Taliban get a lifeline from Pakistani dollars

(Bloomberg.) Thousands of dollars are being smuggled from Pakistan into Afghanistan each day. This is in support of the tightening economy. The US and Europe have denied the Taliban regime access millions of foreign reserves. Islamabad is seeing an increase in outflows, which are contributing to a rapidly evolving economic crisis.

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According to Muhammad Zafar Paracha (general secretary of the Exchange Companies Association of Pakistan), a 26-member organization of currency dealers, traders and smugglers bring as much as $5 Million daily across the border. That more than covers the as much as $17 million that Afghanistan’s central bank injects into the market each week.

These illicit flows reveal how the Taliban are evading the sanctions following their 2021 takeover. For Pakistan, it’s contributing to the depletion of foreign reserves and adding to the downward pressure on the rupee as the currency tumbles to record lows and the economy teeters on the edge of collapse.

“Currency is being smuggled without any doubt,” Paracha said by phone. “This has become quite a lucrative business.”

The US and Europe froze more than $9 billion of Afghan central bank reserve funds to prevent the Taliban from retaking Kabul in August 2021 after twenty years. They feared that the terrorist group would use the money for its own purposes. Under pressure from the United Nations the US agreed to release half to support the economy. But this was put on hold after Taliban bans Afghan women from going to school and working.

Afghanistan is still in dire straits seventeen months later and the human rights situation is only getting worse. The UN warned that over half of the population will be facing acute hunger due to the brutal winter. The regime is able to survive on the help of its neighbor.

“Afghanistan has about a $10 to $15 million requirement on a daily basis,” said Khurram Schehzad, chief executive officer at Alpha Beta Core Solutions Pvt Ltd., a financial consultancy in Pakistan’s commercial capital, Karachi. According to Schehzad, half of this amount is from Pakistan.

Haseeb Noori, spokesperson for Da Afghanistan Bank, claimed that enough dollars are in reserve at the central bank run by the Taliban to support the economy.

It comes partly from the UN which has provided around $40 million in humanitarian assistance each week since last January. The money arrives in Afghanistan via cash and must be converted into the local currency, afghani. Afghanistan is disconnected from the global banking systems. So even though the aid doesn’t directly benefit the Taliban, the dollars ultimately end up in the central bank’s coffers. The UN wasn’t immediately available to comment.

Another source of funding for the regime is from customs tariffs. Some of these are collected in dollars.

“The UN actually supports the afghani currency by supplying dollars to the markets and buying afghanis in exchange,” said Torek Farhadi, a former International Monetary Fund adviser in Washington. “Demand for afghani is actually created by the UN and other sources including dollar smugglers.”

Over the past year, the afghani gained 5.6% against the dollar. This is one of the best performances of any currency around the globe. After falling to a record low of 124.18 in December 2021 (just a few months before the Taliban returned to power), the Afghan currency has since recovered to 89.96 dollars.

Pakistan’s rupee has lost about 37% against the US currency over the period, one of the largest declines. It dropped 10% in just one day in January. This is the largest fall in two decades. The crisis-stricken government allowed the exchange rate to drop in order to receive much-needed loans by the IMF. Pakistan has been dealing with the aftermath from deadly floods, political turmoil, and raging inflation. The country’s foreign reserves dropped to $3.09 Billion in the week that ended Jan. 27, its lowest point in nine years.

The smuggling really took off in the middle of last year after Afghanistan increased coal exports to energy-hungry Pakistan, according to officials at Afghanistan’s finance ministry. It has also been boosted by the Taliban’s ban on the use of Pakistan’s rupee as legal tender in Afghanistan, which forces exporters to trade in dollars and bring the US currency back to the country, the officials said, asking not to be identified because they aren’t authorized to speak to media.

“Our market is bound to get affected when they purchase dollars from the local market,” Jameel Ahmad, governor of Pakistan’s central bank, said in a brief interview before a press conference on the country’s interest-rate decision on Jan. 23.

Haji Mohammad Rashool, one of these traders, exports coal to Pakistan. Coal is Afghanistan’s primary export and Pakistan is its biggest trading partner. He purchases coal from Afghanistan, then sells it in rupee at a markup. The rupee is converted into dollars, and the money is sent back to Afghanistan using the Hawala system of funds transfer. Finding dollars is difficult in cash-strapped Pakistan, Rasool says, so he uses gray markets near the border in places like Peshawar, where he’s willing to pay as much as 10% more than the official rate.

“Almost all traders do the same,” he said of bringing dollars into Afghanistan. We’re “prohibited by the Taliban from bringing rupees back into the country.”

Ahmad Wali Haqmal, spokesperson for the finance minister, stated that the Taliban encourage all to bring in cash in dollars. However they have lowered the maximum dollar transfer from the country to $5,000.

For Paracha of the Pakistan currency dealers’ group, the problem lies with Pakistan’s “flawed” immigration and trade policies and border controls. Paracha stated that every day thousands of people cross the border without visas. Many are also carrying dollars.

–With Reinie Booysen’s assistance

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