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A painful trade shock is coming to Afghanistan
A large trade deficit won't be sustainable under Taliban rule.
Afghanistan’s economy is in for a difficult year. Even beyond the stresses of rule by the Taliban, the state has some economic weaknesses that will be greatly exacerbated by Taliban rule and political isolation.
Trade will be a particular source of difficulty. The last IMF report on the country prior to the collapse of the government counted imports at about $7 billion annually, a huge fraction of Afghanistan’s $19 billion GDP. Imports exceeded exports by about a factor of five. While that high level of imports was sustainable under the unusual circumstances of the U.S. presence, it won’t be sustainable going forward.
So on top of its other problems, Afghanistan will need to balance its trade deficit, a deeply painful process that will, one way or another, reduce the number of imports available to Afghan civilians. Given that its currency reserves have been frozen to prevent the Taliban from accessing them, it will need to balance its trade deficit quickly, without any adjustment period.
This will mean significant hardship for ordinary Afghans. Afghanistan has never been an especially wealthy country, but its citizens will now face severe shortages of imported products, from smartphones to medicines. The country is also heavily dependent on imported electricity and may have to drastically cut back its energy use.
Afghanistan relied heavily on imports
Afghanistan is only a medium-sized country by population, with 38 million people. It has a GDP per capita of only about $500. The cost of living is low, but even if you adjust for that, Afghanistan is a poor country.
Few if any high-tech products are manufactured domestically. Afghanistan’s limited digital infrastructure uses devices manufactured abroad, like smartphones or laptops. While most adults in Afghanistan report some ability to access a phone, and many have some ability to access the internet, these are very expensive investments for a typical Afghan, whose money doesn’t go far internationally. However, Internet access is so useful that Afghans still invest in devices, and they are innovative at getting around slow connection speeds.
Another important import for Afghanistan is electricity. The mountainous country can produce electricity through a series of hydroelectric dams, and plenty of hydroelectric capacity remains untapped. However, the demand for electricity increased rapidly over the last fifteen years, and production has yet to catch up. Instead, it relies heavily on imported electricity from neighbors like Uzbekistan.
Finally, Afghanistan imports most of its medicine and medical supplies. Last year, Afghanistan’s public health minister, Ahmad Jawad Osmani, reportedly said that Afghanistan imports $400 to $600 million worth of medicine each year. For years, experts have lamented Afghanistan’s failure to develop its domestic capacity to manufacture pharmaceuticals. Now the nation could be forced to drastically scale back its use of medicine.
How Afghanistan financed its trade deficit in the past
International trade is a bit more complicated than domestic trade because not everyone uses the same currency. If someone in Afghanistan wants to buy a good produced overseas, they need to obtain access, either directly or indirectly, to a currency that the producer is willing to accept.
Economists have catalogued the ways a country can pay for imports. The simplest and most obvious is exports, which can directly give a country like Afghanistan access to foreign financial assets. Afghanistan has some manufactured exports, like textiles. It has some agricultural products—including the illegal drug heroin, which has been a key source of Taliban funding. It also exports minerals. But as noted above, the value of Afghanistan’s exports have been far less than its imports in recent years.
Another broad category is transfers. A country can simply be given the money, for example, through a foreign aid program, or through remittances from family members living abroad. As the IMF report shows, Afghanistan has received around $8 billion in transfers annually in recent years. The large transfer volume is the greatest reason that Afghanistan was able to sustain such a large trade deficit during the U.S. presence.
A third broad category is investment. Sometimes people are willing to hold another country’s financial assets, even though they will not immediately be able to use these for personal consumption. For example, many foreigners own U.S. stocks or bonds as part of a long-run investment strategy. Because they find the investments attractive, and trust that they will later be able to convert those investments back into their home currencies, they are willing to hold the foreign asset. The attractiveness of U.S. investment is the primary reason the U.S. is able to sustain a large trade deficit.
By contrast, it will not be so easy for Afghanistan under the Taliban. A war-torn country with a politically isolated government will attract little foreign investment—though there may be a few takers.
