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The fate of Afghanistan’s economy after the Taliban takeover

Introduction

Afghanistan is one of the poorest countries in the world due to the destruction of its limited infrastructure through wars, predominantly after the Soviet Invasion (1979- 1989). Along with political instability and high dependency on foreign aid, this state of depravity is perpetuated.

The biggest news in the world from the past few weeks stems from the Taliban takeover of Kabul, the capital of Afghanistan, and effectively replacing the Afghanistan government. With most government officials and Former President Ashraf Ghani fleeing the country, the Taliban has now taken complete control of the presidential palace and declared that the war is over. How will this impact the economic conditions of Afghanistan?

Foreign Investments

As mentioned earlier, Afghanistan is greatly dependent on foreign aid. However, international aid flows are under a cloud of profound uncertainty. German Foreign Minister Heike Maas told the ZDF broadcasting program, “We will not give another cent if the Taliban takes over the country and introduces Sharia law.”(Sharia Law is the Islamic legal system, which governs religious rituals and aspects of day-to-day life, including finance and banking).

Moreover, following recent unrest and the toppling of the government, investor confidence in Afghanistan could drop to an all-time low.

 So, now that the Taliban has taken complete control of Kabul, international trade and business will soon come to a halt as the militant group has stopped all exports and imports, particularly with India. India imports about 85% of its dry fruits from Afghanistan. The Federation of India Export Organisation expressed concern that dry fruit prices may go up in the coming days due to the turmoil in Afghanistan.

 Hence, the Afghanistan economy has the potential to experience a significant downfall, since international aid accounted for ~43% of their GDP (Gross Domestic Product) in 2020, per the World Bank. Thus, considering the following in terms of foreign investment, the nation has a bleak future.

Mineral Resources

According to WION, while Afghanistan may be one of the poorest nations in the world, it is a region of vast mineral resources. In 2010, American geologists said the resources in this region are worth about – $1 trillion.

Valuable minerals such as iron ore, copper, gold, lithium, sulphur, and various gemstones, to name a few. A 2010 report of Afghanistan’s Ministry of Mines recorded the country’s copper resource at almost 30 million tonnes. Further, another report in the same year said that 28.5 million tonnes of copper lay hidden in undiscovered deposits, bringing the total to roughly 60 million tonnes. Given current rates at the London Metal Exchange, the mineral resources would amount to ~$500 million. Moreover, Afghanistan has a gold resource of at least 2700 kilograms, making gold the most favourable hedge ever since inflation. (Inflation is the rate at which the general level for the price of goods & services rise, resulting in a sustained drop in the purchasing power).

However, one mineral has particularly a striking potential. Lithium is a metal used in the batteries of mobile devices and electric cars. The latter application will be crucial in the future, as the automobile sector is quickly transitioning towards zero-carbon forms of transport.

Today, lithium is also facing unprecedented demand, with an annual market growth of 20% compared to just 5-6% a few years ago. According to the International Energy Agency, global demand for lithium is expected to grow by over 40 times by 2040. Additionally, The Pentagon memo designated Afghanistan as “The Saudi Arabia of Lithium”.

China Takes Interest?

Back in 1996, when the Taliban first took control of Afghanistan, China refused to recognize their rule and left their embassy shut for years. This time around, Beijing has been one the first to embrace the Islamist militants next door.

But, what prompted such a change of heart?

Director of the China Program at the Washington-based Stimson Center Yun Sun said: “Twenty years ago, China was not a global power and what was happening in Afghanistan did not bother China.”

Today, China commands an economy worth $14.7 trillion—more than 17 times its size in 1996—in addition to a massive trade-and-infrastructure initiative that stretches across the Eurasian landmass. Although China has not officially sought ties with the militant group, there are hints that it will provide financial assistance to Afghanistan.

 China is currently eyeing the mineral resources of Afghanistan, which are worth $1 trillion. Moreover, the large reserves of copper and lithium specifically will be highly beneficial for the Chinese electronics industry.

The Taliban will need significant assistance to rebuild Afghanistan. Because Western countries and financial institutions are unlikely to assist, China, with its massive reserves of capital and proximity to Afghanistan, can play a supporting role in the survival of a future Taliban government.

Conclusion

In conclusion, Afghanistan may have a chance to grow its economy under such grave circumstances with Chinese assistance.

The exploitation of the rare earth minerals would bring foreign currency to Afghanistan, whose weak economy relies on subsistence agriculture, services, and international aid. However, some observers are calling not to overestimate China’s interests in Afghanistan.

Their statements imply that the idea of a China which would get its hands on the mineral wealth of Afghanistan is a fantasy. Researchers say that the recent investments that China will specifically be for the exploitation of pine nuts (Pine nuts are one of the more expensive nuts on the market). It can be said that Chinese interest and collaboration with Afghanistan under Taliban control may be short-lived.

Sources


1.What next for Afghanistan’s economy? – BBC News
2. Financial News – Forex News, Stocks Market News (fxempire.com)
3. The fate of Afghanistan economy under Taliban rule | Business News (timesnownews.com
4. Minerals worth trillion dollars: So really how big is Afghanistan’s economy under Taliban control? (msn.com)
5. What next for Afghanistan’s economy? – BRIGHT NEWSROOM
6. Why China is interested in Afghanistan (linkedin.com)
7.Taliban to reap $1 trillion worth of Afghanistan’s mineral wealth – Frontline (thehindu.com)