Afghanistan: Reconstruction Will Require Resuscitating Banking Sector
When Afghanistan's new six-month interim administration took office on 22 December, it was truly starting from zero.
The new administration inherits a central bank that was looted by the Taliban as the militia abandoned the city early last month. The militiamen took with them some $5.5 million in U.S. currency, plus close to $1 million in Pakistani rupees and Afghan currency. At the same time, the militia left government employees still waiting for back wages, which today are some six months in arrears.
That makes creating a functioning banking system one of the first problems for the new administration. But it is by no means an easy one to solve. The central bank -- unless it receives immediate foreign assistance -- will have to slowly refill its coffers again with business tax revenues in a barely functioning economy.
The head of the central bank, Sayed Ali Hashemi, says he will not try to predict how long it might take to replace the money the Taliban took. He says it depends entirely on how quickly the economy picks up.
"How long it takes to replace the money will depend on tax collections. And that will depend on the level of economic activity, on the level of trade, on import/export, on the transportation industry, and other sectors. So it is impossible to predict how long."
Hashemi, a longtime member of the opposition Northern Alliance, took up the job of heading a bank with no cash just a few weeks ago. A former student in the economics faculty of Kabul University, he had most recently been an administrator of the presidential palace following the return of acting President Burhanuddin Rabbani to Kabul in the middle of last month.
But getting new funds for the government's central bank -- which is responsible for collecting taxes, paying salaries, printing currency and controlling the money supply -- is just the start of the new administration's banking challenges.
Economists here say Afghanistan's entire banking system is in ruins after decades of war and five years of Taliban rule.
Taj Mohammad Akhbar is the director of the department of national economy at Kabul University's economics faculty. Currently, he says the only functioning bank in the country is the central bank. The rest of the state's banking sector long ago went bankrupt. Those facilities included banks for trade and export development, which provided loans to Afghan businesses, plus special banks for industrial and agricultural development.
Akhbar says the state banks went bankrupt due to their inability to collect on loans amid Afghanistan's war-ruined economy. It was also due to the Taliban's insistence upon -- but inability to operate -- an Islamic banking system eschewing interest on loans. Both factors assured the state banks' inability to build up capital reserves, while high rates of inflation kept ordinary Afghans from putting any money into savings accounts.
At the same time, Akhbar says, private banks under the Taliban quickly earned a reputation for serving mainly to receive capital from foreign countries that supported the militia, but with little accountability afterward.
The economics expert says a top priority for the new administration will have to be creating a banking system that again offers a full range of services, particularly business loans needed to get the economy growing again. He says that, in the past, Afghan governments have commonly relied on state banks to provide such loans in a largely centralized economy. But he says a system of both state and private banks may be needed to achieve a speedy economic recovery.
"In my opinion, in addition to the state banking sector, it is necessary to encourage people inside and outside Afghanistan to invest and put their money into a private banking sector. That will speed up economic activities."
He continues: "The private banking sector could provide credit for small enterprises and to business people so that they can begin to produce as quickly as possible. This way the economy will develop quickly and war-damaged Afghanistan can be reconstructed."
Akhbar says private banks often will assume higher levels of risk than will state banks in lending to businesses. And they often prove more efficient in establishing the commercial banking contacts abroad to help simplify trade procedures.
But Akhbar says it is unclear at this moment what kind of banking system will be adopted by the interim administration or the transitional government that is due to follow it. It is also unclear whether new governments will favor a Western-style or an Islamic banking system, or permit both to exist side by side. That is likely to depend on the governments' political and religious leanings -- something still to be seen.
One advantage of having both systems co-existing would be to facilitate financial contacts with both the West and the Arab Gulf, while also recognizing the strong religiosity of many Afghans.
Still another major challenge facing Afghanistan's banking sector is controlling the country's money supply. Throughout the past five years, the Northern Alliance's Rabbani and ethnic Uzbek General Abdul Rashid Dostum independently printed the Afghan currency, the afghani, with Russian assistance. That was in addition to the stores of afghanis held by the Taliban, who never found a country to print money for them and had no working printing presses of their own. In addition, experts here say Iran briefly printed afghanis for another faction leader, Gulbuddin Hekmatyar, to complicate the money picture further.
The spontaneous printing of money helped Afghanistan's groups meet their financial needs. But it has left the money supply in total disarray, with no one certain how much various groups still hold in reserve to release into the economy as they need to. Some serial numbers on Afghani bills have been used more than once in the frenzy of currency printing, making even rough tallies of the amounts of money in circulation impossible. The uncertainty directly contributes to inflation.
Experts like Akhbar say the final solution to the money supply problem may be for a new government to print its own currency and gradually phase out the existing notes.
As the new Afghan administration faces these issues, another priority may be to take the banking system out of the control of political appointees and return it into the hands of professionals. The Taliban brought many nonprofessionals into positions of responsibility, and the practice -- unless controlled -- could well continue amid the changing of administrations planned for the transition period ahead.
Assuring that a return of the banking system to professionals takes place may be something international lenders will want to pay particular attention to. Donor states have promised significant reconstruction aid for Afghanistan, with some of the amounts and details due to be discussed at a ministerial level conference in Tokyo next month.
The reconstruction funds will have to be channeled, in part, through Afghanistan's banking system, and it will be in the best interests of the donors -- as well as of ordinary Afghans -- to assure these funds are managed properly.
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