Re-Orienting Donor Relations with Taliban-led Afghanistan for Private Sector & Markets Sustainment

June-July, 2024

By Jeffrey Grieco, President & CEO, Afghan American Chamber of Commerce (AACC)

Introduction

When meeting with AACC members and Afghan and U.S. business leaders involved in Afghanistan, there is a sense of slow, incremental drift toward a return to the 1990s under Taliban rule.  The Taliban have continued to consolidate power and resources toward a Pashtun and male-dominated society.  They ensure that all economic resources and benefits are directed at themselves or their affiliated organizations.  This seems untenable with such a diverse society, and while the growth of some terror organizations has increased, the Afghan people continue to be resilient in the face of these challenges.   Most foreign policy realists believe that the Taliban Interim Administration (TIA) is consolidating for the long term and has no intention of ceding power — politically, militarily, or economically.  And so, diplomats and international donors are left with critical decisions about what to do next.

Previously, donor strategies towards Afghanistan and the TIA seemed somewhat disjointed, but now they seem to be converging on a single path: more severe reductions in humanitarian assistance and a near complete halt to most development assistance.  However, there may be some rays of sunlight.  First, the World Bank has received approval to start a few, small development projects targeted at livelihoods creation and women’s economic empowerment.  Secondly, the TIA have decided to participate in the Doha III meeting scheduled for June 30 to July 1.  While they have not committed to a proposed UN agenda as yet, it has elevated the significance of the Afghan Coordination Group (ACG) meeting, which took place in Brussels last week.   Unfortunately, there was no private sector leadership engagement in this recent ACG donor meeting and AACC has not yet received communications about its results.  Nevertheless, the AACC remains hopeful the Doha III meeting will yield positive discussions toward private sector development and we are prepared to assist in making that wish a reality.    

AACC business leaders working inside Afghanistan and those participating from platforms in UAE and Turkey, continue to believe that sustained support for humanitarian assistance is critical to long-term private sector survival.  Afghan private sector supply chains continue to facilitate small amounts of humanitarian assistance and they fear that any further cuts will directly impact the most vulnerable Afghans, women, and children, many of whom were strong U.S. and NATO allies, and are now facing dire poverty situations. 

The Taliban’s economic overtures to their neighbors have had limited success. Their current economic partners are China, Iran, Pakistan, and Russia, but these are not necessarily reliable or ideal for sustainable economic development, let alone political stability. This underscores the need for alternative strategies and partnerships. The lack of robust support for TIA diplomacy and financial cooperation in Central Asian capitals presents an opportunity for donors to explore new avenues, forge new partnerships that can bring about a more stable and economically stabile Afghanistan.

Lastly, there is sparse regional trade or foreign direct investment (except China) going on with TIA-led Afghanistan for several important reasons:

·         TIA frozen assets;

·         Economic and counter-terror sanctions;

·         Decisions of United States (US) and international corresponding banks to block the processing of Afghanistan trade finance transactions; and

·         The failed impact of GL 20 on spurring trade finance transactions for Afghan traders.

 Re-Orienting Donor Assistance to Afghanistan Over the Next Five Years (2025-2030)

International donors, including the US, need to re-orient international aid policy for Afghanistan.  Any of the following recommendations, taken individually or as a group, will be better than the existential state of donor relations with Taliban-led Afghanistan. 

1.       Donors need to separate Afghanistan’s remaining assistance policy and funding strategies into two parts, namely humanitarian and private sector assistance, in a formal manner. While most private sector businesses and non-governmental organizations (NGOs) support the new World Bank 2.0 strategy, where small amounts of aid can be used for livelihood-creating projects in poor areas of Afghanistan and in support of women, there should not be direct development or donor assistance provided via the TIA.  Instead, donors should increase their humanitarian and private sector assistance, but with two critical changes:

                                 i.   Use only local Afghan organizations, with no TIA affiliations, to implement donor assistance programs: The United Nations (UN) has been the leading implementer of international humanitarian assistance, a significant portion of which comes from the US and the American people. After deducting the overhead from the UN system (e.g., including UN headquarters, regional and in-country office overheads), less than 50% of US taxpayer funds or assistance reach the Afghan people who remain mired in persistent poverty despite billions (USD) in humanitarian assistance over the last two decades. Instead, it is time to implement humanitarian aid through Afghan organizations, including Afghan NGOs (especially women-led NGOs) and through Afghan private sector businesses, many of whom have tried over two decades to help their people with donor assistance projects but were rejected mainly by career UN officials.

