Afghanistan is on the verge of economic collapse – and Pakistan should be ready for the fallout

As Pakistan watches the striking turn of events in neighbouring Afghanistan, almost all the attention has remained focused on political negotiations surrounding the formation of the new government. This focus is not misplaced as sustainable peace in Afghanistan has been inextricably linked with the formation of a multi-ethnic, inclusive and representative government.

The immediate problem is that Afghanistan is staring down the abyss of complete economic and financial collapse. This imminent economic meltdown, if left unchecked, will lead to unrelenting social unrest pushing millions of refugees towards Pakistan.

Economic uncertainty

The Afghan economic outlook was not rosy even before the United States decided to jump ship. Afghanistan represented a classic case of a demand-driven, supply-constrained, highly open economy that struggled with an enormous fiscal gap and very weak government revenues. Foreign aid composed three-quarters of the budget and about 42% of gross domestic product.

The drawdown of international troops over the last few years led to significant expenditure cuts by foreign countries. This reduction and the inability of the Afghan economy to attract foreign direct investment began putting brakes on the economy. The Asian Development Bank estimated that about two-thirds of Afghans live below the international poverty line of $1.90 per day. The economic situation in Afghanistan is about to get even worse.

Immediately after the new political order in Kabul, there were widespread bank runs, while the ATMs ran out of cash very quickly. Economists call this phenomenon a “liquidity trap” when uncertainty forces people to hoard cash bringing economies to a standstill.

The fact that the United States and International Monetary Fund have taken away Afghanistan’s access to its foreign exchange reserves means that the country now has almost no ability to import food, essential commodities or life-saving medicines. On top of all this, as the capital flight takes root, a rapidly depreciating currency – the Afghani – will create a hyperinflationary situation making everything further out of the reach of common Afghans. Moreover, as foreign aid flows completely dry up, the Afghan economy will contract by about 25% in the next two years, thereby destroying millions of jobs.

These economic dire straits will push more and more Afghans towards grinding poverty and misery. Consequently, there is going to be a huge refugee exodus towards Pakistan. Reports indicate that thousands have already crossed over into Pakistan through Chaman in the immediate aftermath of the Taliban takeover.

Pakistan’s role

Unfortunately, Pakistan is in no position to host another few million Afghan refugees. Despite increasing poverty incidence, Pakistani policymakers have only been able to earmark a paltry 168 billion Pakistani rupees to Benazir Income Support Programme/Ehsaas Kifalat on account of fiscal constraints.

Lack of resources notwithstanding, an additional wave of refugees would create a number of serious social, economic and political challenges in Pakistan. For starters, given that around 2.5 crore children in Pakistan are already out of school, how is the public education system going to even cope with additional school-aged children?

Also, most Afghan refugees would take up low-paying jobs in the informal economy, thereby taking away jobs from already poor Pakistani citizens. Finally, more pressure on public services, education and jobs would invariably lead to ethnic strife, especially in big cities like Karachi.

One way in which these negative impacts can be ameliorated is by ensuring that Afghan refugees only settle on the western side of the Durand Line. Pakistani state and society must do their utmost to assist Afghans in this time of need by sending teachers, doctors and nurses to these refugee settlements while ensuring protection through a force raised by the Troika Plus countries minus the US.

All efforts to assist Afghans will remain meaningless unless the Afghan economy can be stabilised. Afghan policymakers must dissociate political government formation from economic management and assign economy experts to manage key institutions like Da Afghanistan Bank. Pakistani policymakers can assist Afghanistan by letting Afghan importers pay in their local currency for Pakistani imports, at least for essential items.

Moreover, the State Bank of Pakistan could establish a bilateral swap line of about $2 billion for Afghans wanting to import essentials from the rest of the world – this would cover one-third of Afghan imports in 2020.

Despite taking away planeloads of Afghan teachers, doctors and nurses, Western nations have washed their hands of Afghanistan making it abundantly clear that they will not accept any Afghan refugees. In order to assist the people of this war-torn country, Afghan and Pakistani policymakers must work together and to quicky stabilise the Afghan economy in the immediate short term.

This article first appeared in Dawn.