Credit and National Banking
WORLD OPINION GROWING ANGRY AGAINST US FREEZE OF AFGHAN ASSETS
At the time of this writing, the rapid lifting of sanctions against Kabul, which would allow the unfreezing of Afghanistan’s $9 billion assets abroad, remains unfortunately unlikely.
However, two key events indicate that in many quarters of the world, the outright “theft” of the money of the Afghan people is increasingly disapproved of by public opinion.
- In February 2022 an online petition launched by the Chinese daily Global Times, gathered over 422,000 Signatures in a very short period of time (see image);
- On August 10, in a letter to President Joe Biden and Treasury Secretary Janet Yellen, some 70 prominent mainly American economists called the Biden Administration to allow the central bank of Afghanistan (Da Afghanistan Bank, or DAB) to reclaim its International reserves. The pressure on Biden brought him to transfer part of the assets ($3.5 billion) to a Geneva based foundation (“Afghan Fund”) in charge of monitoring and deciding for what purpose the money can be spent without having it going to the Taliban government. In their letter, they underline the humanitarian disaster beyond belief resulting from the dramatic collapse of Afghanistan: “Seventy percent of Afghan households are unable to meet their basic needs. Some 22.8 million people — over half the population — face acute food insecurity, and 3 million children are at risk of malnutrition. Reports abound of desperate Afghans forced to sell their own organs to afford food for their families. The International Rescue Committee warns: ‘the current humanitarian crisis could lead to more deaths than twenty years of war.’”
Then they add, “But one coercive measure in particular has contributed mightily to Afghanistan’s economic collapse: the blocking of DAB’s access to roughly 7 billion USD in its foreign exchange reserves held at the Federal Reserve Bank of New York. The United Kingdom, Germany, the UAE and others have implemented similar policies blocking access to an additional $2 billion. This is a de facto seizure of foreign reserves that had been built up at great opportunity cost over the course of decades. In addition, DAB’s credentials have been revoked at the World Bank, and roughly $440 million in Special Drawing Rights at the International Monetary Fund have been blocked (as the IMF does not recognize the Taliban-led government). All of this has left Afghanistan isolated from the international financial system and without access to its foreign currency reserves.”
These reserves, they underline, are “critical to the functioning of the Afghan economy, in particular, to manage money supply, to stabilize the currency (the afghani), and to pay for the imports — chiefly food and oil — on which Afghanistan relies. The resulting liquidity crunch led to a sharp depreciation of the afghani. The cost of imports jumped, exacerbated by the war in Ukraine. The private banking system has nearly ground to a halt. Salaries have gone unpaid. Individuals and businesses are unable to access their savings or new finance. For most, the cost of basic necessities is now out of reach.”
In short, “without access to its foreign reserves, the central bank of Afghanistan cannot carry out its normal, essential functions. Without a functioning central bank, the economy of Afghanistan has, predictably, collapsed. The people of Afghanistan have been made to suffer doubly for a government they did not choose. In order to mitigate the humanitarian crisis and set the Afghan economy on a path toward recovery, we urge you to allow DAB to reclaim its international reserves.”
Signers to the letter include the Nobel Prize-winning economist Joseph Stiglitz, Jayati Ghosh, Linda Bilmes; Sir Richard Jolly of the University of Sussex; Dean Baker, Eileen Appelbaum, and Mark Weisbrot of the Center for Economic and Policy Research (CEPR); and Heidi Shierholtz, Jeff Faux, John Schmitt, and Josh Bivens of the Economic Policy Institute, among many others. Andrés Arauz, formerly general director for the central bank in Ecuador, also signed the letter as did Yanis Varoufakis, Member of the Hellenic Parliament
Previously, the UN Secretary-General, leading UN human rights experts, US lawmakers, families of the victims of the September 11 attacks, Afghan women’s groups and feminist leaders, leading human rights organizations, civil society organizations, and others have called for the release of the Afghanistan Central Bank’s assets.
FIRST SIGNS OF A FINANCIAL MODUS VIVENDI WITH THE WEST?
Under pressure, President Biden, despite opposition, “allowed” some changes from his initial total boycott of Afghanistan from the world community.
