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Mark Lowcock

Michael Pisa

Sarah Rose

October 29th, 2021

On the brink: Enabling urgent financial flows to Afghanistan

0 comments | 2 shares

Estimated reading time: 7 minutes

Mark Lowcock

Michael Pisa

Sarah Rose

October 29th, 2021

On the brink: Enabling urgent financial flows to Afghanistan

0 comments | 2 shares

Estimated reading time: 7 minutes

In this article originally published by the Center for Global Development, Professor in Practice in LSE Department of International Development Mark Lowcock and co-authors Michael Pisa and Sarah Rose look at potential solutions to the looming humanitarian disaster in Afghanistan as economic shocks and food shortages ravage the country. This article is part of a series on the ID blog, ‘Afghanistan: After the fall‘.

As Afghanistan enters its harsh winter season, a massive humanitarian disaster appears increasingly likely. Facing food shortages, rising prices, and a breakdown in public services, millions of ordinary Afghans need immediate assistance as their country veers toward economic collapse.

Even before the Taliban took over the government in August, the Afghan economy was buckling under the COVID-19 pandemic, severe drought, intensifying conflict, and loss of investor confidence. Today, the economy sits on a precipice. Most development assistance to the aid-dependent country stopped the moment the Taliban took Kabul, as the United States (which has provided nearly half of total aid to Afghanistan over the last two decades) and allied countries moved to restrict any funding that could benefit the Taliban. Private funds, including remittances, have also dried up.

To help ease the toll on the millions of ordinary Afghans facing the double predicament of a Taliban takeover and economic crisis, the international community has taken some important steps. International commitments—including $1.2 billion in donor pledges made in response to a UN appeal in September—should help reduce the severity of the humanitarian crisis. Pre-Taliban takeover, the UN was helping eight million Afghans; new money will enable them to do more. The G20 is also focused on Afghanistan and recently issued a statement of shared principles and agreed-upon actions that signal consensus among members on the need to prevent a humanitarian disaster. While these efforts are welcome, they leave unaddressed several acute challenges that prevent critical financial flows from reaching Afghanistan.

Earlier this month, the Center for Global Development held a private workshop focused on addressing three urgent questions:

  • How do sanctions on the Taliban affect the ability of international organizations to provide critical assistance?
  • With most of Afghanistan’s foreign reserves frozen in US financial institutions, what steps can the United States and international community take to maintain pressure on the Taliban while staving off economic crisis?
  • With restrictions on channelling aid through state structures, what will happen to the large aid programs—and the services they delivered—that used to be run through the government?

The event featured briefings from former senior Afghan economic officials—Mustafa Mastoor (former Minister of Economy), Shah Mehrabi (member of the Supreme Council of Da Afghanistan Bank and former senior economic advisor to the Minister of Finance), and Gul Maqsood Sabit (former Deputy Minister of Finance)—and included participants from donor organizations, implementing partners, and think tanks.

The main theme that emerged is the need to forge a middle path between the two extremes of (a) punishing the Taliban by ceasing aid flows and preventing access to foreign exchange reserves at the expense of ordinary Afghans or (b) increasing financial flows at the expense of potentially bolstering an unsavuory regime. Such a “middle path” would seek to save lives by providing necessary humanitarian aid in the short-term, avoid a total economic collapse with all the spillover effects that risks, preserve the development gains made over the last two decades (notably in health and education), and put Afghan society on a trajectory that avoids disintegration without strengthening the Taliban.

Below we provide key takeaways from the discussion alongside our recommendations for near-term actions that international actors can take, ideally with leadership from the United States government (these recommendations are the authors’ views and do not represent consensus among discussion participants).

Existing sanctions are doubly constraining due to uncertainty; more clarity and flexibility is needed

The United Nations and United States have imposed sanctions that affect how NGOs and other actors can operate in Afghanistan. The UN’s sanctions date back to 1999 when the Security Council first froze the Taliban’s funds and prevented other funding to the group in response to the Taliban’s sheltering of Osama bin Laden. Beginning in 2002, sanctions were amended to apply to specific individuals associated with the Taliban rather than a blanket application.

US sanctions on the Taliban stem from the organization’s 2002 inclusion as a Specially Designated Global Terrorist (SDGT). Sanctions also apply to several individuals affiliated with the Taliban who are included on the Treasury Department’s Specially Designated Nationals And Blocked Persons List (SDN). These sanctions prevent transactions or any material support to the Taliban or designated individuals.

In September, the US Treasury’s Office of Foreign Assets Control (OFAC) issued two general licenses allowing humanitarian assistance and the exportation of certain humanitarian-related commodities (e.g., food and medicine) to Afghanistan. This was a welcome step, but aid organizations still face two significant challenges working within the US sanctions regime.

