Ajmal Ahmady on the Afghan Economy and the Challenges Facing the Nation’s Future

Ajmal Ahmady is the former acting governor of the Central Bank of Afghanistan and is now a senior fellow at the Harvard Kennedy School of Government. Ajmal joins Macro Musings to talk about his experience as a central bank governor in Afghanistan and the challenges now facing the nation’s economy. Specifically, David and Ajmal discuss his unique role as the country’s central bank chief, the structure of the Afghan monetary system, the state of the nation’s economy moving forward, and more.

Read the full episode transcript:

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].

David Beckworth: Ajmal welcome to the show.

Ajmal Ahmady: Thank you very much for having. It's a pleasure to be here.

Beckworth: It's great to have you on. You have an amazing story to tell from being a central bank governor, to fleeing into the airport, to getting out of Afghanistan before it fell. And we want to get into all of that as well as what is it like to be a central bank governor in a non-advanced economy. It's a great perspective for our listeners and for myself to hear. Before we do that though, Ajmal tell me about your career. How did you get into this path? I know you've done many things before being a central bank governor, but walk us through that. How did you end up at the central bank?

Ahmady: Sure. So it's definitely a non-linear career path. I entered college and wanted to work in economic development. And so spent a few years working actually in microfinance, in Cameroon, in central Africa. I worked for the World Bank in Afghanistan and the Ministry of Finance in Afghanistan. And then went to graduate school here at Harvard. I did a joint degree and afterwards worked in the investment management industry for about eight years. And worked for a variety of firms, primarily doing emerging markets or global macro type of investing in local currency, dollar bonds, FX, et cetera. And then what happened was the minister of finance that I had worked for in around 2003, 2004 went on to be elected. And that was President Ghani. And so I had a conversation with him and returned to Afghanistan. I worked for four and a half years as the economic advisor to the president, one and a half years as Minister of Industry and Commerce. And then finally as a central bank governor.

Beckworth: Okay. So you were there the last year as central bank governor in Afghanistan, maybe walk us through, what is this typical day in the life like of a central bank governor in Afghanistan?

Duties of an Afghan Central Bank Governor

Ahmady: In some ways it's similar to what you would expect a central bank governor to do. Every day I would walk in, I would have a meeting with my chief of staff and there would be a number of documents that we would have to sign every day or three times a week we would have FX auctions. And so these were when we would sell dollars to the market. And I would meet with the head of our monetary policy department and the head of our market operations department. And that was the committee that made the decisions on how much to auction to the market. And then as we went throughout the day, I would have a mix I'd say of internal meetings. Meetings with department heads, whether that's finance, banking supervision, or another department, and then we'd have a number of external meetings.

Ahmady: So it was very frequently that we had meetings with the CEOs of the banks. We were moving forward an integration to move forward mobile money. So I'd meet with the heads of the telecom companies. And in Afghanistan, we had a unique market participant called money exchangers, Sarafas, and these were people who sent and received money and exchanged money. And so they were a large market participant in Afghanistan. I would meet with them as well. And then of course, other ministries and ministers and other people who had interest at the central bank.

Beckworth: Fascinating. So was the afghani, was it pegged or did you let it float during your time there?

Ahmady: It was a floating rate.

Beckworth: Floating. Okay.

Ahmady: So back in 2000, let's say 2003 or so, it was roughly 50, maybe a little bit less, 45, to the dollar. And then it had been stable for some years. And then on an overall depreciating trend over the past few years. So by the time I arrived, it was approximately 80 to the dollar.

Beckworth: Ajmal, so you let the currency float. Does that mean you were targeting inflation or some other objective?

