Urgent actions needed to avoid collapse of Afghan banking system'; economic cost could be colossal, UNDP warns

Urgent actions are required to prop up Afghanistan’s banks, a United Nations agency said, warning that a spike in loan defaults, lower deposits, and a cash liquidity crunch could cause the financial system to collapse within months

Nov 22, 2021
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Urgent actions needed to avoid collapse of Afghan banking system

Urgent actions are required to prop up Afghanistan’s banks, a United Nations agency said, warning that a spike in loan defaults, lower deposits, and a cash liquidity crunch could cause the financial system to collapse within months. The UN Development Programme (UNDP) on Monday said the economic cost of a banking system collapse - and consequent negative social impact - “would be colossal”, asking for urgent measures by the international community.

“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 UNDP said.

The Taliban military takeover in August and subsequent blocking of the country’s reserves and development aid by donors have sent the economy into freefall, putting the country’s banking system under immense strain. The new rulers, the Taliban, quickly moved to restrict the withdrawal.

Reports said billions of savings of Afghans over the years have been lost as the banks in the country ran out of cash. 

“We need to find a way to make sure that if we support the banking sector, we are not supporting Taliban,” Abdallah al Dardari, head of UNDP in Afghanistan, was quoted as saying by Reuters.

Commenting on the situation, he said, “We are in such a dire situation that we need to think of all possible options and we have to think outside the box,” adding, “What used to be three months ago unthinkable has to become thinkable now.”

Aid agencies have been trying to bring cash into the country but their efforts remain almost insignificant as transactions channels remain blocked. 

To ensure adequate liquidity for short- and medium-term needs, as well as credit guarantees and loan repayment delay options, the UNDP proposed to save the banking system include a deposit insurance scheme. 

Calling on international financial institutions, the report said their extensive experience of the Afghan financial system would be “critical to this process.” Furthermore, experts have pointed out that the present crisis would not be resolved only by getting the much-needed humanitarian aid into the country, it would continue until the banking sector issues are addressed. 

(SAM)