The first challenge is uncertainty around who is sanctioned and what activities are permitted. Aside from the named individuals, there is some confusion as to whom the sanctions apply, including whether they pertain solely to officials known to be connected to the Taliban, or ministries led by individuals on the SDN list, or the entire Afghan government.

While UN agencies, with their diplomatic immunities, may be able to operate in the current sanctions environment, this lack of clarity poses a major challenge to the international NGOs that often carry out last-mile delivery of humanitarian and development services, and which tend to be more risk-averse about the repercussions of unknowingly violating existing rules. The result may be more limited humanitarian engagement than the drafters of these licenses intended.

The second limitation relates to the content of the licenses. As many have pointed out, these general licenses pertain to humanitarian activities while leaving restrictions in place on other crucial activities, including those related to peacebuilding, human rights, education, and support for economic activity outside of illicit drugs. Prohibitions on funding these activities make it more likely that the development gains achieved over the last twenty years will be lost.

In a recent review of its global sanctions programs, the Treasury Department identified, among other things, the need for improved clarity and better tailoring to avoid unintended economic, political, and humanitarian consequences on non-targeted populations. The Department also recommitted to soliciting input from humanitarian groups on what these approaches should look like in individual contexts. These findings offer a potential window of opportunity to advance the following recommendations.

The US Treasury should issue additional licenses that allow for a broader scope of humanitarian and development assistance in Afghanistan

As CSIS’s Sue Eckert, former Treasury official Adam Smith, the Alliance for Peacebuilding, and the Charity and Security Network have all argued, OFAC should issues licenses for Afghanistan that allow for crucial development, peacebuilding, and human rights activities beyond just the basic humanitarian needs, similar to the approach that it has taken with licenses for countries like Yemen.

The US Treasury should convene a meeting with the World Bank, UN, other bilateral donors, and NGOs working in Afghanistan to clarify the scope of sanctions.

As Smith and Eckert have noted, INGOs and other actors, need assurances that they will not be prosecuted for inadvertent violations. Zero tolerance for violations will constrain desperately needed engagement with the Afghan population. NGOs also need to clearly understand the level of due diligence they must demonstrate.

The World Bank should convene a donor group to explore how each donor operates within existing sanctions.

Different donors may have different levels of comfort operating within the sanctions regime. Although many international organizations, including UN agencies, the IMF, and the World Bank, do not have a legal obligation to comply with US sanctions, they often do so on principle. International NGOs do not have the same luxury and must avoid engaging in unexempted transactions with sanctioned entities and individuals. Understanding the universe of available actions, based on what each donor or institution can individually do, can help yield a more coordinated collective response.

With frozen foreign exchange reserves contributing to economic instability, there is an urgent need to explore their limited, conditioned release

Afghanistan is running out of money. In addition to a sudden stop in aid flows, the newly formed government has also lost access to most of Afghanistan’s $9.5 billion in foreign currency reserves, most of which—around $7 billion—are currently frozen in US-based financial institutions by demand of the US Treasury. The International Monetary Fund has also restricted Afghanistan’s access to its $460 million allocation of Special Drawing Rights (SDRs) and other IMF resources.

With limited access to foreign currency, Afghanistan cannot pay for imports, including food, fuel, health commodities, and electricity. It is also unable to hold the dollar auctions needed to defend the value of the Afghani, raising the risk of hyperinflation. Finally, the collapse in aid flows and domestic revenue has prevented the government from paying the salaries of civil servants, many of whom haven’t received a paycheck in months. As a result, public service delivery has largely shut down, threatening the real gains that aid investments have helped Afghanistan realize over the last twenty years. The Taliban has tried to forestall a balance of payments crisis by imposing import restrictions and limiting bank withdrawals to $200 per week per person. But these measures further constrain economic activity and will likely only delay the impending crisis.

Releasing Afghanistan’s foreign exchange reserves could help the government fend off a financial crisis that would take a heavy toll on Afghans and create greater geopolitical instability. But the US Treasury Department has signalled its unwillingness to budge.

The United States and international community should allow limited, monitored release of reserves to pay for essential imports.

The United States might not allow unconditioned release of Afghanistan’s frozen funds, but it should allow the Afghan government limited access. Access could start small and be conditioned on specific uses which can be independently monitored and audited with an option to terminate in the event of misuse. Tying the use of funds to the purchase of essential imports—particularly food, fuel, and health commodities—and/or to the facilitation of dollar auctions to prop up the value of the Afghani could help meet the needs of ordinary Afghans facing food insecurity without giving the Taliban discretionary control. There is precedent for such an arrangement. A portion of the Venezuela’s central bank’s offshore funds frozen in the United States was released to finance economic relief for healthcare workers during the pandemic.