Ahmady: According to the central bank law, our mandate was to keep inflation low. So that was the overall target, which we monitored. And I think we did a good job, even as provinces were falling until the very end. We maintained inflation at low single digits, which is something even an advanced economy would strive [for], but we did very well there. Approximate target was the currency rate because we had almost a one-to-one inflation pass through from the currency, because again, the large trade deficit. And so we monitored the FX rate quite closely. I mentioned we had three times a week FX auctions, and that was something that we monitored. And if you think of my reaction function, especially during that last month or so, the way I approached it was, we had very high political volatility because obviously the political situation was deteriorating.

Ahmady: We had a worsening or deteriorating security environment as provinces were falling. And so the one thing that I wanted to maintain to give confidence to the citizens was to maintain macroeconomic stability. So I did not want to let the currency go so that inflation would spike up. The currency would go at the same time provinces were falling and other security issues were happening. And so I took that upon myself and the central bank to maintain that macroeconomic stability until the very end. And I think we were successful there. So again, inflation volatility was in single digits, inflation was in low single digits, we had international reserves of 15 months that represent 15 months import coverage. And so we sold a little bit more dollars towards the end, but I think it was justified based on that type of framework. if I had chosen not to, I think it would've led to panic earlier.

The one thing that I wanted to maintain to give confidence to the citizens was to maintain macroeconomic stability. So I did not want to let the currency go so that inflation would spike up. The currency would go at the same time provinces were falling and other security issues were happening. And so I took that upon myself and the central bank to maintain that macroeconomic stability until the very end. And I think we were successful there.

Beckworth: One more question about this, Ajmal, how did you measure inflation in Afghanistan?

Ahmady: We had an independent statistics agency and so they conducted surveys, as you would expect in other countries. And we also had a monetary policy department and I would often ask them to conduct independent surveys from our statistics agency to make sure that we were following up and had more frequent data points to monitor. So they would go out and ask what the price was for a kilo of wheat or rice and basic staple commodities. So we used both.

Beckworth: Okay. And you had a lot of foreign reserves. They're now sitting in the New York Fed, but the country accumulated a lot of them, is that right?

Ahmady: That's right. Afghanistan runs a very large trade deficit, but that was financed through international aid flows. And so our current account was on balance in surplus. And so we accumulated those international reserves. And so we had accumulated approximately 9 billion of those. We were expecting to receive the SDR allocation, which would've taken us to around 9.5 billion around that point. Of course, that was never dispersed. But if we took a look at those reserves using common international metrics, it was quite high. So represented approximately 50% of GDP or about 15 months import coverage ratio. And so by any metric, I think it was a high level of reserves for the economy.

Beckworth: Yes, definitely. I was surprised to hear how large it was, 9 billion. Well, with the IMF disbursement 9.5 billion. So a large number, you had this nice cushion, things dramatically changed. The Treasury department decided to hold onto those funds once the country fell to the Taliban. Before we go to that story though, just a little bit more about being a central bank governor there, this show focuses a lot on the advanced economies, the Fed, the ECB, Bank of Japan. And they have a unique set of challenges or objectives that they follow. And I'm just wondering, how is it different from your perspective as a central bank governor in a non-advanced economy? So what are the unique set of challenges that you think you face and others like you face in that setting?

The Unique Role of Being an Afghan Central Bank Governor

Ahmady: I classify it as two unique challenges. So one is technical and maybe one operational. On the technical side, and one of the things I'm researching here during my fellowship is, taking a look at monetary policy in less developed economies and seeing how it's different than you would expect in a G10 economy. So for example there's a well-known Taylor Rule that analyzes or forecasts the reaction function of central banks in advanced economies. And there have been even augmented Taylor Rules for less developed economies, but in Afghanistan we had, for example, unique challenges. So we had a very high dollarization rate. It was about 65% of the economy. Obviously monetary policy in that environment is not going to be as effective. We had a very low financial inclusion rate, only about 12% to 15% of Afghan citizens had a bank account.

