Why Afghanistan might be China’s money pit after messy US withdrawal
- Afghanistan faces a financial void after the United States, European Union and IMF have suspended aid and frozen billions in reserves
- China could step in and aid Kabul financially, but the high risk and extraction costs of mineral resources might outstrip any benefits to Beijing
First off, there is the inconvenient fact that, whoever is running the country, Afghanistan runs a current account deficit that has to be funded. Money needs to be found from somewhere to help balance the books. Aid inflows equated to almost 43 per cent of Afghanistan’s gross domestic product in 2020, according to the World Bank.
“Given Afghanistan’s large current account deficit, DAB was reliant on obtaining physical shipments of cash every few weeks,” Ahmady, who is now outside Afghanistan, tweeted on August 18. “The amount of such cash remaining is close to zero due [to] a stoppage of shipments as the security situation deteriorated, especially during the last few days.”
Confidence in the afghani rested on the continuation of regular arrivals of pallets of US dollars. On August 13, two days before Kabul fell and with pallets of US dollars expected on the Sunday, Ahmady said he was made aware that “there would be no further USD shipments”. On the Saturday, as Ahmady describes it, the afghani fell from 81 to the US dollar to 100 before settling back at 86.
Kabul residents sought hard currency, prompting Ahmady to restrict local banks’ access to US dollars to conserve the DAB’s remaining physical dollar reserves.
Realising the gravity of the situation, Ahmady informed Ghani who, according to Ahmady, contacted US Secretary of State Antony Blinken to request the US dollar shipments be resumed. But while that request was approved in principle, Ahmady’s said nevertheless “the next shipment never arrived”.
Washington will not be supplying pallets of US dollars to the Taliban, raising the question of who might step into the breach. The European Union has already suspended aid to Afghanistan.
Neither can the Taliban access the bulk of the DAB’s reserves. Ahmady’s estimates put the total value of DAB reserves at US$9 billion just before the fall of Kabul, with some US$7 billion of that being held at the US Federal Reserve. Washington has now frozen those US$7 billion along with other money held by entities under US jurisdiction.
Leaving aside US Treasury sanctions on the Taliban, there is also the issue of United Nations Security Council Resolution 2577, to which China is a signatory and which extended all current UN sanctions on the Taliban until December. In any case, would China ever see its money again if it chose to offer assistance?
Of course, there is future access to Afghanistan’s mineral riches to consider. In 2010, an internal US Defence Department memorandum described Afghanistan as “the Saudi Arabia of lithium”, a metal that is a key component in the manufacture of electrical vehicles.
Accessing that lithium would be attractive to Beijing, but it should also have been for Washington. Yet, 11 years after that memorandum, that lithium remains unmined and the United States has departed Afghanistan.
Stability in Afghanistan would clearly suit China. Additionally, there are economic opportunities for China in Afghanistan, but Beijing should be cautious. Afghanistan could be a bottomless money pit.
Neal Kimberley is a commentator on macroeconomics and financial markets