Editor in Chief: Moh. Reza Huwaida Thursday, July 19th, 2018

Banking Scandals, Wobbly Economy

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Banking Scandals, Wobbly Economy

In its 2009-2014 strategic plan, the Central Bank of the government of Afghanistan pronounces its motto as "sta bility of prices and a stable financial system". A decade later than the bank resumed its normal activities following a long interval of chaos and total collapse of financial infrastructures, initial signs told a promising story. In the course last one decade, the country's strategic central bank gave a hopeful picture of the overall financial activities in Afghanistan. However, it now seems to be more like a myth rather than a reality.

The billion-dollar aids poured to the country could rapidly change the situation and communicated an apparently optimistic perspective for financial and economic stability in the country. Following a short period of relatively economic growth and financial successes, the government announced it had embarked on building a stable basis for financial and economic activities. They said significant steps were taken to rebuild the wrecked infrastructure that was ruined during the war time. However, they were right to some extent.

But the point that remained undiscovered is that the successes are temporary and false. Main achievements were seen in the nascent private sector activities. Establishing financial institutions and economic corporations, boosting trade activities, expanding international trade, investing on infrastructural areas and growing construction market opened a ray of hope of having a developed, stable and healthy economy. Nonetheless, the recently enhancing financial crisis casts doubt over the promising future of Afghan economy. President Karzai administration and the international community had enough time to develop and put into practice certain long term and strategic plans to ensure sustainability of the current growth rate and a relative stability of Afghan economy. But it didn't happen.

At the present, the fragile security situation has overshadowed all other matters of concern for the country. However, economists believe that the current economic vulnerability is far more critical than the long standing security dilemma. Low revenue collection, anemic job creation, high levels of corruption, weak government capacity, and poor public infrastructure remain as great challenges on the way to build a developed, peaceful and prosperous Afghanistan. Economic pressures and highly dependent budget is of the main challenges even at this period when huge amount of money is being poured to the country. Mismanagement of economic and financial institutions has led to notorious financial corruption and bank failures.

Kabul Bank story topped the country's list of concerns as a handful of corrupt shareholders let it go bankrupt. The government faces huge challenge in financing its operating budget as several contributing countries have stopped part of their donations. They say releasing donations are subject to International Monetary Fund's (IMF) agreement with the Afghan government over mistrust created as result of Kabul Bank failure and the government's inappropriate handling of the issue. IMF support is a crucial benchmark for most of Afghanistan's donors who pour in billions of aid. Afghan government is making struggles to convince IMF to resume payments to the Afghan Reconstruction Trust Fund which accounts for bulk of the Afghan national budget.

Following long debates over the bank failure and weak financial governance between stakeholders, the government's inability to come up with a serious solution to the Kabul Bank crisis could see the IMF withdraw its support for aid-reliant Afghanistan, which would automatically trigger an aid review among major donors. Few days later than IMF announcement, Britain said it would delay payment of 85 million pounds in aid to Afghanistan this year. The British Department for International Development (DFID) said the payment was being delayed because of the continued absence of an International Monetary Fund (IMF) support program. The World Bank also demonstrates willingness to suspend funds unless the IMF gives a green light to the donor resources to resume aids.

So far, $700 million of IMF fund is lost by Afghan government and more than $500 million is suspended. A big portion of suspended funds would have financed the operating budget, in particular, the government staff salaries. Accordingly, further suspension of aids will cause an immediate financial crisis which, in the long run, can potentially destabilize the country and help more mercenary recruitment by militants.

Wrestling with a huge financial scandal by collapse of the country's biggest private bank, the government exhaustedly observes failure of the second largest bank. MPs on Monday July 11, 2011 said that the country's second largest bank, Azizi Bank, was on the verge of a total failure due to causes resembling to those in Kabul Bank case. The bank's collapse, they said, had been expected a long time ago but the shareholders preferred not to disclose the disgrace. Ahmad Behzad, Wolesi Jirga's second deputy made it pubic on Monday that Azizi Bank had sold its assets to a private company, the documents of which were availed to parliament.

As experiment with the Kabul Bank case showed, the panic caused by failure of a second bank will quickly spread across the country that will lead to immediate demand for withdrawal of deposits. For such scandalous incidents, the nascentAfghan banking sector has, to a great extent, lost credibility in public. The corrupt financial institutions have created a sense of unwillingness in public to enter into financial markets and partake in investments.The people then would prefer to keep their money in their pockets rather than losing it in corrupt deals of the Bank managers.

The most recent vicissitude in national currency's exchange rate, inflation of goods prices and declining investments are partially caused by such disgraceful happenings. However, it is attributed to withdrawal plan of the coalition forces and political instability. Acknowledging that political dispute among the three branches of power have severely affected economic activities, let's not forget that banking scandals are more tangible to people rather than egocentric conflicts amongst states branches.

Unstable rate of the Afghan currency clearly indicate the country's dependent and wobbly financial and economic system. In comparison to the chaotic juncture of statelessness, the country's economy has improved significantly since the fall of the Taliban regime in 2001 largely because of the infusion of international assistance, recovery of the agricultural sector, and service sector growth. Despite the progress of the past few years, Afghanistan is extremely poor, landlocked, and highly dependent on foreign aid, agriculture, and trade with neighboring countries. Much of the population continues to suffer from shortages of housing, clean water, electricity, medical care, and jobs. Criminality, insecurity, weak governance, and the Afghan Government's inability to extend rule of law to all parts of the country pose challenges to future economic growth. Afghanistan's living standards are among the lowest in the world.

While the international community has so far served a lofty purpose in Afghanistan, pledging billions of dollars since 2002, the Government of Afghanistan needs to immediately overcome a number of challenges. It will never find more opportunities such as the current one to improve its capacity to hold responsibility for more economic and financial undertakings. No need to say, the government does its best to restore its damaged reputation over Kabul Bank case but it seems to be unable avoiding further crises caused by inefficient handling of financial issues.

IMF and donor community's disagreement with Afghan government's policies over banking scandals and insufficient preventive measures to stop further collapses will intensify following announcement of a second bankruptcy. In such a critical juncture, further disagreement with international financial institutions and the donor community and unrealistic and impractical actions against disastrous financial corruptions will put at risk the country and the decade-long relatively good achievements. If continued, this will paralyze the country's financial system and the government operations.

Nasrudding Hemati is the permanent writer of Daily Outlook Afghanistan and Writes on National and International issues. He can be reached through mail@outlookafghanistan.com

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