full year of the republic, according to projections by the World Bank.

The U.N. says over 90% of the Afghan population isn’t eating sufficiently and that nearly half of the population is facing acute hunger. Families have resorted to selling their children or their organs to survive. The worst drought in decades has
compounded the crisis.

“The current humanitarian crisis could kill far more Afghans than the past 20 years of war,” warned the International Rescue Committee, a nongovernmental organization that has been providing assistance in Afghanistan for decades.

No profit in months
-------------------
Most entrepreneurs are small tradesmen. Many have had to shut down or pause operations since August. Miya Ibrahim imports flour, cooking oil and rice. He says he hasn’t made a profit in months.

“I’m running at a loss now,” says Mr. Ibrahim, who runs a wholesale store in Kabul. “We’re here just to keep the business going. I pay the rent of the shop, the salary of a worker and of my four sons, who work here, out of my own pocket.”

Mr. Ibrahim’s main problem is that it has become much more expensive to import goods to Afghanistan. “Our biggest challenge is banks. No one can send money abroad,” said Mr. Ibrahim, who now buys goods almost only from bordering Pakistan.

Foreign companies and banks are widely avoiding transactions with Afghanistan for fear of running afoul of international sanctions that target the Taliban leadership. That means people such as Mr. Ibrahim can no longer pay for imports through bank
transfers. Like other traders, he has switched since last August from banks to exclusively paying suppliers through hawala networks, a centuries-old system of informal money transfer based on trust.

Hawaladars hold deposits, offer loans and make international payments on behalf of traders. Although hawaladars aren’t licensed to perform these functions, the Afghan central bank has quietly tolerated it. But going through hawaladars, who operate in
much of the Muslim world, is more expensive and riskier than sending a bank transfer.

Since the Taliban takeover, “hawalas have worked more than they have at any point in the past 20 years,” said Haji Zirak, a hawaladar and spokesman of Afghanistan’s leading hawala market, Sarai Shahzada in Kabul. “We have kept the economy going.�
�

The U.S. and some other countries consider hawala transactions illegal because they are unregulated and could potentially be used to launder money.

When international bank transfers broke down, Azizullah Shafiq, who imports medicines from suppliers in California and South Korea, had no choice but to put his business on hold. With no new supplies coming in, he rationed the sale of some drugs at his
retail pharmacy.

“If I agree to sell all of our supplies, by tomorrow they will run out,” said Mr. Shafiq, pointing to a box of antibiotics imported from South Korea. He said some drugs for treating cancer and diabetes are among those that can no longer be found in
Afghanistan.

Foreign aid, providing food, healthcare and other things, distributed to people through the U.N. and nongovernmental organizations has tried to address some of the needs that the government can’t. The U.S. remains the single-biggest provider of aid
with over $774 million pledged to Afghanistan since the August pullout. The U.N. in March raised $2.4 billion for Afghanistan from member countries. The World Food Program, a U.N. body, said it is $1.2 billion short of the money it needs to distribute
food to all the 23 million Afghans who need it this year.

Many individuals and nongovernmental organizations have struggled to send funds to help victims of the recent, devastating earthquake in eastern Afghanistan because of the difficulty in making payments through bank transfers.

Domestic airline
----------------
There are some success stories. Prominent Afghan entrepreneur Fahim Hashimy is reviving his domestic airline, East Horizon, whose fleet stopped operating four years ago. The airline plans to relaunch with two 50-seat Bombardier CRJ jets, with plans to
buy or lease more if there is demand. Mr. Hashimy said he hopes his planes will be airborne by September, offering domestic and regional flights.

“I don’t want to sound patriotic, but it’s our country. That’s where we were and that’s where we will be,” said Mr. Hashimy, who lives outside Afghanistan but owns a range of businesses inside the country, including a television network. “
It’s a business we invested millions of dollars in. And the current government has been more welcoming than the previous government.”

The Taliban government has issued all the permissions needed for East Horizon to resume operations, he said. All that is missing is one of the two planes, which is due to arrive to Afghanistan from the Netherlands, along with its Danish crew.

Major telecom companies, such as the local subsidiary of the United Arab Emirates’ Etisalat—one of few, big foreign companies in Afghanistan—never stopped working.