Afghan Fund
As a reminder, in August 2021, after the Taliban took power, roughly $9 billion of its foreign assets were frozen in the United States, Europe and the United Arab Emirates. Since then, the US had been under pressure to return the roughly $7 billion being held at the New York Federal Reserve Bank to Da Afghanistan Bank (DAB), the Afghan central bank. “US law says that the central bank reserves of a country that for whatever reason, has an unrecognized government, don’t belong to that government,” said William Byrd, an expert on Afghanistan at the United States Institute of Peace.
The Schiller Institute and, as mentioned above, many prominent international economists, including Nobel laureate Joseph Stiglitz asked the US Administration release the money to prevent millions to perish from starvation and the humanitarian and economic disaster left behind. But the US refuses any official recognition of what it still calls a “terrorist” government composed by individuals searched for by the FBI and whose names figure on the list of UN sanctions. Until that is changed, not a penny can go directly to the Afghan government.
The US also wanted compensations for the victims of the 9/11 terror attacks. Biden took the unusual step of signing an executive order in which he declared a national emergency over the “widespread humanitarian crisis” and economic turmoil in Afghanistan, which posed a threat to US security. His administration then asked a judge to allow it to move half of the Afghanistan reserves in U.S. custody, to a Geneva, Switzerland-based trust fund, described as for the purpose of supporting the Afghan people – a permission that was granted and went unchallenged in court.
Hence, mid-September 2022, the US announced that half of the reserves ($3.5 billion) would be transferred to a new, private foundation in Geneva carrying the name “Fund for the Afghan People” and that the other half remains in the U.S. subject to ongoing lawsuits filed by victims of the 9/11 attacks and their relatives. This latter excuse of sequestering Afghanistan funds is concocted, based on a U.S. court summary judgment in 2012 which found the Taliban and other defendants liable to pay damages of $6 billion, plus accumulated interest, for charges that the Taliban took part in the 9/11 attacks, for which experts point out, there is no evidence. The US Department of Justice has since argued that these damages should be cut by more than half, as legally they are meant to be compensatory rather than punitive in nature.
On moving half the $7 billion to and account in Switzerland, said to be at the Bank for International Settlements, makes it “much less vulnerable to litigation in the US, and that’s a major accomplishment,” said Byrd. “It’s good that Switzerland stepped in, as it’s not clear that anybody else would have been able – with credibility – to take on [the Afghan fund],” says Byrd.
Managing the Afghan Fund is a board of four people having the power to decide how to disburse the reserves:
- Prof. Shah Mehrabi, member of the Supreme Council of the Central Bank of Afghanistan, former advisor to the Afghan president and Professor of Economics at Montgomery College ( US ).
- Anwar ul-Haq Ahadi, a former Afghan Finance minister who strangely declared on Oct. 23: “The freezing of these assets was a political decision, and the issue that Afghanistan’s current government has not been recognized yet is political. if the problems are solved, there is no need for this trust fund and it will be canceled. At that time, the money will be transferred to the Da Afghanistan Bank (DAB).”
- Alexandra Baumann, head of the Prosperity and Durability Division at the Swiss Foreign Ministry, who said “We are looking at an absolutely desperate economic situation [plus] there is no legitimate government in Afghanistan.” “The DAB in its current form is not a fit place for this money,” says Baumann. “We do not have any guarantee that if the money goes back right now that it will be effectively used for the benefit of the Afghan people.”
- Scott C. Miller, the US Ambassador to Switzerland, a co-chair of the Gill Foundation who self-describes as “an LGBTQ rights activist and philanthropist.”
Since the Fund intends to support macroeconomic and financial stability in Afghanistan, the money will not be used to finance international humanitarian aid – a criterion that was underlined by the Afghan experts the Swiss and Americans consulted, says Baumann.
