A new situation report released by UNDP detailed the state of the banking and financial system prior to the political transition on 15 August 2021, as well as the current situation in the three months since.

It described a system at a near-standstill, with humanitarian interventions thwarted by the country’s liquidity crisis, deepened by a lack of confidence on the part of depositors and international markets. IMF projections cited in the report predict a contraction of up to 30 percent in the Afghan economy for 2021-2022.

“Prompt and decisive action is urgently needed, with delays in decision-making expected to increase the cost of a banking system collapse – a grim predicament,” the report said.

Total banking system deposits fell from 268 billion AFN (US$2.9 billion) at the end of 2020 to 194 billion (US$2 billion) in September of this year, according to the report. They are expected to fall to 165 billion AFN (US$1.8 billion) by the end of 2021, a loss of approximately 40 percent.

Meanwhile, non-performing loans in the system’s relatively small credit market have increased from around 30 percent at the end of 2020 to 57 percent in September of this year.

Abdallah Al Dardari, UNDP Resident Representative in Afghanistan, notes that while the collapse of the financial system is exacerbating fast diminishing economic activity, banking is also one of the most important connectors of the country to the outside world.

“Without the banking sector, there’s no humanitarian solution for Afghanistan,” he said. “Do we really want to see Afghans completely isolated?”

The report recommended a number of coordinated actions, including deposit insurance for depositors; adequate liquidity ensured for the system to meet both short- and medium-term needs; and credit guarantees and loan repayment delay options for the real economy. (ILKHA)