A camp set up by a state-owned Chinese mining company sits mostly empty near a protective wall in the arid mountains of Mes Aynak in Afghanistan on October 10, 2012. Photo: AFP
by Neal Kimberley
by Neal Kimberley

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
The Taliban’s return to power in Kabul could offer economic opportunities to China. Afghanistan is rich in minerals – access to which would benefit the Chinese economy – but there are no guarantees. In fact, there is every likelihood Afghanistan could just prove to be a money pit into which Beijing pours cash with China getting little back in return.

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.

Under the now-collapsed government of president Ashraf Ghani, the United States provided hard currency backing for the Afghan afghani through regular shipments of pallets of US dollars. Ajmal Ahmady, the Ghani-appointed governor of Afghanistan’s central bank, Da Afghanistan Bank (DAB), explained the situation in a recent series of illuminating tweets.

“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.

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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”.

Leaving aside that the cancellation of US dollar shipments appears to have occurred some days before Kabul fell, the US-backed Afghan government’s dependency on Washington’s largesse in the form of pallets of US dollar bills is clear.

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.

Afghans wait in long lines for hours to try to withdraw money, in front of Kabul Bank, in Kabul, Afghanistan, on August 15. Photo: AP

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.

Additionally, the International Monetary Fund has said that US$500 million of funds earmarked for Afghanistan as part of a recently approved US$650 billion IMF plan to support coronavirus-afflicted developing countries’ economies will not be made available to the new rulers in Kabul.
This leaves a financial void. Beijing could conceivably step in and assist Kabul financially, but would it want to?

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.

Perhaps the extraction cost, combined with the need to build the required transport infrastructure, was deemed prohibitive. In fairness, Chinese state-owned mining giant China Metallurgical Group Corp signed a contract with the Afghan government in 2007 to mine copper at the Mes Aynak, 40 kilometres southeast of Kabul, but that project still has not prospered.

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