Planet Money - Afghanistan's Money Problem

Episode Date: September 15, 2021

Afghanistan's economy changed — almost overnight — after the Taliban retook control of the country | Subscribe to our weekly newsletter here.Learn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

This is Planet Money from NPR. When we get Ajmal Ahmadi on the line, he won't tell us where he is. Not what city, not what country, not even what continent. It's not a secret, but I'd rather not say. What he will say is that he's with his loved ones, he's safe. And like the rest of us, he's been watching what's happening in Afghanistan, and specifically its economy, and trying to make sense of it all. But unlike most of us, he helped set up some of the systems that made Afghanistan's modern

economy run. And just a month ago, he was still working on those systems because of who he is. My name is Ajmal Ahmadi. I'm 43 years old, and I'm the former central bank governor of Afghanistan. August 15th was already kind of a strange day to be running the government's bank. Ajmal was in his office in Kabul. He was the acting governor at the time, appointed by the American-backed government. News had been coming in from all over Afghanistan that the Taliban was taking over different cities and regions. And Ajmal knew that Kabul would fall to the Taliban soon. So much so that when he arrived at work that Sunday, he had two packed suitcases in his car.

Still, the changes that happened happened so suddenly that I don't think anyone could have said or expected this. Ajmal was in charge of the Afghanistan Bank, the central bank. It's pretty much Afghanistan's version of our Federal Reserve. Central Bank regulates all the country's banks and tries to keep inflation in check. Ajmal was also the country's acting minister for industry and commerce. He was a busy guy. With the Taliban closing in, the country was already running low on currency. People were starting to hoard cash. We're trying to manage the economic situation, which I know it seems quite ridiculous in retrospect that we're still trying to resolve these economic issues. But I think the key point

is that no one felt as though Kabul would fall within a matter of hours. So there he was in his office organizing who would take over in case he had to leave and also doing regular office stuff. But messages, notes, intel kept coming in that the Taliban had taken over this part of Kabul, that part, that they were almost there. So at that point, I didn't feel as though I was getting accurate information. So I began to think that the city might fall that afternoon. And that's when I decided to leave for the airport. Why did you think you needed to leave right away? It wasn't clear what the Taliban's view towards government officials would be. I had worked very closely with the president for the past seven years, and I implemented a lot of reforms over those seven

years and made some enemies. Ajmal threw a bag together. He packed his laptop, some papers, but he also left some things behind. Books, rugs, a painting given to him by an Uzbeki colleague. My graduate degrees are still on the wall at the central bank. I didn't have time to take them down or search through other papers or other documents to take them with me. I didn't even have a chance actually to take my salary. My salary for the past year and a half is still at the central bank. What should have been a 20-minute drive to the airport took a few hours.

And when he got there, it was chaos. He scrambled to buy a one-way ticket out. He almost didn't make it onto any of the few flights. And along the way, the bags he had packed didn't make it onto the plane. But he did. Within a few hours, the Taliban had taken control of the country. Hello and welcome to Planet Money. I'm Erika Barris. And I'm Alexei Horowitz-Ghazi. Today on the show, Afghanistan's economy and how it changed overnight when the Taliban took over. What that means for foreign aid, trade, and for the bricks of Afghan gold sitting in the basement of a New York building.

Ajmal Ahmadi was born in Afghanistan, but his family left in 1980, when he was just two years old. The Russians invaded, and my father, who was a doctor working at an American hospital at that time, decided to leave. And so he had to pay someone to smuggle us out of the country in the middle of the night. They went to Pakistan, then Germany, and eventually found their way to Los Angeles. That's where he grew up. Ajmal and his family were some of the millions of Afghans who left the country around the time of the Soviet occupation, including many members of my own family, who ended up in New Mexico, where I was born and raised. A lot of them say the high mountain desert and adobe buildings reminded them of home.

And a lot of historians and economists point to this moment a little over 40 years ago as the beginning of a cycle of war and destruction that's repeatedly hobbled the Afghan economy. Afghanistan's in the middle of Asia and the Middle East. And in the mid-1950s, Afghanistan's government used that position to draw economic aid from both the U.S. and the USSR. Ironically, at first, that Cold War competition helped. So the 1950s are the period that's often seen as sort of the golden days of Afghanistan. Vanda Felbabb-Brown at the Brookings Institution has spent a lot of time researching and working in Afghanistan.