William Byrd says the funds could, “Provide Afghan banking sector liquidity; Keep Afghanistan current on its debt service obligations (an aim critical to maintaining the country’s eligibility for new funding from international financial institutions); Support exchange rate stability; Transfer funds, as appropriate, to public Afghan financial institutions, or for any other purpose that benefits the Afghan people approved by the Fund’s Board of Trustees; Pay for essential central banking services like SWIFT payments … “
Board member Anwar ul-Haq Ahady told VOA that, “Afghanistan has memberships in international bodies that have membership fees. If the Taliban do not pay those fees, then they could be paid from the Afghan funds,” But VOA notes that “the overall preference is to save the money and not spend any amount on humanitarian or development needs, according to Ahady and U.S. Special Representative for Afghanistan Thomas West.” According to both Washington and Switzerland, in addition to disbursing some of the money to support the Afghan economy, the Fund intends to preserve the assets so they can one day be returned to the DAB – but only once the institution is free of Taliban influence and has adequate anti-money laundering measures in place. Two top DAB officials appointed by the Taliban are subject to international sanctions. If the fund proves successful, countries that are holding the remainder of the frozen Afghan reserves – roughly $2 billion – could decide to pour that money into the Geneva Fund, Byrd believes.
The Afghan government rightly called the decision to set up the Geneva fund “unacceptable” and a violation of international norms. For them, understandably, all central bank reserves—$7 billion held in the United States and $2 billion held in Europe and the Middle East—should be transferred to the central bank under their management. “Foreign currency reserves belong to the people of Afghanistan and have been used for many years in light of the law for monetary stability, strengthening the financial system, and facilitating trade with the world,” said Habiburahman Habib, the Taliban’s economy ministry spokesperson. “Any action of the United States regarding the allocation, use, and transfer of the country’s foreign currency reserves is unacceptable, and we want to reconsider this matter.”
New Bank Notes
One idea of Alexandra Baumann, member of the board of the Afghan Fund, was to use the fund to print new Afghan bank notes for daily transactions, crucial for a country dominated by cash. Without access to fresh banknotes for more than a year, Afghanistan’s cash has been deteriorating, with notes torn in shreds or held together with cellotape, exacerbating the impoverished country’s liquidity crisis.
Now, this bank note replacement has happened, but not really as planned. In an interesting development, on Nov. 9, a Polish firm did make its first delivery of new afghani banknotes to Kabul. However, the firm was not paid out of the $3.5 billion of Afghan assets in the Geneva fund but directly, via international banking systems, by the Afghan central bank itself.
The operation even got the green light from the US. “Afghanistan’s markets run primarily on cash, but existing banknotes are crumbling …The Central Bank will be able to replace old and damaged banknotes, and this will improve the Afghan people’s ability to purchase food and other necessary items,” was the sanctimonious comment by a U.S. State Department spokesperson. According to Reuters, “the payment represents a shift for Afghanistan’s central bank, which has been largely cut off from the international financial system since hardline Islamist Taliban insurgents seized power in the country last year. Some Taliban members are subject to international sanctions.”
US-based Shah Mehrabi, who remained a member of the Supreme Council of the Central Bank of Afghanistan, and on the Fund’s board, whose four members are in charge of deciding for what purpose the money of the Afghan Fund will be spent, said explicitly that the assurances to banks and companies by the U.S. Treasury, they would not be prosecuted for allowing a transaction by Afghanistan’s central bank, which has two Taliban members in its leadership– had been instrumental in allowing the purchase of replacement bank notes.
Mehrabi said, “These transactions that were facilitated by the Treasury are welcomed by all Afghans.” A spokesperson for Afghanistan’s finance ministry said that new banknotes would be used solely by the central bank for replacing old notes, not to fund the budget. Mehrabi said that the bank would release its financial statements to ensure the cash was accounted for and that the bank had agreed to be subject to third party monitoring and the U.S. Treasury had approved of an agency to carry out the monitoring.
In another sovereign decision, to stabilize its currency, Afghanistan announced it will auction US dollars to the tune of $150 million a month to inject hard currency into the economy and take out afghanis, whose devaluation versus the dollar is driving up prices.
Aid salaries have injected some dollars into the economy, which have helped stabilize the currency, but they haven’t taken any local currency out, which is said to be the cause of why inflation remains above 50 percent.
A NATIONAL BANK FOR INFRASTRUCTURE
Afghanistan should not “return to normal” begging money from the World Bank and other supranational institutions dictating their conditions on the country.