Even as the international community remains wary of strengthening the Taliban, it must weigh the longer-term costs of channelling aid outside existing state structures

Until recently, several large donor-supported health and education programs were channelled through Afghan state structures—in particular, through the World Bank-supported Afghanistan Reconstruction Trust Fund (ARTF). For example, Sehatmandi, a health and nutrition program funded by the ARTF and the World Bank and implemented by Ministry of Public Health in partnership with NGO service providers, covered around 60 percent of health sector funding. Sanctions and a general reluctance to engage a Taliban-led government threaten the continuation of these programs, with severe consequences for the health (and in some cases survival) of the population (though Sehatmandi has short-term bridge funding to keep it alive until the end of the year).

While some service delivery can be maintained (sanctions permitting) through direct funding to NGOs and potentially from the UN, bypassing state structures will ultimately hollow out Afghan institutions and increase the country’s fragility. In the absence of activities and salaries, the government will lose program delivery capacity and a talented, educated class of professional civil servants.

The international community should explore ways to preserve delivery mechanisms that work through civil servants but are walled off from sanctioned individuals.

The international community has invested significantly in the development of Afghan state institutions and the Afghan civil service over the last twenty years, but any gains are now at risk.

As USIP’s William Byrd has argued, it will be important for the international community to “demarcate clearly between the Taliban regime and the Afghan people.” Taking this a step further, it will be important to distinguish, whenever possible, between Afghan state institutions and the civil service, on the one hand, and Taliban leaders on the other. Central to determining how that distinction bears out in future assistance will be negotiating whether there is an arrangement of conditions and third-party monitoring that will be both acceptable to the United States and other international donors and agreed to by the Taliban.

Greater urgency is needed to avert a humanitarian crisis in Afghanistan. In the short-term, action is needed to establish greater clarity and flexibility in the sanctions regime and devise a conditional approach to the release of the country’s foreign exchange reserves. Donors must also begin to tackle questions with a longer-term lens, including whether, and under what conditions, they can support state efforts to deliver public services while continuing to sideline the Taliban. With these actions, the United States and its allies would meaningfully improve Afghanistan’s chances of avoiding a massive humanitarian disaster with little risk (and possible benefit) to their geopolitical and national security interests.

The views expressed in this post are those of the authors and in no way reflect those of the International Development LSE blog or the London School of Economics and Political Science. You can read more articles in this series, ‘Afghanistan: After the fall’ here.

Photo credit: Adobe Stock

About the author

Mark Lowcock Headshot

Mark Lowcock

Sir Mark Lowcock has worked for 36 years in international development policy and programme management and global humanitarian issues. His areas of interest include development finance, multilateral reform, governance, the organisation of international development and humanitarian institutions and operational management in fragile and conflict-affected settings. He served as Under-Secretary-General for Humanitarian Affairs and Emergency Relief Coordinator for the United Nations between 2017 and 2021. From 2011 to 2017 he was the Permanent Secretary of the UK Department for International Development. He is a Visiting Professor in Practice in the Department of International Development at the LSE and has been a Visiting Fellow at the Blavatnik School of Government at Oxford University.

Michael Pisa

Michael Pisa is a policy fellow at the Center for Global Development, where his work focuses on how digitalization is shaping economic development. He is currently overseeing a project on how governments can use and regulate the use of data in a way that supports innovation, growth, and development while protecting individuals against abuse. Before joining CGD, Pisa served as a senior advisor to the Under Secretary for International Affairs at the US Treasury Department, where he helped organize and inform the Obama Administration’s efforts to support financial inclusion abroad. In earlier roles, he served as deputy director of Treasury’s Office of International Banking, and acting US financial attaché in Afghanistan. Pisa received a PhD in political science from the University of California, San Diego.

Sarah Rose

Sarah Rose is a policy fellow at the Center for Global Development. Her work, as part of the Center’s US Development Policy Initiative, focuses on US government aid effectiveness. Areas of research and analysis include US development policy in fragile states, the use of evaluation and evidence to inform programming and policy, the implementation of country ownership principles, the policies and operation of the Millennium Challenge Corporation (MCC), and aid transition processes. Previously, Rose worked for the United States Agency for International Development (USAID) in Mozambique as a specialist in strategic information and monitoring and evaluation. She also worked at MCC, focusing on the agency’s country selection and eligibility processes. She holds a Masters degree in public policy and a BS in foreign service, both from Georgetown University.

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