                               ii.  Use more Afghan private sector businesses for donor assistance and supply chain support: Much of the food security supply chain that feeds and supports Afghanistan today could quickly be done under purchase order contracts from international donor agencies, including the UN. This would also provide significant cost savings to donor taxpayers. The donors can work with these local Afghan businesses to implement appropriate monitoring and evaluation of purchase orders, and donors can still distribute assistance to needy populations throughout Afghanistan’s 34 provinces—by using private supply chains. 

2.       The US, UN, and EU should collaborate to find a suitable political solution to Afghanistan’s problems of access to trade finance and increased food security. 

                                 i.   As a brief background, most Afghan traders have been struggling to conduct trade fiancé (import or export) transactions since 2021 because of the US, European Union (EU), and UN sanctions placed on Afghanistan. This failure has been compounded by the unilateral decision of US global banking institutions like JP Morgan and Citibank, which refuse to process any trade finance transactions with Afghanistan due to shareholder and other risk assessments. 

                               ii.   The Treasury Department’s General License 20 (GL20) was supposed to be “The Solution” to the banking/trade finance problems in Taliban-led Afghanistan, but it has not worked. Traders still cannot execute trade finance transactions for their businesses, and they cannot transfer money into or out of Afghanistan using their banks to pay their workers. Many of these worker families are at or below the poverty line.

                             iii.   More worrisome, these restrictions have caused the entire Afghan trading community, including trade transactions with neighbors such as China, Iran, Pakistan, and Russia, to move into these banking spaces. They are offering their own state-owned banking and financial services. 

                             iv.   Worse yet, now almost 95% of trade transactions and cash transfers have moved to the secretive and unregulated form of Islamic banking called “Hawala” transfers ---which are outside the international banking system and cannot be monitored by US or international counter-terrorism watchdogs. With the increase in Islamic State of Iraq and Syria-Khorasan (ISIS-K) attacks across Afghanistan, it is likely that they are or will soon be using these Hawala transfer mechanisms, making it easier to purchase weapons, explosives, and other terror-financed transactions. 

                               v.  Over the last year, the AACC Banking & Finance Working Group, together with the Afghan Bankers Association (ABA), spent many hours discussing and preparing strategic recommendations for the donor community.  These recommendations were presented to donors at our AACC Istanbul Donor Conference event on March 4, 2024.  To date, the AACC and ABA have not received any donor response to these thoughtful and urgent recommendations.  We have provided as an annex to this document a copy of those recommendations.

3.       One recommendation to solve the trade finance and cross-border payments issue in Afghanistan is to have the International Monetary Fund (IMF), in partnership with donor states, create a limited bilateral mechanism or financial vehicle for countries to enter limited bilateral financial arrangements for trade financing and cross border payment transfers with Afghanistan, especially for those transactions deemed essential to national economic and humanitarian sustainability.

                                 i.  Historically, the IMF spearheaded this type of bilateral finance arrangement (post-Second World War (WWII) and into the late 1960s. It could be considered again now for Afghanistan, but with more limitations and protections that would prevent strong partner states from using the mechanism to the detriment of weak states like Afghanistan. Nonetheless, the IMF could assist in this implementation and oversight.  Currently, donors and the UN ship pallets of cash each month to a private Afghan bank for distribution to UN agencies and international NGOs on the ground, a form of bilateralism. Still, it is not sustainable and does not support market-based financial transactions. It has also artificially supported the appreciation of Afghanistan’s currency under the TIA, which will end once these humanitarian cash transfers end, which many donors and many in the US Congress are supporting now.   

                               ii.  Issues with bilateral finance agreements: Bilateral finance payment arrangements can also be wildly de-stabilizing to market development, but no other solution is available. Limited bilateral financial arrangements may be the only possibility for Afghan traders in a land-locked country under TIA control to survive and keep feeding their nation. It would also help move more transactions from secretive Hawala transactions into a more transparent, accountable trade and payment transfer system.  To their credit, In 2022-2023, the World Bank tried one concept entitled the “Humanitarian Exchange Facility” (HEF), but several donors and the TIA refused to support it.  TIA felt it was taking too much Central Bank functioning away from their oversight.   