You have economic aid coming from the Soviet bloc and also from the West, from the United States, and it leads to a whole variety of economic development projects. Irrigation, dams, highways. And this balancing act, playing off American capitalism and Soviet communism, lasted all the way until 1978, when Afghan communists overthrew the Republican government. That led to a Soviet invasion and occupation that lasted 10 years. The war cost the USSR tens of billions of Soviet rubles, over an estimated $100 billion in today's

money. The U.S. spent over $2 billion funding the Mujahideen insurgency against the Russians, but the larger toll was on the Afghan economy. A key element of the Soviet occupation in the 1980s was to destroy the countryside. Because by about 1984-85, the Soviets realized that they controlled the cities in Afghanistan, but they cannot control the rural areas. And so they destroy bridges, irrigation systems, burn down orchards, burn down villages, and burn down the economy. On the eve of the Soviet invasion, Afghanistan's GDP was around $3.3 billion, higher than it had ever been. So whatever legal agricultural production you had building up from the 40s through about the 70s, goes literally up in ashes in the 80s under the Soviet scorched earth policy. That was followed by a civil war until the mid-90s when the Taliban,

a group of militant Islamists, seized control of the country. And after years of violent instability, you could see how many Afghans would have been relieved to have just any form of government. violent instability, you could see how many Afghans would have been relieved to have just any form of government. By then, foreign aid had more or less evaporated, and the Afghan economy was basically reduced to a single major export, poppies for heroin production. And from the beginning, the Taliban set out to remake Afghan society and the Afghan economy, in line with their strict interpretation of Islam. The Taliban saw all facets of modernity as a source of Afghanistan problems, something to be undone.

And so the Taliban was undoing, destroying all kinds of administrative and institutional structures in addition to physical facets of modernity. For example, when they took over Kabul at the time, they were literally setting planes on fire, planes being seen as a facet of modernity that was to be destroyed. That had a huge impact on the economy. As did banning half the population, women, from going to school or working outside the home. Economists talk about a couple things that really help a country grow. Innovation and human capital.

More people working, embracing new technology, building infrastructure. Economists talk about a couple things that really help a country grow. Innovation and human capital. More people working, embracing new technology, building infrastructure. It was like the Taliban read an economics textbook and decided to do basically the opposite. Then came 9-11, followed by the U.S. invasion, the ouster of the Taliban, and the creation of a U.S.-backed government. Ashmal Ahmadi was in his early 20s, and after college at UCLA, he worked on microfinance projects. He watched development unfold in Afghanistan, and he wanted to return. You know, I was excited to go back and connect.

I, of course, heard a lot of stories from my parents, from my grandparents. I'd seen a lot of pictures. I had very vague memories when I was a child, but it was a new experience when I went back. He returned to Kabul to work at the World Bank and in 2004 became the advisor to the Minister of Finance. And over the next two decades, Ajmal worked a string of jobs in and out of the Afghan government with one fundamental goal in mind. I always told my staff, I said, we're trying to build systems here that outlast the individuals.

So individuals will come and go, but the systems that we systems here that outlast the individuals. So individuals will come and go, but the systems that we put in place hopefully will be permanent. Along the way, Ajmal also went back to the U.S. to get a couple degrees at Harvard, worked a few finance jobs. And by 2014, Ajmal returned as the economic advisor to the Afghan president. Then he got to work. Of course, Ajmal was only one of many civil servants working on these projects, but he did play a big part in revamping the central bank's organizational structure. He made a national standard operating manual. We created a wholesale and retail payment system within the central bank. The wholesale system connected the central bank with the 12

commercial banks of Afghanistan. He hired and promoted women. They were allowed to work again and launched an electronic payment system that allowed people to send money through their phones. All this while Afghanistan's economy was growing. Tens of billions of dollars came into the country in foreign aid. That money paid for infrastructure projects and universities and health care. Also, reportedly, a lot of bribes.

And Kabul grew from a city of a few hundred thousand people to one of millions. A city with shopping malls and fast food restaurants. I've actually been to a KFC there, although the K in this case stands for Kabul fried chicken. And I think there was a lot of Afghans returning to the country and there's this period of optimism where we all felt we can help contribute to and help rebuild the country. this period of optimism where we all felt we can help contribute to and help rebuild the country. In the two decades following the U.S. invasion, Afghanistan's GDP grew from around $4 billion to over $19 billion. A lot of that growth was funded by foreign aid in the form of a lot of cash, but also the support of the most powerful bank in the world, the U.S. Federal Reserve,

which kept money on hand for Afghanistan so it could do business anywhere. We call these foreign reserves. A foreign reserve is something we don't talk about very often, but almost all countries have them. It's a rainy day fund. Afghanistan has $9 billion in reserves. Neither of us have been there, but if you did go into the basement of the Fed building in New York, you will find bricks and bricks of gold that belong to other countries around the world that are being held in case of emergency. Okay, let's just talk about that gold for a second. Countries have been storing bricks there for nearly 100 years, and they're each held in their own depositories. Bricks belonging to different countries do not

mix. Countries don't hold all their foreign reserves in gold, but still, there is a lot of gold down there. OK, back to Afghanistan. Nine billion dollars in foreign reserves isn't a lot for a country. China has trillions held by the Fed. So even with all this growth, Afghanistan was still a tiny economy. And as often happens in small countries where the currency is unstable, the dollar, our dollar, the U.S. dollar, is used alongside the local currency. Essentially, though maybe not formally, the Afghan.S. dollar, is used alongside the local currency. Essentially, though maybe not formally, the Afghan economy was what economists call dollarized.

