Assessing Economic Crisis Response Options for Afghanistan

In this interview, Alex Zerden discusses his recent proposal in Lawfare on utilizing private central banking to establish a humanitarian financial corridor for Afghanistan. After the Taliban’s takeover in August, international donors suspended billions of dollars in humanitarian assistance and many market participants are unwilling to engage in banking functions due to sanctions compliance concerns. The stark withdrawal of aid and lack of financial solutions contributed to Afghanistan’s rapidly deteriorating humanitarian and economic situation, putting an estimated 23 million Afghans at high risk for starvation this winter. The conversation explores the scope of sanctions, innovative financial solutions, and involvement of international stakeholders to understand how to best address the unfolding crisis.

  • Alex Zerden is an adjunct senior fellow in the Energy, Economics, and Security Program at the Center for New American Security (CNAS) and founder and principal of Capital Peak Strategies LLC. As a regulatory lawyer, economic policymaker, and financial diplomat, Alex brings 15 years of public and private sector experience at the intersection of financial services, national security, and law with a focus on financial regulation, anti-money laundering and countering the financing of terrorism (AML/CFT), economic sanctions, anti-corruption, financial enforcement and oversight investigations, economic crisis response, and public-private partnerships. He served as the Treasury Department financial attaché at the U.S. Embassy in Kabul, Afghanistan, in 2018–2019.

The discussion, moderated by Jacob Kurtzer, has been edited for purposes of brevity and clarity.

JK: Can you describe the various challenges, financial and regulatory, that are inhibiting a more robust and expeditious humanitarian response in Afghanistan?

AZ: The international community had committed substantial financial assistance to the people of Afghanistan over a prolonged period of time. That was supposed to continue, and it stopped because of the Taliban’s takeover in August 2021. It was far from perfect due to high levels of corruption and other challenges. The international community and the United States lost a known and trusted counterpart. 

Now the Afghan banking and financial system has essentially frozen up and not enough money is coming into the economy. That’s because the international community gave about 40 percent of GDP, or 75 percent of the Afghan government’s budget. That money was suspended and affected the Afghan economy. Many stakeholders believe that this is due in large part, if not the only part, because of UN and U.S. economic sanctions.

The basic and routine functions of moving money into and around Afghanistan are now a major issue of concern. This routine aspect of financial services is now under strain for the provision of humanitarian assistance, much less economic and development assistance into Afghanistan—with a sanctions overlay at present as well.

JK: When you talk about that routine business being stopped, what’s the cause of that stoppage?

AZ: The Afghan banking system was incredibly anemic going into the crisis. Now international banks are hesitant to move money into Afghanistan because of sanctions compliance concerns. Banks also have a different risk appetite for the same reasons that the United States and international community don’t have a known or trusted counterparty.

JK: Can you explain in layman terms the need for this central banking function and what’s going on with the Afghan central bank currently?

AZ: The Afghan central bank, Da Afghanistan Bank (DAB), oversees monetary policy; it must keep the price of the local currency, the afghani, stable. DAB engages in other kinds of routine banking functions that would normally be in the purview of a private bank. It operated as a central node or switch, given the lack of infrastructure in place for traditional private banking in the country.

Since August 15, the international community and international private banks suspended their relationships with DAB. Foreign banks are no longer willing to interact with the central bank, in large part because of perceptions of sanctions risks. The UN sanctions were against 135 individuals, roughly five institutions, money service providers, and the Haqqani Network.

Under U.S. sanctions, the sanctions exist without any definition of the Taliban. Without that formal definition of who or what are the Taliban, prudent actors—including relatively conservative large international commercial financial institutions—take the position that without having a definition of the Taliban, they are going to take a risk-off approach to dealing with Afghanistan. It would not be unreasonable to assume that the central bank, controlled by the Taliban, is in itself “the Taliban” under U.S. sanctions and not worth the risk from a sanctions compliance perspective.

JK: We have the sanctions question, which is one that there’s been some movement on in terms of licenses and UN exemptions. Then there’s this central banking functionality. They’re fundamentally connected, but they seem to be slightly separate questions. You proposed an innovative solution in a Lawfare article to replicate that central banking functionality with a different entity that there may be less risk aversion or a greater level of comfort. Can you explain your proposal a bit further?