                             iii.   How to move forward: We propose that Afghanistan’s most vital private sector trading partners in Central and South Asia, like Uzbekistan, Kazakhstan, Tajikistan, and perhaps India and Pakistan, utilize their state-owned trade finance banks to establish “limited bilateral trade payment agreements” with qualified Afghan traders and private sector companies who wish to do trade finance transactions with exporters or importers within Afghanistan.  Each of these countries maintains existing US and international corresponding bank relationships and has used their state-owned trade finance banks to undertake similar arrangements temporarily in the past. This would help supercharge export-led growth for Afghanistan and these partner states. A pre-qualifying application process could be established by partner trade finance banks where Basil III vetting would occur before bilateral partner states approve transactions. The arrangements could also be supported by international donor organizations like the World Bank or Multilateral Investment Guaranty Agency (MIGA), to help de-risk or offer specific transactional insurance mechanisms to help support these types of bilateral trade finance transactions. 

                             iv.  The IMF’s Afghanistan presence: One additional and not inconsequential problem to overcome at this point is the IMF’s suspension of operations in Afghanistan without a recognized government in place. It is unclear whether the IMF could assist the Afghanistan private sector (both for-profit and non-profits), with this type of bilateral payment programming.   Since so much of Afghanistan’s trade finance payments impact their own balance of payments regime, the IMF role seems the logical choice here.     

4.       The US should shift its humanitarian and economic assistance strategy with Afghanistan to one that supports rapid and large-scale integration of Afghanistan’s private sector economy into the Central Asia Region (CAR)—via its five republics, including Kazakhstan, Kyrgyzstan, Uzbekistan, Tajikistan, and Turkmenistan. There should no longer be C5 Plus One (C5+1) or Central Asia Region (CAR) Plus U.S regional partner meetings without regular, inclusive, fully resourced, economic integration workstreams where Afghanistan’s private sector is included as regional economic partners (without TIA direct involvement). Given the increasing role of China, Iran, Pakistan, and Russia in Central Asia that we see today in the post-U.S and NATO military withdrawal, the State Department should develop a U.S-led CAR regional economic integration assistance strategy.

a.   International donors are already working together regionally to some degree. The UN, Asian Development Bank (ADB), European Bank for Reconstruction and Development (EBRD), Islamic Development Bank (IsDB), U.S. Agency for International Development (USAID), World Bank, and the World Trade Organization (WTO) are undertaking a host of CAR integration initiatives such as customs integration initiatives, harmonization of cross-border processes for more efficient road transport, e-commerce, and regional digital marketplaces, interoperability of regional banks, small and medium-sized enterprise (SMEs) funds for regional export promotion activities, facilitating regional remittances, structuring partnerships with US, EU and CAR multinational corporations, and much more.

b.  Afghanistan’s private sector should be included in many of these various program activities. There is no more significant influence inside Afghanistan with the current TIA leadership than its own traders and private sector business leaders, especially on economic policies.  By enabling these Afghan companies regionally, donors may help leverage the needed changes sought by the international community today.

c.       In addition, the U.S International Development Finance Corporation (DFC) and USAID, should increase US assistance and market-focused economic programs to Afghan private sector businesses for expansion of critical commercial trade supply chains and food security investments that take place within the CAR but help the Afghan economy as well.  Many sizeable Afghan trading houses have relocated to the CAR, Turkey, or the United Arab Emirates (UAE), while retaining their Afghanistan-based enterprises in Kabul, Herat or Mazar-e-Sharif).  Most of these businesses are not TIA aligned and would welcome trade support within CAR.

5.       Afghanistan’s private sector needs increased export promotion funding and related technical assistance, allowing them to increase EU Generalized Scheme of Preferences Plus (GSP+) exports, providing duty-free access for Afghan exports of fruits, nuts, dates, saffron, minerals, gemstones, and more.  Unfortunately, the U.S GSP system has not been renewed since it expired in 2020, and the renewal legislation is unlikely to pass Congress soon. So, focusing on EU GSP+ access is a better place to start. The EU GSP+ was renewed in November 2023 by the Council of EU Member States, and the European Parliament extended the scheme from 2024 to 2027. The EU GSP system has many conditions, including respecting the principles of various human and labor rights conventions.  Donors should advocate to EU policymakers to allow Afghan private sector participation in GSP+ but maintain prohibitions against participation by TIA state-owned entities or any TIA-controlled ones.  