One alternative, is to create a new type of bank capable of being the adequate partner of the BRICS, the SCO and other multilateral institutions, especially with Afghanistan itself becoming a member of the BRICS+ win-win platform for mutual development and cooperation. The Schiller Institute proposes the creation of a new State Bank dedicated exclusively to long term investments in physical and human infrastructure:
- The bank could be called the Afghanistan National Bank for Infrastructure (ANBI);
- ANBI would be created in the legal framework of the Da Afghanistan Bank (DAB), the national bank currently in the hands of the Taliban Interim Authority (TAI);
- Using selected parts of Afghanistan’s huge mineral reserves as collateral, the sovereign wealth funds of China, Russia, but also Turkey, Iran, Qatar, India, Norway, Brazil and Saudi Arabia should consider extending emergency credit lines, eventually denominated in their national currencies (yuan, ruble, rial, rupee, etc.);
- These credit lines will provide the founding and working capital for ANBI;
- Foreign investors will not have shares in the ANBI but will have a seat and a voice in the oversight boards and committees;
- The ANBI will be a new financial public entity, modeled on the German Kredit fur Wiederaufbau or the French “Credit National” and “Caisse de Dépôts et des Consignations (CDC)” which also invested exclusively in infrastructure in Europe during the post-World War II period.
- Also to be created, a National Planning Office (NPO) acting under the Prime Minister's authority and legally empowered to facilitate and enhance implementation of basic infrastructure projects in a cooperative, cross-agency way with ministries, regions, city councils and local authorities;
- Based on the projects selected and adopted by the NPO, the ANBI--with the DAB’s case by case approval--will allocate the required financial liquidity to the Afghanistan Treasury Department once the latter opens a specific, dedicated account and appoints a “mission team” for each selected project or mission;
- Through this procedure, the Afghan Treasury Department will be empowered to provide the required investments to national and international entities, both public and private, chosen to make the selected projects a reality;
- In optimal circumstances, the government should present its five-year national infrastructure plan to the parliament and other traditional consultative bodies to win public consent for the NPO’s overall policy orientations. Having the support of a vast part of the population represents a key advantage for success;
- Investments in basic infrastructure will allow Afghanistan to rise to a “higher platform” of efficiency and prosperity. With a dynamic economic recovery, Afghanistan’s tax base will be expanded and revenues from trade will boom. A rising tax revenue will allow the DAB to play its own role and after a ten-year period allow paying off the initial investors.
POVERTY ALLEVIATION, WHY CHINA CAN BE A MODEL?
A press release published on April 1st, 2022, called “Lifting 800 Million People Out of Poverty – New Report Looks at Lessons from China’s Experience,” acknowledges the incredible success of China in terms of poverty reduction:
“Over the past 40 years, the number of people in China with incomes below $1.90 per day – the International Poverty Line as defined by the World Bank to track global extreme poverty– has fallen by close to 800 million. With this, China has contributed close to three-quarters of the global reduction in the number of people living in extreme poverty. At China’s current national poverty line, the number of poor fell by 770 million over the same period.”
The release comments on a joint study titled, “Four Secades of Poverty Reduction in China, Drivers, Insights for the World and the Way Ahead,” undertaken at the joint initiative of China’s Ministry of Finance (MOF) and the World Bank (WB), whose experts are sometimes allowed to do their job. It was jointly led by the World Bank and China’s Development Research Center of the State Council (DRC).
The report analyses “respectively growing agricultural productivity, incremental industrialization, managed urbanization and rural-to-urban migration, and the role of infrastructure.”
From the standpoint of Afghanistan, where over 75 percent of the population depends on agriculture, it is worth studying China’s “miraculous” transformation. Over a 40-year period, starting from an agricultural revolution, the center of gravity of China’s economic activity and employment shifted from agriculture to industry and services.