AZ: One of DAB’s key functions was the regularly held U.S. dollar auction program. Money would come in and DAB would auction out U.S. dollars, physical cash as well as electronic dollars, into the Afghan economy. The Afghan central bank would purchase and exchange afghani, the local currency. This would be a way to promote price stability of the afghani. It was also a powerful signal to the Afghan economy and the marketplace that there would be a continuous provision of U.S. dollars because the Afghan economy relies heavily on dollars.

I proposed to privatize that function because of the current international policy environment—particularly, the U.S. government’s approach to the Taliban and to the Afghan central bank where there were no direct interactions, economic activity, or key services. There needs to be a substitute to promote greater liquidity or getting more cash into the Afghan economy. The independence of the Afghan central bank, free from Taliban influence, can preserve the functionality of the Afghan central bank and other Afghan state institutions where the Taliban doesn’t unjustly interfere.

We’re in a terrible place, and extraordinary policy options are being proposed because of the dire humanitarian and economic situation in Afghanistan. No one proposal is a solution, but multiple proposals could form a framework that promotes greater economic activity in Afghanistan and achieve the goal to prevent the widespread suffering of tens of millions of Afghans from starvation.

Afghanistan is incredibly dependent on international imports. It imports more than 10 times what it exports. This creates what economists call a balance of payments problem. There is an imbalance between what goes out and what comes in. Unfortunately, Afghanistan only really produces heroin and methamphetamines that the rest of the world wants to buy in any consequential amounts. To offset that, the international community was providing money into the country. The central bank was converting some of that money into physical U.S. dollars, to the benefit of the wider economy by allowing people to import wheat, oil, petroleum products, and basic goods.

All of that seized up on August 15. In this context, I proposed to recreate some of that functionality through a private bank in Afghanistan. Some of this is occurring at a very small scale. The United Nations, according to very public social media reports, is moving bulk cash into Afghanistan through one of these private banks—the Afghanistan International Bank, or AIB—with the consent of the Taliban-controlled Afghan central bank. This is partially effective, but it only benefits the United Nations and its operations in the country. It’s not benefiting the wider Afghan economy to promote that broader-based liquidity.

JK: You mentioned some of this is happening at a small scale. Has this happened in any other heavily sanctioned jurisdictions? Can you think through what reservations and concerns there might be from policymakers or what potential pitfalls there might be to this proposal?

AZ: I want to focus on the characterization of the sanctions. Afghanistan is not subject to U.S. sanctions, but the Taliban are subject to them. Given the lack of clarity from the U.S. government about the scope of those sanctions, it has the effect of being a de facto jurisdictional sanctions program. Although this is not the intended policy choice of the Biden administration, it appears that the outcome is people, stakeholders, and particularly large risk-averse financial institutions are treating them as jurisdictional sanctions.

That makes a difference because there are jurisdictional programs around the world against Iran, Venezuela, and North Korea. Afghanistan is different; at their most minimal, the sanctions are against 135 people and not against 38 million Afghan citizens. That’s a hard framing and policy tension where the Biden administration should provide additional clarity. 

The administration has made some steps in the right direction on sanctions exemptions, sanctions licensing, fact sheets, and frequently asked questions to better understand the scope of the sanctions. But it has not attempted to answer this fundamental question of who or what are “the Taliban” that would give practitioners, humanitarian organizations, and financial institutions the confidence to implement a compliance program and a regulatory framework that can address the true scope of the sanctions.

This is the first time that a U.S.-designated terrorist organization has taken over all mechanisms and all levers of a country. We are in uncharted territory. There was no anticipation of this dramatic change in circumstances.

The challenges posed by my proposal are extraordinary. It’s not the first choice I would recommend to my old self as the Treasury Department financial attaché sitting in Kabul, or to U.S. policymakers sitting in Washington. This is out of the dire circumstances that all reasonable policy options should be entertained. This undermines state institutions, by design. Creating a parallel governing structure through a private central bank is a huge problem. 

Rather than policy that maximizes opportunity, we are minimizing downside challenges in the hopes of keeping people alive through this winter. That was the imperative of my proposal.

JK: As you mentioned, there are various proposals. What other steps do you think that the U.S. government, international financial institutions, and other government donors could do in the short term to help alleviate and address the liquidity challenge that you talked about?