Other companies are functioning in a limited way. Private television stations set up with U.S. assistance during the republic era are still active, although advertising revenues are nearly nonexistent. The financial challenges combine with Taliban
restrictions, including a ban on foreign content.

The local Coca-Cola and Pepsi bottling plants are still operating but are seeing lower sales.

When it first took power, the new Taliban government, desperate to bring in foreign investment, went on a PR offensive to show it wanted good relations with the rest of the world, especially emphasizing that women’s rights would be respected.

By November, Ali Wardak, an Afghan-American business consultant, was receiving daily calls from foreign companies cautiously asking about investing in Afghanistan. He said he received calls from investors in the U.S., Brazil, China and elsewhere, most
asking about mining and oil-and-gas reserves. Afghanistan has vast mineral riches, including precious stones, gold and rare-earth minerals.

“I want to pave the way for foreign companies to be able to come,” said Mr. Wardak, 33, who is lobbying the Taliban government to become more business-friendly. “The only way for the country to get back on its feet is to support the private sector.�
��

But sanctions, concerns over rule of law and Taliban policies such as the decision to keep secondary schools for girls shut, meant many foreign companies lost interest.

‘Time for cooperation’
------------------------
Haseeb Habibi, a former Taliban fighter, was freed from prison in August with the Taliban takeover, after spending years in detention by U.S. and allied Afghan forces. Now, he is serving as deputy director of economic cooperation at the Ministry of
Foreign Affairs.

“We were at war for our national and Islamic values. But now is the time for cooperation. With the same passion that we fought against them, we now welcome them,” said Mr. Habibi, who still carries an AK-74 rifle. “I was doing what was right for my
country then, and I am doing what is right for my country now.”

Prior to 2001, Afghanistan was still reeling from the destruction caused by the Soviet invasion two decades earlier and the civil war that followed. Under the first Taliban regime, Afghanistan was considered a pariah state.

With the U.S.-led invasion, Afghanistan shifted to a market economy. Sectors such as construction and logistics prospered, as did the telecommunications and media industries. But the economy remained dependent on military spending and international
funding, with aid equal to nearly half the country’s GDP.

War and widespread corruption hurt private-sector growth, and Afghanistan remained reliant on imports. Illicit opium cultivation continued to represent a key part of economic activity. In April, the Taliban formally banned the cultivation of poppy.

One area that appears to have improved under the current Taliban government is the need to pay petty bribes in order to do business. Previously, trucks carrying goods across the border would have to pay bribes of hundreds of dollars per truck on each
trip to the security forces manning the many checkpoints on roads leading to big cities. There is far less of it now, entrepreneurs said. Although to keep the Taliban on their side, some wealthy businessmen are offering free food and clothes to their
foot soldiers instead, according to people close to some of those businessmen.

Under the former republic, corruption was so widespread that the private sector spent $4 billion in undeclared payments to customs officials a year, according to private estimates shared by a senior representative of the Afghan Federation of Chambers of
Commerce. Despite the economic slowdown, the Taliban government has collected customs revenues that are comparable to the fallen republic’s, or around $700 million in the first five months of the year, according to the World Bank.

Price of detergent
-----------------
But the current inflationary crisis has put basic goods out of the reach of many Afghans. A basket of basic household goods cost 41.6% more in May than a year earlier, according to data from the World Food Program. Food prices continue to rise, partly
because of the war in Ukraine and global supply-chain disruptions.

Habibullah Amini owns a detergent manufacturing company in Kabul that supplies cleaning products across Afghanistan. He says the costs of running his business, which has 15 full-time employees, keep rising.

Fuel prices have doubled over the past year. Mr. Amini pays for imported materials in dollars but sells his washing liquids in afghanis, and he loses money whenever the afghani plunges. The retail price of his products keeps changing as a result.

Since the collapse of the republic, Mr. Amini has been paying for imported perfumes and other raw materials through hawaladars. He has to pay them in cash—often $50,000 at a time.

Just before the Taliban takeover, his company, Qatra, was doing so well that Mr. Amini invested in new equipment to expand production. It has never been used. “Now we only produce as required, as our orders come,” he said.

https://www.wsj.com/articles/afghan-economy-crumbles-since-taliban-takeover-11658061588

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