Afghanistan's Monetary Authority: Exploring The Central Bank's Role

Afghanistan does have a central bank, called Da Afghanistan Bank (DAB). DAB was established in the capital, Kabul, with initial assets of 120 million Afghanis. DAB's responsibilities include maintaining the value of the Afghani and domestic price stability by implementing appropriate monetary policies. However, the bank has faced challenges in recent years due to the Taliban's control of the country and the subsequent freezing of its assets by the US and other countries. As a result, DAB has struggled to carry out its functions effectively, leading to economic difficulties in Afghanistan.

The Taliban's interference in Afghanistan's central bank

Afghanistan does have a central bank, called Da Afghanistan Bank (DAB). However, the bank has been facing challenges since the Taliban seized power in the country.

Under the former government, DAB parked billions of dollars in currency, U.S. Treasury bonds, and gold in the United States. But when the Taliban took control, the Biden administration froze these assets, preventing the militant group from seizing and misusing the money as they had with U.S.-made weapons. As a result, DAB has been struggling to function effectively, with a lack of liquidity and banknote shortages hurting businesses and the wider economy.

The US has concerns about the bank's leadership and anti-money laundering safeguards, which are central to the standoff over the Taliban's demand for the return of DAB's frozen assets. While the Taliban has promised to use the reserves only for monetary policy and has offered to bring in third-party monitors, Western officials are hesitant to send what could be seen as a gift to the Taliban.

To address these concerns, the US and its partners established the "Afghan Fund" or "Fund for the Afghan People", a Swiss-based foundation with an account at the Bank for International Settlements. This fund will hold $3.5 billion of DAB's reserves and make targeted disbursements to support Afghanistan's economy while keeping the funds out of the Taliban's hands. The US has stated that it will not support the return of these funds to DAB until the bank demonstrates its independence from political influence and interference, implements adequate anti-money laundering and counter-terrorism financing controls, and completes a third-party needs assessment with a reputable monitor.

While the establishment of the Afghan Fund is a step towards addressing Afghanistan's economic crisis, it is just the beginning. The fund's success will depend on the decisions made by its Board of Trustees, which consists of Afghan, American, and Swiss representatives.

The freezing of Afghanistan's assets

Afghanistan's central bank, Da Afghanistan Bank (DAB), has been at the centre of a political standoff between the Taliban and the US since the Taliban's takeover in August 2021. DAB's assets, totalling around $9 billion, were frozen by the US and other countries, to prevent the Taliban from accessing them. This has had a devastating impact on Afghanistan's economy, contributing to its collapse, high unemployment, and widespread hunger.

Prior to the Taliban takeover, DAB had approximately $7 billion in reserves deposited at the Federal Reserve Bank of New York, with a further $2 billion in Europe. After the fall of Kabul, the Biden administration froze these funds, citing uncertainty over who had legal authority to access the account. This decision was made amid concerns that the Taliban would seize and misuse the money, as they had with US-made weapons.

The freezing of DAB's assets has had severe consequences for the Afghan people. The lack of liquidity and banknote shortages have hurt businesses and disrupted remittances, payrolls, and aid efforts, causing prices to rise for vulnerable consumers. The situation has been exacerbated by the war in Ukraine, with half of Afghanistan's population suffering from hunger.

In February 2022, the Biden administration announced its intention to split DAB's frozen assets, moving $3.5 billion to a trust fund for humanitarian assistance in Afghanistan, and reserving $3.5 billion for potential legal claims by families of the victims of the September 11 attacks. This decision sparked outrage among some, who argued that the funds should be returned to the Afghan people.

In September 2022, the US and Swiss governments established the "Fund for the Afghan People", a Geneva-based foundation aimed at preserving and selectively disbursing the $3.5 billion in frozen assets. The fund is governed by a Board of Trustees, consisting of Afghan, American, and Swiss financial experts, and is intended to support the Afghan economy without going through the Taliban administration. However, it is recognised that releasing these funds will not be enough to resolve Afghanistan's economic crisis.

The remaining $3.5 billion in frozen assets continues to be the subject of litigation by 9/11 victims' families. In August 2022, a federal magistrate judge recommended against awarding damages, citing the bank's "immunity from jurisdiction". However, the ultimate outcome of this judicial process remains uncertain.

The Taliban have demanded the return of DAB's assets, promising to use the reserves only for monetary policy and in accordance with DAB regulations and Afghan laws. They have offered to bring in third-party monitors and claim that DAB retains enough staff to meet international standards, including precautions against money laundering and terrorist financing. However, Western officials are sceptical of the Taliban's intentions and have called for the bank to demonstrate its independence from political influence and interference.

The impact of the frozen assets on the economy

Afghanistan's central bank, Da Afghanistan Bank (DAB), has been left practically bankrupt after the freezing of its assets in the United States and Europe following the Taliban's return to power in 2021. The bank, which is responsible for protecting the value of the Afghan currency, limiting inflation, and supplying foreign exchange, now faces a lack of liquidity and banknote shortages, hurting businesses and crimping remittances, payrolls, and aid efforts.

The freezing of DAB's assets has had a devastating impact on Afghanistan's economy, which was already facing challenges due to drought, the COVID-19 pandemic, and mass displacement driven by conflict. The asset freeze was intended to prevent the flow of money to the Taliban, but it has had far-reaching consequences for the country's people, pushing the economy to the brink of collapse.