The categories described above don’t always have bright lines drawn between them. For example, it might be hard to break down what was going on at a facility run by a nonprofit that operates on foreign government grants but also subcontracts some of its functions to for-profit companies, and hires both foreign and domestic workers. It may be especially difficult to break down these categories in Afghanistan.
A fair amount of the money the US government spent in Afghanistan went to local workers or contractors, creating a sort of quasi-export industry. While one might think of exports as requiring goods to cross borders, the concept relevant to trade balances is slightly different: it includes any interaction between two people with different home currencies. Tourism, for example, functions as a kind of export.
More than 300,000 civilians worked in some capacity for the United States. These were exporters, of a sort, providing the country with more currency reserves. So too were people who did any kind of paid work for foreigners staying in the country; even if it was something as simple as providing them with a meal.
Most of this is going away. Foreigners are withdrawing, and most or all of their money will leave with them. Overall, Afghanistan is about to lose access to a substantial amount of foreign currency—very quickly.
The collapsed government’s central banker sent out a warning
Over the long run, the most common solution to this kind of problem is to let the currency “float” to the appropriate value. A country that is running out of foreign currency will devalue its own currency, either as a conscious choice, or because that choice is forced on it by markets.
There are people out there who would accept some number of afghanis in exchange for a dollar, it may just be a lot higher than it was a few months ago. If the afghani devalues enough, Afghanistan’s exports will become more competitive, its imports will be more expensive, and the trade deficit will tend to shrink.
However, instantaneous adjustments to exchange rates may be painful. If a business had used imports as an input, and the afghani suddenly depreciated, that business would suddenly be unprofitable, because the imports it uses would become more expensive in terms of afghanis.
A central bank can help smooth out issues like this in the shorter run. If nobody else is willing to accept afghanis internationally, Afghanistan's central bank, the DAB, may be able to step in and facilitate trade, at least temporarily. If the DAB announces it is willing to purchase 80 afghanis per dollar, then foreigners will be willing to accept afghanis, knowing that they can convert those back into a more widely accepted currency. This ability is only credible, of course, if the central bank actually has a stash of foreign reserves with which to “defend” its currency.
While Afghanistan had foreign reserves prior to the Taliban takeover, the Taliban do not have access to those reserves, and would not be able to defend their currency.
Ajmal Ahmady, who until recently ran the DAB, escaped the country a week ago as the Taliban advanced on Kabul. Through his Twitter account, he both described his chaotic final week of work and his thoughts on the future of the afghani, the currency the bank oversees.
“I am writing this because I have been told Taliban are asking DAB staff about location of assets,” he wrote on Twitter Wednesday. “If this is true - it is clear they urgently need to add an economist on their team.”
Ahmady writes that the bank held about $9 billion in dollars or other assets that are easily traded globally and hold purchasing power outside of Afghanistan.
Critically, most of those assets are held in New York, where the DAB has electronic accounts with large institutions like the Federal Reserve. There are no vaults holding billions in physical cash. That would be inelegant and dangerous, especially in a country like Afghanistan.
Ahmady predicted, correctly, that the U.S. government would freeze those assets as the government collapsed. The U.S. position is clear: “any central bank assets the Afghan government have in the United States will not be made available to the Taliban,” a U.S. official told the BBC. Other institutions where the DAB had assets, such as the IMF, followed suit.
Ahmady sees this combination of events—the trade deficit, the U.S. exit, Taliban rule, and the frozen assets—as a recipe for a painful shock to international trade that will ultimately raise inflation and “hurt the poor.”
There are some policy methods that conceal a devaluation—ways that the afghani can become objectively less valuable without a reduction in stated or official exchange rates. For example, imports can be prohibited or taxed. Some civilians’ ability to freely exchange afghani for other currencies might be curbed. These kinds of kludgey policy interventions make it harder to use the afghani, but can for a time reduce the downward pressure on the official exchange rate.
But these are just stopgap measures to delay recognition of the facts on the ground. If the Taliban don’t develop a plan—such as reclaiming the frozen funds through diplomacy with the U.S. and IMF and using them to defend the currency while winning back the confidence of foreign investors—then the afghani is going to experience a rapid and large fall in value. Ordinary Afghans will suffer as a result.