UN warns Afghan financial system could collapse in months

The United Nations has warned that Afghanistan’s financial system could collapse in months due to a rise in people unable to repay loans, CNN reported.

According to the three-page report, the UN’s Development Programme (UNDP) said the economic cost of a potential banking system collapse, as well as the negative social impact, “would be colossal.” 

The UNDP’s proposed plans to save the banking system include a deposit insurance system, measures to ensure adequate liquidity for short-medium term needs and credit guarantees for loan repayment delay options, according to CNN. 

“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. 

The report noted that 40 percent of the country’s deposit base will be lost by the end of the year if current trends and restrictions continue. It also added that with banks stopping new credit, the nonperforming loans had doubled to 57 percent from September 2020 to the end of the year, CNN reported. 

This comes after Afghanistan’s economy has been in freefall since the Taliban seized control of the country in August, creating a severe strain on their banking system and causing weekly withdrawal limits to stop a run on deposits. 

The country’s banking system was considered vulnerable before the Taliban takeover, CNN reported. 

Afghanistan’s UNDP head Abdallah al Dardari said in an interview the country needs to find a way to create a banking sector that doesn’t need the Taliban’s influence. 

“We need to find a way to make sure that if we support the banking sector, we are not supporting Taliban,” al Dardari said in an interview via 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,” he said. “What used to be three months ago unthinkable has to become thinkable now.”