• Inflation and Currency Devaluation: The lack of liquidity at DAB has led to steep inflation and a devaluation of the Afghani, the Afghan currency. This has made imports more expensive and further exacerbated the economic crisis.
• Disruption to Banking System: The banking system in Afghanistan has seized up, with credit cards not working and difficulties in sending money internationally. This has affected Afghans living abroad who are trying to send money to their relatives back home.
• Shortages and Hunger: The economic collapse has led to shortages of essential goods, including food and fuel. According to the World Food Program, 14 million people in Afghanistan did not have enough to eat as of August 2021. The situation has been made worse by the war in Ukraine, with half of Afghanistan's 39 million people suffering from hunger.
• Loss of Jobs and Income: Many people, especially women, have lost their jobs. Government workers and teachers are going without paychecks, and those with jobs are struggling to make ends meet due to the rising prices.
• Humanitarian Crisis: The combination of economic collapse, high unemployment, and widespread hunger has resulted in a humanitarian crisis. People are struggling to access basic necessities, and aid organizations are finding it challenging to deliver assistance due to the liquidity crisis.
• Impact on Healthcare and Education: The freeze on assets and the suspension of foreign aid have affected the healthcare and education sectors, which were previously heavily reliant on international aid. This has led to the closure of healthcare facilities and disruptions to vaccination efforts.
• Social Unrest: The economic crisis and shortages of essential goods have resulted in social unrest, with children following vehicles and begging for money.
• Long-term Consequences: The frozen assets and economic collapse will have long-term consequences for Afghanistan's development. The World Bank estimates that it will take years for the country's GDP to recover.

While there have been some efforts to release a portion of the frozen assets, such as the establishment of the "Fund for the Afghan People" in Switzerland, the impact of these measures has been limited. The Taliban's lack of recognition by the international community and concerns about their governance have contributed to the ongoing economic crisis in Afghanistan.

The role of the US in Afghanistan's central bank

Afghanistan does have a central bank, called Da Afghanistan Bank (DAB). DAB was established in the capital, Kabul, and is responsible for maintaining the value of the country's currency, the Afghani, and promoting domestic price stability.

The freezing of DAB's assets has had a significant impact on Afghanistan's economy, contributing to a lack of liquidity, banknote shortages, and rising prices. In an effort to address the humanitarian and economic crisis, the Biden administration signed an Executive Order (E.O.) in 2022 to enable the use of a portion of the frozen assets for the benefit of the Afghan people. The E.O. established the "Afghan Fund" or the "Fund for the Afghan People," a trust fund based in Switzerland, with an initial allocation of $3.5 billion. The fund is governed by a Board of Trustees, including Afghan, American, and Swiss representatives, and aims to provide targeted disbursements to support Afghanistan's economy while bypassing the Taliban administration.

The US has outlined conditions for the eventual return of the remaining frozen assets to DAB, including demonstrating independence from political influence, implementing adequate anti-money laundering and counter-terrorism financing measures, and undergoing third-party needs assessments and monitoring. While the US recognizes the need to support Afghanistan's economic stability, it remains cautious of the Taliban's intentions and capacity to manage the economy effectively.

The future of Afghanistan's central bank

Afghanistan's central bank, Da Afghanistan Bank (DAB), is facing significant challenges due to the country's political and economic crisis. The bank's ability to function effectively has been hindered by limited funds and a lack of liquidity, which has contributed to rising inflation and a struggling economy.

The future of DAB is uncertain, and there are several factors to consider when discussing its prospects. Firstly, the bank's reserves have been frozen by the United States and other countries, totalling over $7 billion, which has restricted DAB's ability to carry out its role. While the US has diverted $3.5 billion of these funds to a "Fund for the Afghan People" in Switzerland, it is not yet clear what will happen to the remaining assets. The US government has stated that it will not support the return of these funds to DAB until the bank can demonstrate its independence from political influence and interference, particularly from the Taliban.

The Taliban's role in Afghanistan's governance further complicates the situation. The group is not recognised as a legitimate government by the US or any other nation, and some of its officials are under sanctions for extremist acts. The Taliban has promised to use DAB's reserves only for monetary policy and to clean up corruption in the banking sector. However, there is scepticism about their intentions, and Western officials are reluctant to provide what could be seen as a gift to the group.

To regain access to its frozen assets, DAB will need to implement several reforms. This includes reaffirming its legal autonomy, appointing a non-political leadership, and rebuilding its professional staff. Additionally, DAB will need to address concerns around anti-money laundering measures and counter-terrorism financing. The bank will also need to restore its essential functions and rebuild confidence in the Afghan economy to encourage international banks to resume doing business with Afghanistan.

While the establishment of the "Fund for the Afghan People" is a positive step, it is not enough to resolve Afghanistan's economic crisis. The fund will need to be managed effectively and make targeted disbursements to support the Afghan economy. The fund's board of trustees will play a critical role in deciding how the funds are utilised, and their decisions will significantly impact the future of DAB and Afghanistan's economy.

In conclusion, the future of Afghanistan's central bank, DAB, depends on a combination of factors, including the release of frozen assets, reforms within the bank, and the complex political dynamics involving the Taliban. While there are significant challenges, a strong central bank is crucial for Afghanistan's long-term economic stability and growth, particularly in the agricultural and extractive sectors.

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