Ahmady: And so there's unique challenges that we had, technical challenges there. So there's some initiatives that I had to strengthen supervision of the banking sector and deepen financial markets in Afghanistan. I think operationally, we had a branch in each of the provinces in Afghanistan, but we had of course, significant security concerns. So I guess we'll get to that later, but as provinces were falling, how would we manage our transfers to those provinces? We usually sent money in conjunction with the military who would protect the money that we would send to one of our branches. And even when the Taliban took over some provinces, the question was, well, should we allow banks to operate there? Should we tell them to close down? What was the regulatory framework in such an environment? Obviously it's an extreme environment, but there's no textbook for that. What do we do in terms of AML/CFT. And on the other side of that, of course we're being supplied with dollars. And so that has its own unique challenges as well.

Beckworth: So I'm curious when the Taliban had captured certain provinces, but not the entire country, did they continue to use the existing currency, the afghani and the dollar as if nothing had changed? Were they, in other words still connected to you guys and your policies?

Ahmady: Yeah, it was and interesting dynamic. They had taken over some provinces and I think their reaction or their activities in different provinces, I guess varied perhaps by the local commander. So in some places they had asked the banks to continue to operate, in other places, our staff was threatened. So it was very dependent, I guess, on the local context. But at the end we decided that to continue to provide services in those areas, we, as a supervisor would allow the banks to continue to operate. But to not use dollars because that would cause conflict with the dollar program we had with the US government.

Beckworth: Yeah, there's stories I've read about countries going through civil war, where there are actually two central banks, one's the existing, and then the competitor, the faction that's starting the civil war. They'd set up their own and they'd compete. But in your case, it sounds like that wasn't happening. The Taliban were just kind of using what was already in place.

Ahmady: Yes. So, sorry. I didn't answer that particular point, but they were not trying to introduce their own currency or that sort.

Beckworth: Okay. Fair enough. So tell us about out your story. You have a very harrowing, amazing, incredible story that you told on a nice Twitter thread. We'll provide a link to it. But tell us about your story getting out of the country, you finding out about what happened, just the developments leading up to that. And then later we can talk about a Foreign Affairs article you've written about the bigger picture behind this. But get us through those days there, where you were really worried and concerned about everything happening around you.

Evacuating Afghanistan During the Taliban Takeover

Ahmady: Yeah. So I think the Taliban had been taking over districts in Afghanistan for quite some time, but really hadn't taken over any provincial capitals. And they took the first one on August 6th, Zaranj, which borders Iran. But I think even at that point, the interpretation was it's a far off province. It's not a reflection of maybe the larger provincial capitals. And then a week later, around August 12th or so, or August 11th, a number of major capitals fell. And that's the point where I think I said this is not heading in the direction that I think I, or many others had expected. But we were still going to work, we were still continuing to deal with the daily, you asked what was the typical day like, that continued to be the case. Although in the background, obviously we were worried about what was happening.

Ahmady: And then as I outlined that Friday and in Afghanistan, Fridays are a holiday. So that's the day off. On Friday, we received notice from the Fed that the dollar shipment, which was expected for that Sunday, would not be sent. And so that caused a large issue on our side, because at this point we were still not expecting Kabul to fall. So for the next day or two, we were dealing with a potential stoppage of dollars and a liquidity shortage. I had even tried to convince and met with banks and Sarafas, and said, nope, we'll figure out this issue. And then on Sunday, the day when Kabul fell, I went to work. I was still worried, of course. But by around noon, I went to the airport. Around 4:00 PM, found out that the president had already left the country at that point. And then there was a scramble to get on an aircraft. And at the end, I was able to literally get on the back of a C17 as the door was closing. Wasn't on the manifest. So it's not the way I expected or intended to leave the country, but it's how it happened.

We received notice from the Fed that the dollar shipment, which was expected for that Sunday, would not be sent. And so that caused a large issue on our side, because at this point we were still not expecting Kabul to fall. So for the next day or two, we were dealing with a potential stoppage of dollars and a liquidity shortage.

