The Afghan economy hostage to China and Pakistan?

A direct result of the Taliban’s takeover of Afghanistan is that the landlocked country is up for economic and resource grabs by Pakistan and China that have moved in swiftly to fill the space vacated by the United States and allies. For one, the new rulers do not have either the background or the experts to deal with intricate economic issues that confront the impoverished country. Even the chief of its central bank fled the country last month.

Of the remaining bureaucracy dealing with the economy, many are known to have dual passport/citizenship and have ample reasons to be wary of incurring wrath of the new authorities that could extend to their families. Any initiative, even by way of floating ideas or discussion, without action, can be risky. This opens the prospects of Pakistani officials, like the military that had helped the Taliban achieve victory last month, may get drafted to run, or guide, the running of the Afghan economy, at least for some time.

Taking advantage of the situation that they helped create, China and Pakistan have already chalked out plans. One indication comes in the form of an announcement by Pakistan Finance Minister Shaukat Tarin that his country will trade with Afghanistan in Pakistani rupees. He has cited as the reason the dollars crunch in Kabul. Tarin also talked about the future framework of trade between Pakistan and Afghanistan. He also offered to help the Taliban government to fill the technical positions left vacant due to the recent evacuations.

China has stepped in – uncharacteristically since it is not known to lend money easily – by committing USD 31 million to get the Afghan economy moving. While the taliban will welcome it, it also raises the prospects of joint exploitation. On their part, the Taliban have opened the doors by eagerly seeking a tie up with the Chinese BRI that, to begin with, will be by extending the China Pakistan Economic Corridor (CPEC) to Afghanistan.

China and Pakistan have begun to act while other countries are buying time to decide on whether to recognise the interim Taliban government in Afghanistan. On his part, Pakistan’s foreign minister Shah Mehmood Qureshi told Reuters on September 9 that Afghanistan’s assets “should be unfrozen so that they can be used.” without mentioning the beneficiaries.

Using Pakistani rupee (PKR) to trade with Afghanistan, when Pakistan itself has been increasingly using Chinese Yuan since 2018, making much of the Sino- Pak trade Yuan-based, raises the prospects of three-way dovetailing of the economies. Clearly, the Chinese economy, being the strongest of the three, will benefit, while allowing a measure of advantage to the other two, as Yuan is emerging as a strong currency in international trade.

Pakistan stands to gain hugely, acting as the middleman and cornering resources by way of transit and facilitation charges – just the way, ironically, it did for two decades with the US-NATO while facilitating their movements in and out of Afghanistan. But Pakistan’s own economy is in perpetual crisis and runs huge deficit in terms of debt servicing, among other indicators. Its exports have bloomed and imports have plummeted, along with the inflow of earnings from the diasporas. A Bloomberg report last week described the Pakistani rupee as Asia’s worst- performing currency as it hit its 13-month low of 166.98 PKR to a USD in the interbank market last week with the August trade deficit widening to an all- time high of $4.05 billion.

Fahad Rauf, head of research at Ismail Iqbal Securities, anticipates the current account deficit for August to now surge to the June current account deficit (CAD) of $1.6bn or twice the July number of $773 million owing to 133 % year-on-year and 24% month-on-month growth in the trade deficit. Others believe that the CAD could hit the roof, breaching the central bank’s projections of 2-3% of GDP for the entire fiscal year, should the trade balance deteriorate further on import buildup to support the ongoing consumption-based economic recovery.

After two decades of western aid, Afghanistan ranks as one of the most at-risk, fragile economies in the world. Poverty is endemic, as is underdevelopment, because of long-term, high-intensity conflict says the World Bank; 90% of Afghanistan’s population lived on less than $2 a day and Kabul which received $4.2 billion in aid in 2019 will receive none this year unless the US were to make some serious exceptions or at least lift the ban on providing the Taliban government access to Afghan funds under US control.

Prior to the current unrest, some 3.5 million people were already forcibly displaced within the country’s borders. Recent estimates suggest that another 550,000 have been displaced since the start of 2021, 80% of them women and children. Till things stabilise – and it is difficult to say when – in Afghanistan, it is up for exploitation by two principal neighbours – China and Pakistan.