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Revisiting the Cash Shortage in Afghanistan

Categories : Cash and Crises, Cash is a contingency and fall-back solution, Cash is the most widely used payment instrument
January 9, 2022
Tags : Access to cash, Afghanistan, Cash and Crises, Cash cycle efficiency, Humanitarian
Four months after the Taliban took over Kabul, the Afghan banking system is on the brink of collapse. Afghanistan direly needs physical cash to jumpstart its imploding economy.
Manuel A. Bautista-González

Ph.D. in U.S. History, Columbia University in the City of New York

Post-Doctoral Researcher in Global Correspondent Banking, 1870-2000 – Mexico and South America, University of Oxford

This post is also available in: Spanish

After the Taliban took over Kabul, the Biden administration froze Afghan reserves abroad. The U.S. government also suspended air shipments of shrink-wrapped pallets of U.S. dollars to Da Afghanistan Bank (DAB), the country’s central bank, paralysing the banking system.

The Retail Payments System Collapses

Until August, Afghanistan received cash shipments of $249 million every three months in boxes of bound $100 notes that were kept safe in the DAB’s vaults and the presidential palace. Since then, U.S. dollars have nearly disappeared from circulation.

Although there are afghanis for $4 billion worth, only $500 million worth circulates in daily payments. “The rest is sitting under the mattress or under the pillow because people are afraid,” said Abdallah al Dardari, head of the United Nations Development Programme in Afghanistan and a former deputy prime minister of Syria.

Worn-out afghanis (in denominations of AFN10, 20, 50, and 100, equivalent to USD0.09, 0.19, 0.48, and 0.95) have returned to circulation. Afghans refuse to take them in return for their U.S. dollars, said money exchangers to UNI. The DAB collected and incinerated old banknotes worth AFN1.7 billion (USD16.19 million) in 2021.

In addition, counterfeit banknotes (in the AFN500 and 1,000 denominations, equivalent to USD4.76 and 9.52) are circulating more frequently. “I have received them many times,” said Abdul Salim Asadi, a shopkeeper in Kabul. “On the one hand prices have spiked, on the other hand fake banknotes are spreading,” said Abdul Rahim Ahmadzai, another shopkeeper.

A Full Breakdown in the Cash Cycle

It is challenging for Afghans to withdraw funds from their bank accounts. The Taliban have imposed capital controls, including limits to bank withdrawals (first to $200 and then $400 a week) and a complete ban on the use of foreign currency, despite the heavy reliance on U.S. dollars. As the New York Times and the Financial Times have reported, Taliban fighters patrol banks where anxious customers wait for hours, seeking to withdraw cash from their accounts.

The Scarcity of Cash Magnifies the Economic Collapse

Afghan homemakers sell their belongings on the streets to get cash to buy food and medicine or raise funds to emigrate.

Afghans are also postponing regular and urgent medical care.

Restoring (Some) Liquidity: The Case (and Denomination) of Personal Remittances

Per the World Bank, remittances to Afghanistan reached $788.92 million in 2020, 4% of Afghan GDP. Most remittances originate in Iran, Saudi Arabia, Great Britain, Germany, and the United States.

Western Union and MoneyGram suspended transfers to Afghanistan after the fall of Kabul. On September 2, the U.S. Treasury authorised financial institutions to process personal remittances to Afghanistan.

However, after Western Union and MoneyGram resumed money transfers to the country, the DAB ordered banks to pay remittances in local currency to preserve scarce U.S. dollars, part of capital controls imposed by the Taliban. “It’s a matter of concern that the remaining physical cash of U.S. dollars is going to reduce further,” said an Afghani banker to Reuters.

Afghanistan Needs Physical Cash to Jumpstart its Banking System

Afghanistan’s cash shortage resembles similar crunches in countries such as Zimbabwe, Venezuela, Lebanon, Syria, and Myanmar experiencing political and economic dislocation, social instability and humanitarian crises.

After the Taliban took over the country, United Nations (U.N.) agencies and aid groups used hawalas (informal money-moving networks) and cash withdrawn from banks to pay staff salaries and make smaller cash purchases. However, “these modalities are not sufficient for the large scale operations requiring cash payments or cash assistance in-country,” said Stephane Dujarric, U.N. spokesman.

In October, Reuters reported U.N. officials were preparing plans to fly in U.S. dollar bills to Kabul for distribution via banks in payments of less than $200 directly to those needing food assistance and to pay salaries to U.N. and nongovernmental organisations staff, without Taliban involvement.

Restoring the continuity of the cash supply is critical in mitigating Afghanistan’s economic collapse.

This post is also available in: Spanish