And to use the dollar, you need dollars. So a few times a week for the last three years, a shipment of paper money would arrive in Afghanistan. Until the Taliban took over, around 75 percent of purchases were made with dollars. Everything from buying a soda to buying a house to trading with other countries. And the last day Ajmal Ahmadi was at work at the central bank, he called an emergency meeting. Because of security concerns, a shipment of dollars that was supposed to arrive that Sunday just hadn't. That would have caused a severe economic issue under normal circumstances. of severe economic issue under normal circumstances. And so we were trying to resolve how we could potentially deal with that under the assumption that the government would continue. After the break, the government tries to continue.

With the dollar shipment stalled and the Taliban moving closer to Kabul, there started to be a run on the banks of Afghanistan. A bank run, of course, is when people try to take out more cash than the bank actually has on hand. So Asma and his colleagues placed a limit of $1,000 on bank withdrawals. They raised the interest rate on overnight deposits to encourage the holding of Afghanis and a couple other things. But of course, by the next day, the Taliban had taken control of the country, and they've since appointed a new central bank governor, though it's unclear whether he has any background in finance or economics. But what surprised Ajmal was that one of the very first things the Taliban did

was to expand on one of the policies he himself had set up that last day. One of the first decisions that the new central bank governor has taken was to implement the restriction or the limits on withdrawals. And they lowered it even more than we did because, of course, the situation has worsened. Because since the day Ajmal left, there haven't been any of those shipments of dollar bills into Afghanistan. Now, normally a country without dollars can just use its own currency. And Afghanistan does have its own currency, the Afghani.

But there's a problem. They can't actually print any more of it. Something else I had seen was that there is no monetary printing press in Afghanistan. Is that true? That is true. And I think that's going to provide a challenge for the country. And we were slated to get some more shipments of Afghanis, physical Afghanis, later this year and throughout the next year. And I'm not sure if those will continue or under the sanctions regime, whether those will also be prohibited.

That's right. Afghanistan does not have its own press to print its own currency. It actually outsources that to companies in other countries. And that is going to be harder without access to dollars. And there's really no economy that can function well without a steady supply of paper money. You know, if they weren't able to source Afghanis, and they also don't have the shipments of dollar bills coming in, what would be the end result? I mean, I think at that stage you have a monetary contraction, which isn't good for any economy. A monetary contraction is when there's less money in the system than there was the year before.

That can lead to a cycle of deflation. Prices fall, overall spending drops, and economic activity slows. Also not good for an economy like Afghanistan's? The Taliban's global reputation. The U.S. designates the Taliban as a terrorist group. It's been under international sanctions for decades. And because of those sanctions, Afghanistan's economy has now lost that essential lifeline of foreign aid. We had a large trade deficit, which was financed by international aid. And now that international aid is no longer there. Grants financed around 75 percent of spending in

the country. And that all stopped last month. The World Bank and the IMF aren't sending aid. For a couple weeks, Western Union even stopped letting people wire money to anyone in the country. And those $9 billion held outside the country in case of emergency? That reserve belongs to Afghanistan. The Taliban doesn't have access to it. And so it's going to be much more challenging to pay for those imports that previously came into Afghanistan. The modern international economy requires modern international banking, and that's largely controlled by bankers in the United States.

modern international banking, and that's largely controlled by bankers in the United States. Without being able to engage with that system, Afghanistan's economy is quickly seizing up. And for the time being, all Ajmal Ahmadi can do is watch. I mean, you've spent your entire adult life working on the opposite of what we're seeing today. It's heartbreaking. It's heartbreaking because I spent seven, eight years trying to

put systems in place to improve the economic situation of the country. And we've moved in the complete opposite direction. So it's heartbreaking. Are you a teacher trying to make economics more accessible? We make it easy to use Planet Money in the classroom. Go to npr.org slash teach planet money. You can also email us planetmoney at npr.org. We're also on all the socials media at planet money. Today's episode was produced by Dave Blanchard and edited by Bryant Erstadt.

Alex Goldmark is Planet Money's supervising producer. Special thanks this week to Alex Zerdin and Sean Murabi. I'm Erika Barris. And I'm Alexi Horowitz-Ghazi. This is NPR. Thanks for listening. And a special thanks to our funder, the Alfred P. Sloan Foundation, for helping to support this podcast.