The report says that “The drivers of economic growth shifted from agriculture to industry to services over time. In the first two decades from 1980 to 2000, China’s rapid economic growth was largely driven by growth in total factor productivity. The agricultural sector contributed less than 30 percent of the overall GDP in 1978 but employed almost 70 percent of the labor force. The reforms implemented under Deng Xiaoping’s leadership resulted in huge efficiency gains in agriculture. This in turn made the reallocation of labor from agriculture to more productive industrial and service jobs possible and drove further gains in total factor productivity. Human and physical capital accumulation further supported and sustained the gains in income unleashed by the reform process. After an initial explosion of growth in agriculture, with GDP growth peaking at 15 percent in 1983, the epicenter of growth moved to industry from around the mid1980s to the mid-2010s. More recently, services have become the leading engine of growth. While total employment increased from 402 million in 1978 to 775 million in 2015, the share of agricultural labor dropped from 69.6 percent to 18.3 percent. The rise in employment occurred exclusively outside agriculture, fed by an expanding labor force. Services and manufacturing absorbed movers from agriculture and new entrants to the labor force with a net job creation rate close to 10 million per annum. Cluster-based industrialization and export-oriented manufacturing in coastal regions fueled by high investment absorbed surplus rural labor nation-wide through migration and urbanization.”
The key was cultural optimism in the form of scientific and technological progress applied to economic and social transformation.
The report: “The modernization of China’s agricultural sector was supported by substantial public investments in agricultural research, extension services and production infrastructure. China’s traditional agriculture was vulnerable to weather and natural disasters. Important investments thus included flood control projects, repairing field drainage ditches, improving soil structure, and reducing water logging. The use of plastic mulch film to conserve soil moisture, the wider application of chemical fertilizers, pesticides and the use of agricultural machinery, as well as the development of better quality seeds were key factors supporting higher yields. The development of high-yield rice varieties in the 1970s, producing 20–30 percent more rice per acre, led to steeply rising harvests in China and across much of Asia and Africa. Finally, the application of watersaving technologies such as sprinkler irrigation, micro-irrigation, and low-pressure pipe irrigation reduced water consumption per acre. The efficiency of irrigation increased from around half the OECD level in the 1970s to around three quarters today.”
DIGITAL CASH, SMARTPHONES AND INTERNET, PART OF THE SOLUTION?
Millions of Afghans are facing dire conditions of declining access to food, water and basic health services. But still in January 2022, NGOs complained that even if they get funding to do something about it, it will be hard to persuade western commercial banks to help transfer any cash into Afghanistan. Sanctions from the United States and UN have been a major contributing factor to the crisis. Billions of dollars of Afghan assets have been frozen abroad. Partly as a result of the sanctions, the Afghan banking system has been plunged into chaos, and the country is facing a liquidity crunch.
In December 2021, the UN Security Council agreed on a humanitarian exemption to the sanctions regime, for the purpose of helping aid groups to once again operate legally in the country. Before the change, banks risked breaching their domestic laws or running afoul of the U.S. — which holds immense sway over the global financial system — by transferring humanitarian funds.
In January 2022, UN Secretary-General António Guterres said that further changes are needed to help the humanitarian effort, “Rules and conditions that prevent money from being used to save lives and the economy must be suspended in this emergency situation.” he said. “International funding should be allowed to pay the salaries of public sector workers and to help Afghan institutions deliver health care, education, and other vital services.” The Security Council’s adoption of a humanitarian exception to the sanctions regime “provides financial institutions and commercial actors with legal assurances to engage with humanitarian operators, without fear of breaching sanctions.” But despite a formal level of reassurance, international banks just don’t deliver. They know the US is at war with “these terrorists” and have already other priorities to take care of.
As a result, funds are getting into the country through what are called “full-scale workarounds,” such as physically transporting dollars via aid workers or relying on informal cash transfer networks, known locally as “hawala” which charge up to 10 % per transfer. As an alternative, NGOs are now using their own agents to distribute cash. Some in the humanitarian sector consider setting up a public or nonprofit entity to transfer the money.
One option is to fly in the money by airplane. According to Reuters, since October 2021, international officials started “preparing to fly in cash for the needy while avoiding financing the Taliban government, according to people familiar with the confidential plans. Planning for the cash airlifts is going ahead against the background of a rapidly collapsing economy where money is short. (…) The emergency funding, aimed at averting a humanitarian crisis in the face of drought and political upheaval, could see US dollar bills flown into Kabul for distribution via banks in payments of less than $200 directly to the poor –with the Taliban’s blessing but without their involvement.”