AZ: First, we can start with the U.S. government defining the Taliban for U.S. economic sanctions. The Treasury Department issued frequently asked questions but declined to address this problem. It’s a very fair and straightforward question, but the answers may be very complicated under the current scope of sanctions. The lack of definition allows financial institutions and other stakeholders to hide behind ambiguity. Reducing that uncertainty would go a long way.

Second, within the U.S. government, someone needs to own this problem. This is a multifaceted and multistakeholder challenge that cuts across U.S. agencies, multiple public and private sector equities in the humanitarian and development space, and international financial institutions. Within the U.S. government, it’s everyone’s problem, so it’s no one person’s problem. Instead, a coordinator role should be created for this economic response issue.

There are two ways this can happen: either designating someone within the existing U.S. national security structure to own this problem and to have this as their full-time responsibility or bringing in an outside coordinator with new resources and staff to manage this crisis. Otherwise, it’s going to remain a little bit of a problem to a lot of people, and there isn’t the accountability that’s required to provide manageable solutions that can help the tens of millions of at-risk Afghans.

We are seeing other proposals include a currency swap facility. We’re seeing the repurposing of, for instance, the Afghan Reconstruction Trust Fund from World Bank administration to the United Nations. What we need to see here is accountability, oversight of these funds, and a strong oversight and enforcement framework for compliance. There will be a lot of money swirling around, and there’s grave concern of diversion by the Taliban. In the case of noncompliance, a credible deterrent mechanism can either repurpose or suspend assistance if the Taliban violates their obligations to allow this money to get to the Afghan people without the Taliban’s control or diversion of it.

That’s a major problem because we can go from very little money to then the spigot opening up very widely. I have serious concerns about how immediate response will go into the country, but then may not benefit those most in need and may be diverted at a large scale.

JK: You mentioned a number of times the United Nations’ differing sanctions framework in terms of the individuals and the entities. How do the UN sanctions and the recent exemptions agreed upon by the Security Council at the end of last year fit into this puzzle?

AZ: The United Nations has a regime in place of sanctions against the Taliban. This was started in the 1990s. It was updated in 2011, under Security Council Resolution 1988. It did not have a provision for humanitarian assistance for any carve outs. The United States, to its credit, took some very forward-leaning steps to issue general licenses at the outset of the crisis. It provided sanctions General Licenses 17, 18 and 19 in addition to the existing general licenses: General Licenses 14 and 15 on September 24, General License 16 in December, and in conjunction with the United Nations (Security Council Resolution 2615) on December 22.   

UN member states did not have either the legal authority or apparent capability to implement any sanctions relief absent UN action. I commend the United States and outside stakeholders, and the efforts and the political capital spent to provide sanctions exemption through the recent UN Security Council resolution—CSIS’s Sue Eckert was very intimately involved in this process as well. It’s a question about how member states will implement those capabilities and these newfound authorities. Again, the United States has a very sophisticated economic sanctions regime in place. It is much less dynamic in other consequential jurisdictions around the world. We’re unfortunately in a bit of a wait-and-see period to understand how domestic jurisdictions will implement any sanctions relief under this capability.

There’s a lot more work to be done. These sanctions licenses by the U.S. Treasury Department focus heavily on “basic human needs,” humanitarian assistance, and potential economic development assistance. However, large swaths of the Afghan economy within the Afghan private sector are not covered by those licenses. Gaining clarity on the scope of U.S. sanctions and relief on sanctions will provide the resources necessary for the Afghan private sector to engage in the economic activity that can save Afghan lives. 

The international community is not going to be able to reach the tens of millions of Afghans who are at risk. Bulk food deliveries will not solve this problem. We should focus our attention on unlocking the power of the Afghan private sector. Despite its challenges, it has been effective in provisioning supplies in a market-based way for decades if not many hundreds of years. This is the route to help most Afghans who are most at risk right now.

Jacob Kurtzer is director and senior fellow of the Humanitarian Agenda at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Alex Zerden is an adjunct senior fellow of the Energy, Economics, and Security Program at the Center for New American Security (CNAS) and Founder and Principal of Capital Peak Strategies LLC.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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Alex Zerden

Adjunct Senior Fellow, Center for New American Security (CNAS)