Millions of dollars are being smuggled into Afghanistan from Pakistan every day, providing support for the isolated economy, according to a recent report published in Bloomberg News.
These financial flows take place despite the international restrictions on the Taliban, and after the US and EU denied the Taliban’s “interim” government access to billions of dollars of Afghanistan’s foreign reserves.
For Pakistan, these unauthorised outflows are exacerbating an economic polycrisis spiraling out of control, as the country’s political leaders scramble for power amidst the chaos.
“Traders and smugglers are bringing as much as $5 million across the border daily”, Muhammad Zafar Paracha, general secretary of the 26-member ‘Exchange Companies Association of Pakistan’, a group of currency dealers, told Bloomberg News. “That more than covers the as-much-as $17 million that Afghanistan’s central bank injects into the market each week”.
The illicit flows reveal how the Taliban continue to evade sanctions after their 2021 takeover of Afghanistan. For Pakistan, it has contributed to the steady depletion of crucial foreign reserves, and added to downward pressures on the Pakistani rupee as the currency tumbles to record lows against the dollar and the economy teeters on the brink of collapse.
“Currency is being smuggled without any doubt,” Paracha told Bloomberg, adding that “this has become quite a lucrative business.”
Earlier, Pakistan Customs said that currency hoarding, not dollar smuggling, was contributing to the shortage of the greenback in Pakistan. However, it is obvious to others that currency is not just a store and measure of financial value, but also the primary mode of transaction for goods and services.
When the Taliban retook Kabul in August 2021, the US and Europe blocked more than $9 billion in Afghan central bank reserves held in their jurisdictions. They fear that the funds would be used by the militant group to finance terrorism.
Under pressure from the United Nations, the US prepared to release half of the amount to help stabilise the Afghan economy, but put this release on hold after the Taliban issued a prohibition on Afghan women from attending school or working.
Seventeen months since the Taliban’s second ascent to power, Afghanistan’s conditions are dire and the human rights situation is only getting worse each day. The UN has warned that more than half the population faces acute hunger over the harsh winter. But money from its neighbor is helping the regime to scrape by.
Da Afghanistan Bank, the Taliban-run central bank, has “enough dollars in reserve to support the economy”, its spokesman Haseeb Noori said. Some of it comes from the UN, which has been providing about $40 million in humanitarian aid each week since last year.
As Afghanistan is cut off from the global banking system, the money is transported as cash into Kabul, and must be converted into Afghani, the local currency, once it arrives. So even though the aid doesn’t ‘directly’ benefit the Taliban, the dollars do ultimately end up in the central bank’s deposits controlled by the militant group. The UN did not immediately respond to comment on the reports published by Bloomberg and others.
“The UN actually supports the Afghani currency by supplying dollars to the markets and buying afghanis in exchange,” Torek Farhadi, a former International Monetary Fund adviser in Washington, said. “Demand for Afghani is actually created by the UN and other sources, including dollar smugglers.”
Customs tariffs, some of which are collected in dollars, are another source of funds for the Taliban regime.
The Afghani has gained about 5.6% against the greenback over the past year through Monday, statistically one of the strongest performances of any currency in the world. The Afghani has recovered to about 89.96 per dollar, after hitting an all-time low a few months after the Taliban captured Kabul, at 124.18 per dollar in December 2021.