Beckworth: And so you made it out safely and now you're at Harvard sharing your story with me and with others. One question about the delivery of dollars. So you mentioned, the Fed said, "No, you're not going to get this shipment." Was this the 454 ... was that million you were supposed to get? Or was it another shipment?

Ahmady: It was about 250. So typically, we have 9 billion in reserves that are held abroad and because we run that large current account deficit, we actually need the physical dollars to be supplied. Periodically, as we did these FX auctions, we would run low on dollars and then we would be resupplied.

Beckworth: So Ajmal, how is the central bank now doing? I mean, I saw on Twitter, your replacement, I believe, Taliban sitting maybe at your former desk, I don't know if it was your desk, if you saw that picture or not. He had a AK-47 there, and of course lots of jokes on Twitter like, "That AK-47 is for forward guidance." Or someone said, "Can he hit his target with that AK-47?" Speaking of like inflation targets. A lot of humor, but what is the status of your former employees? The central bank itself? Is it functional? What do you know?

Ahmady: The new central bank governor is reputed to be someone who was previously on the Taliban economic commission. So I think he's a loyalist to the Taliban in that way. It doesn't seem that he has a background in banking or finance or technical matters. I think it will be challenging for him to run the central bank. And in terms of staff or institutional memory, I've had a mix. So some staff were able to leave with the withdrawal, some have chosen to remain. Some, for example women, have been told to stay home. There's a mix, but I think it's definitely right to say that there's been a loss or degradation of institutional capability within the central bank. It'll be tough. I don't know the accuracy of that picture or if that was actually him, but it's going to be tough for him to run. And beyond just the specific governor, I think the macroeconomic situation has dramatically changed. So whoever's in that seat, the way it was on August 14, is very different from the way it is today in October, 2021.

Beckworth: That's a great point. Even if you were still there and you had all your staff there, the fact that the economy's tanked and as well as you don't have the reserves, even the best central bank governor would have a very tough job. Well, let's move on to your Foreign Affairs article. We'll come back to the Afghanistan economy in a minute, but I wanted to get your big picture taken on why Afghanistan fell to the Taliban. You have an article in Foreign Affairs and it is titled, *Why Afghanistan Fell: An Insider's Account of What Went Wrong.* So what is your takeaway here? What's your view?

I think it's definitely right to say that there's been a loss or degradation of institutional capability within the central bank. It'll be tough...And beyond just the specific governor, I think the macroeconomic situation has dramatically changed.

Why Did Afghanistan Fall to the Taliban?

Ahmady: What I did in that article was propose a framework for thinking through what happened in Afghanistan. I proposed six factors, three internal and three external. The reason or the driver behind the article was really because I felt as though there had been a number of articles and commentary citing one reason. They would say, Afghanistan fell because the Afghan army didn't fight, or because there was a lot of corruption. They tended to say, there's this one issue, that's the reason, and that's that. But really, I think it was, obviously, more complicated than that.

Ahmady: There were weaknesses in the Afghan government, in the institutional capabilities of the Afghan government. I cite those three, which were political leadership, military leadership and corruption. But, there was a number of external factors that contributed to the downfall as well. Here, in particular, I said that the catalyst, or what really started us moving towards a state collapse was this Doha deal signed by then ambassador Khalilzad in February 2020, which excluded the Afghan government.

Ahmady: It was a negotiation that was held with the Taliban directly between the Taliban and the US. It put a number of conditions which weakened the Afghan government and in retrospect were really quite surprising. For example, it forced the Afghan government to release 5,000 prisoners who had committed crimes. Can you imagine this being done somewhere else? Or, it prohibited the US or limited the US's support of Afghan's troops in rural areas. There's a number of clauses within that agreement I think that weakened the political and security sectors of Afghanistan. Then, of course, Biden's decision to withdraw very quickly, including contractors that were supporting the Afghan forces. At the same time, you have the Taliban having a sanctuary in Pakistan and being supported by the military intelligence there, the ISI. And so all those factors coming together, I think contributed to the downfall.