                                 i.  Currently eligible products for EU GSP+ treatment include: animal and vegetable products, minerals and base metals, textiles, machinery and mechanicals, chemicals, and footwear. The EU GSP+ utilization rate by CAR nations is increasing rapidly, with Uzbekistan at 96%, Tajikistan at 86%, and Kyrgyzstan at 81%, all based on 2022 data.

                               ii.   By including Afghanistan in EU GSP+ programming, Afghan businesses, including many owned by women entrepreneurs, could start to export and grow their enterprises more strategically—either through direct exports to the EU under GSP+ or in support of CAR companies and their expanding utilization of EU GSP+ benefits. NB: Kazakhstan is no longer eligible due to its own praiseworthy economic success, and Turkmenistan’s utilization rate cannot be determined yet because of a lack of trade data sharing.  The EU manages its GSP program closely.  For example, in 2023, the EU suspended India from several GSP+ categories, including plastics, textiles, precious metals, pearls, and more.

6.       The Donor community, including the U.S, EU, UN, and World Bank, should be focusing more on Afghan “localization” or assistance program implementation through local Afghan businesses and non-profits, with a commensurate decline in assistance implementation by UN agencies, international NGOs, and traditional “Beltway” development implementing partners. Donors should be committed to building the core competencies of Afghan private sector implementers, including NGOs and for-profit businesses because they will essentially be more sustainable forms of economic development. After nearly two decades of assistance through other methods, it is time for Afghan citizens and business enterprises be given the chance to lead their own humanitarian and private sector development implementation, with close donor monitoring and evaluation. 

                                 i.  More local teaming with donors: In this regard, Afghan private sector leaders should advocate strongly for more local procurement of donor projects and humanitarian support. Afghans should propose more “teaming agreements” with donors and should be able to demonstrate past performance with successful implementation (maybe not perfect, but with strong performance).   AACC feels that enhanced women and girls program partnerships could be a great way to scale local implementation.

                               ii.   Zero tolerance for corruption & better resourcing:  Of course, there should be zero tolerance for corruption within local programming. The Organization for Economic Cooperation and Development (OECD) data seems to validate that locally-implemented programs have less corruption, are likely to be more accountable, and are frequently more impactful.  But they need resources to scale these impacts.

                             iii.    Leveraging remittances: In 2023, the World Bank found that official remittance flows to low- and middle-income countries totaled more than $656 billion and grew by 1.4 percent from 2022. The World Bank has also shown how remittance flows to low- and middle-income countries continue to rise while Official Development Assistance (ODA) has plateaued together with foreign direct investment. Remittances from the Afghan diaspora abroad could also be a point of increased localized leverage for humanitarian and private sector assistance projects. Often, remittances are directed at community-based, local projects like earthquake-proof housing, clean water or sanitation systems.  By partnering with local Afghan businesses and NGOs donors could build a set of incentives to increase remittance flows to local communities and see this “leveraged assistance” as a better alternative, especially for supporting women and girls and during crisis response and humanitarian assistance projects. 

Final Thoughts

Afghanistan remains the nexus between Central and South Asia, as it has since antiquity when it was the crossroads of the original “Silk Road” connecting the Mediterranean civilizations with China and India. It also contains at least US $1 trillion in mineral wealth which could fund future Afghanistan development for decades, if managed competently.  In our private sector delegation visit with non-sanctioned Taliban economic leaders in September, 2023, TIA stated they were committed to being private sector-driven, supportive of traditional Afghan traders and seeking integration into regional Central and South Asia markets.  They stated they want to build a market-led, export-led growth economy in Afghanistan.  The Afghan people deserve a chance to build a prosperous Afghanistan which leads quickly to full female involvement in the economy and broader society.  They represent more than 50 percent of the Afghan population, and their economic agency, education and consumption are assets that benefit all Afghans including the private sector.   We hope this memo provides some insights on how to get there.