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Afghanistan banking system could collapse, warns UN

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KABUL: The United Nations on Monday warned that Afghanistan’s financial system could collapse within months if no urgent action is taken to prop up local banks, amid lower deposits and a cash liquidity crunch pushing more people to poverty.

The UN Development Programme, in a three-page report, said the economic cost of a banking system collapse, warning that social fallouts of such a collapse would be colossal.

“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 report said.

“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, told 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. What used to be three months ago unthinkable has to become thinkable now,” he said.

Afghanistan’s banking system was already vulnerable before the Taliban came to power. But since then development aid has dried up, billions of dollars in Afghan assets have been frozen abroad, and the United Nations and aid groups are now struggling to get enough cash into the country.

The UNDP’s proposals to save the banking system include 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.

“Coordination with the International Financial Institutions, with their extensive experience of the Afghan financial system, would be critical to this process,” UNDP said in its report, referring to the World Bank and International Monetary Fund.

The United Nations has repeatedly warned since the Taliban took over that Afghanistan’s economy is on the brink of a collapse that would likely further fuel a refugee crisis.

UNDP said that if the banking system fails, it could take decades to rebuild.

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