Beckworth: Yeah. I've been wondering about that ever since this has happened. How consequential was that treaty? Because I've heard many accounts. It was kind of a gut blow to morale, to the spirit. As we've heard many times, the Afghanistan military really needed the infrastructure of the US military to make it effective. And this was a signal it wouldn't be there in the future, and it started a snowball effect with all these other factors that you've mentioned. We'll provide a link to that article. Listeners can check it out. All right, let's move to the Afghanistan economy. Let's first talk about it pre-fall. Before things got testy. What was the structure of the economy? What were the main industries? How did it operate?

There was a number of external factors that contributed to the downfall...in particular...the catalyst, or what really started us moving towards a state collapse was this Doha deal signed by then ambassador Khalilzad in February 2020, which excluded the Afghan government.

Detailing the Pre-Fall Structure of the Afghan Economy

Ahmady: Sure. So Afghanistan's GDP, we could start there. In 2001, think of it as very small economy, $2 billion. This is right after the Taliban. And with the influx of refugees returning, the international aid coming into the economy, by 2015-16 that had grown to 20 billion. So 10 times larger. Per capita income was still relatively small, around $500 to $700 per capita income. We had grown a lot, but it was still a small country with a high degree of poverty. I think it's still largely an agricultural nation. About 60% of Afghans are active in the agricultural sector. But because of the aid economy, because of the services, or maybe let's say telecom companies or telecom sector, the services industry had grown very large. It represented by those later years, more than 50% of the economy.

Ahmady: We had an industrial base. It was perhaps 10% to 15% of the economy, with agriculture the remaining part. You had sort of these different sectors. In terms of our balance of payments, as I've stated before, we ran a very large trade deficit. We exported a few, 100 million, and my goal that I set as Minister of Industry and Commerce was to actually to reach one billion in exports, but we imported seven to eight billion dollars per year. That was very large trade deficit that was financed by those international aid flows.

Ahmady: That was a structural type of issue that I think we had to deal with. Growth had been quite high from 2001 to 2014. And again, that was because refugees were coming back, aid was coming in, but by around 2012, when the US began to reduce the troop presence from more than 100,000 to only 8,000, that had a stagnating effect on our growth rates. Growth rates that were perhaps in the double digits in the earlier periods, in later years between 2015 and 2021, were relatively low, maybe 2% to 4%. That was something that we were always working on to try to seek ways to increase that. We worked on ... Maybe it's bad to say now, but doing business [inaudible] type of indicators, type of reforms. We made progress there. We tried to diversify our trading routes. I worked on a project called TAPI, the Turkmenistan, Afghanistan, Pakistan, India natural gas pipeline, large infrastructure type projects. So there was a number of initiatives tried to diversify and strengthen the economy.

Beckworth: Okay. What about the mining industry? I've heard a lot about… there's a lot of rare metals under the ground there. Is that something that's up and coming?

Ahmady: The famous report is from the US Geological Survey which cited that Afghanistan has between one and three trillion in mineral resources. The problem has always been that we've had that potential, but we've never moved to production. That's the key issue that plagued Afghanistan in earlier years, during the past 20 years, and is likely to continue in future years. There's a lot of smaller scale mining going on in emeralds, in talc, in maybe coal, but for the larger scale mining projects, we were unfortunately unsuccessful.

By around 2012, when the US began to reduce the troop presence from more than 100,000 to only 8,000, that had a stagnating effect on our growth rates. Growth rates that were perhaps in the double digits in the earlier periods, in later years between 2015 and 2021, were relatively low, maybe 2% to 4%. That was something that we were always working on to try to seek ways to increase that.

Ahmady: There had been some contracts that had been signed. So the two largest ones, for example, one was Aynak copper mine in Afghanistan, which is one of the largest, if not the largest untapped copper mine in the world. Very high grade. World class scale and quality. A Chinese mining company by the name of MCC had come in and bid for that contract around 2008. There were issues with that contract. We can go into those details if you'd like, but they had problems, so it never really moved into production.

