The United Nations in its latest report has warned that the economic cost of a banking system collapse in crisis-stricken Afghanistan "would be colossal."
In a report on Afghanistan's banking and financial system, the UN Development Programme (UNDP), the global body’s development network, Monday called for urgent action “to prevent the banking system from collapsing" in the war-torn South Asian country.
"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 noted with concern.
It could take decades to rebuild the banking system if it collapses, according to the report.
The abrupt withdrawal of most foreign development support for #Afghanistan after the Taliban takeover has sent the country's economy into freefall.— Birgit Schwarz (@BirgitMSchwarz) November 22, 2021
The banking system, the UN warned today, is on the verge of collapse. The social impact "would be colossal."https://t.co/CluXs3oLVj pic.twitter.com/CKGXD5lpeJ
The country has been teetering on the brink of a major humanitarian catastrophe following the botched exit of the US-led international forces and the Taliban’s sweeping takeover three months ago.
In recent weeks, UN agencies have sounded alarm bells, warning that millions of Afghans could run out of food before the onset of winter and around one million children are at the risk of starvation.
The unfolding crisis has also affected the already fragile banking system in the country, especially with billions of dollars in Afghan assets frozen by the US.
“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.
“We are in such a dire situation that we need to think of all possible options and we have to think outside the box,” he said.
The UN agency has proposed solutions such as a deposit insurance scheme, measures to ensure adequate liquidity for short and medium-term needs, as well as credit guarantees and loan repayment delay options to prevent the collapse of the banking system in Afghanistan.
“Coordination with the International Financial Institutions, with their extensive experience of the Afghan financial system, would be critical to this process,” the report states, referring to the World Bank and International Monetary Fund (IMF).
The report further warns that with current trends and withdrawal restrictions, about 40 per cent 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 57pc 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.
He warned that a spike in people unable to repay loans and less deposits exacerbated by cash shortage could cause the financial system's crash within months.
The UN official also warned about the consequences of a banking collapse for trade finance.
“Afghanistan last year imported about $7 billion worth of goods and products and services, mostly foodstuff ... If there is no trade finance the interruption is huge,” he said. “Without the banking system, none of this can happen.”
Last week, the UN envoy in Afghanistan, Deborah Lyons, also called for “urgent steps” to address the looming humanitarian crisis in Afghanistan and stave off economic collapse.
“To abandon the Afghan people now would be a historic mistake — a mistake that has been made before with tragic consequences,” Lyons told the UN Security Council.