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UN urges action to avoid 'colossal' collapse of Afghan banking system

UN Development Programme warns that if the financial system fails in Afghanistan, it could take decades to rebuild.

AFP

The United Nations has repeatedly warned since the Taliban took over that Afghanistan's economy is on the brink of a collapse.

The United Nations has pushed for urgent action to prop up Afghanistan's banks, warning that the country's financial system could collapse within months.

The insight came from a UN Development Programme report on Monday, which predicted that a spike in people unable to repay loans, lower deposits and a cash liquidity crunch could cause the breakdown.

"Afghanistan's financial and bank payment systems are in disarray. The bank-run problem must be resolved quickly to improve Afghanistan's limited production capacity and prevent the banking system from collapsing," the report said.

The UNDP said the economic cost of a banking system collapse, and consequent negative social impact, "would be colossal."

'A dire situation'

Finding a way to avert a collapse is complicated by international and unilateral sanctions on Taliban leaders.

"We are in such a dire situation that we need to think of all possible options and we have to think outside the box," Abdallah al Dardari, head of UNDP in Afghanistan, told Reuters.

The UNDP's proposals to save the banking system include a deposit insurance scheme and measures to ensure adequate liquidity, as well as credit guarantees and loan repayment delay options.

"Coordination with the International Financial Institutions, with their extensive experience of the Afghan financial system, would be critical to this process," UNDP said in its report, referring to the World Bank and International Monetary Fund.

'Banks may not survive in next six months'

The UNDP report said that with current trends and withdrawal restrictions, about 40% of Afghanistan's deposit base will be lost by the end of the year.

It said banks have stopped extending new credit, and that non-performing loans had almost doubled to 57% in September from the end of 2020.

"If this rate continues of non-performing loans, the banks may not have a chance to survive in the next six months. And I am being optimistic," al Dardari said.

An abrupt withdrawal of most foreign development support after the Taliban seized power has sent Afghanistan's economy into free fall, putting a severe strain on the banking system.

Afghanistan's banking system was already vulnerable before the Taliban came to power, and weekly withdrawal limits are now set to stop a run on deposits.

Since then development aid has dried up, billions of dollars in Afghan assets have been frozen abroad, and the United Nations and aid groups are now struggling to get enough cash into the country.