The UN started doing such cash-drops this May. According to the Da Afghanistan Bank (DAB, central bank) some $761.6 million has been delivered. “This aid preserves the value of the Afghani (national currency),” said an official of the bank. And early July, another $32 million reached a commercial bank.
Another solution, building on the fact that 19 million Afghans already have a cell phone, would be to develop, eventually with Chinese cooperation, a highly performing digital payment system. It would not “replace” the banks, but facilitate financial transactions, trade and payments. In 2017, only 14 % of Afghans had a bank account.
As a matter of fact, e-trade and a digital payment system were two key elements of China’s economic miracle. According to an article in China Daily of September 2021, “In China, ecommerce, digitally inclusive finance, and poverty alleviation programs supported by big data have had positive impacts on poverty reduction.”
First, “E-commerce promotes growth in incomes and capacity-building for the poor. China has the world’s fastest-growing e-commerce market, where more than 40 percent of global e-commerce transactions take place. Many poor people have benefited from the booming e-commerce industry. For example, the National Rural E-commerce Comprehensive Demonstration Project has helped nearly 3 million registered impoverished households realize income growth. In 2019, online retail sales in 832 poverty-stricken counties reached 107.6 billion yuan ($15.7 billion).” Second, “E-commerce platforms have greatly reduced the threshold for small and micro businesses to enter the market. Rural residents that were marginalized because of their geographic location can now display their farm produce and handicrafts online and find buyers, thereby increasing sales and revenue. Also, e-commerce drives the development of whole industrial chains, creating job opportunities and providing diverse options for rural labor. Online retailing has created over 28 million jobs in rural China.”
And finally, “E-commerce also provides learning opportunities, thus stimulating the entrepreneurial potential of the poor. Between April 2015 and March 2017, 1.12 million people from 765 national-level poverty-stricken counties joined 559 courses offered by Taobao University online. High investment costs have always proved to be a development bottleneck for small and micro-enterprises. Many countries have explored different ways of providing those loans, but many still encounter difficulties getting loans. However, the G20 High-Level Principles for Digital Financial Inclusion endorsed by the G20 in 2016 marked the beginning of the digital era of inclusive finance.”
It should be underscored that in China, traditional financial institutions utilize digital technologies to improve the availability of financial services for marginalized groups. Financial agencies also support non-cash payments for the bulk purchase of farm produce such as grains, and the issuance of pensions, medical insurance, and agricultural subsidies to the rural population.
Since its establishment in 2015, China’s first cloud computing-based commercial bank, MYbank, has provided contactless loans to more than 4 million clients in 146 poverty-stricken counties. In 2017, JD.com launched a digital agricultural loan. In two years, this project has collaborated with more than 100 cooperatives in Shandong, Hebei, and Henan provinces and other places, providing roughly 1 billion yuan in loans, with zero overdue repayments and defaults.
This is confirmed by the April 2022 joint report of the World Bank and China’s State Council on four decades of poverty reduction, “The poor population and micro businesses in rural areas got access to financial services such as digital credit, mobile payment, and internet insurance. The application of digital technology in financing helps to provide new solutions to the “last mile” problem of inclusive finance, contributing to lessening the impact of insufficient mortgages for the poor. (…) The number of online banking accounts in rural areas totaled 612 million in 2018, covering 63.22 percent of the rural population; the number of annual online banking payments reached 10.21 billion; payment receipt services provided by banks for rural electronic transactions reached 578.34 billion yuan (The People’s Bank of China 2019).”
Of course, this implies expanding access to the Internet. In China, as of March 2020, its internet coverage rate reached 64.5 percent. More than 98 percent of administrative villages have fiber optic internet connections and 4G, and 99 percent of poverty-stricken villages have broadband access, guaranteeing internet access for the vast majority of people via computers or mobiles. Besides, thanks to traditional infrastructure such as power grids and roads, people in most residential areas in China enjoy a stable power supply and transportation facilities.