Ahmady: Similarly, we had an iron ore mine. This again is world class. 62% iron ore content, which is something you'd find in Brazil or Australia. An Indian company had bid for that, but that also didn't move to production. So we have [the] potential for large scale mining, but as you know, it requires large investments both to bring those out of the ground and to transport them as a landlocked economy. Those were the challenges that we weren't able to solve.

Beckworth: You mentioned China putting a bid on that mining contract. There seems to be a lot of new news about China and Russia and other countries around trying to get their hands into Afghanistan. I have an article here in fact. It's titled, *Regional Powers Back Aid for Afghanistan as Russia Hosts the Taliban*, and this was I believe from this month, but is there a sense that with the US gone now, these other regional powers are going to start investing in Afghanistan? I'm sure China would love to get their hands on that copper, for example.

Ahmady: I'm probably less optimistic that these stories will be implemented. So again, I outlined sort of the challenges we faced over the past 20 years when there was sort of a security umbrella or secured environment. And the Chinese had that contract 15 years ago and they didn't move to production. Those types of projects will require a multi-billion dollar investment over many years. And, as I understand it, the Chinese typically want to send their workforce over there to do a lot of the work. So in this environment where there's still a security concern, would the Chinese government be willing to send thousands of Chinese mining employees and spend billions of dollars in Afghanistan in an unsecure environment, an environment that's gotten more unsecure. I'm probably skeptical at this point.

We have [the] potential for large scale mining, but as you know, it requires large investments both to bring those out of the ground and to transport them as a landlocked economy. Those were the challenges that we weren't able to solve.

The Afghan Monetary System

Beckworth: Okay, well, let's go to the monetary system. You touched on it a little bit already, but walk us through the dollarization versus the local currency usage. So you've mentioned dollars use was at 65% if I recall. And the Afghani's the currency, correct?

Ahmady: Correct.

Beckworth: Okay. So if I'm a typical Afghan, I'm going to the market, what do I actually use as my transaction asset? Do I use the Afghani or do I use the dollar or both?

Ahmady: I think you'll use the Afghani for daily purchases. So the market purchasing goods you'll use Afghani. The dollar was used maybe for larger transactions, land transactions, or for paying for imports. But we did allow for bank deposits to be held in dollars as well. So that's 65% figure… if I'm going to go and 65% of my funds are going to be held in dollars and 35% be held in Afghani.

Beckworth: Okay. So a lot of that was held in bank deposit form. So a lot of the transactions were done in the local currency. You also mentioned the central money exchange market traders. Tell us a little bit more about them. How important were they to getting funds distributed across the country relative to the central bank?

Ahmady: Yeah, they formed an important part of the ecosystem in Afghanistan. And the reason for that is, again, we only had a 12% to 15% financial inclusion rate. Only 12, 15% use the formal banking system and the rest would go to a Sarafa and they'd either use them for multiple purposes, so someone would go to them and say, I have some savings, perhaps I don't trust the banking sector. You hold my money. That's one purpose.

Ahmady: Another is they would go to the Sarafa and say, please send money to my family who's in Ghazni or Faryab. And that person would send the money using those means, or even internationally, they would have that or simply to exchange from Afghanis to dollars and vice versa. And the Sarafa congregate it. They had a building in the central of Kabul called Sarai Shahzada and they would go there. And you would think of it as… trading pits I think they're called at the CME or one of these other exchanges. You had a lot of these money exchangers and they would buy and sell dollars in Afghanis. And that's where the FX rate would largely be determined and a lot of monetary flows would end up.

Beckworth: So now that the country has fallen, is that market still healthy, is it still robust? Do they still have connections to the outside world, even though they don't have access to the dollars through the central bank?

Ahmady: So you could think of it as an informal institutional structure that emerged because unfortunately state collapse in Afghanistan is not something that's unheard of so it's happened before. And so this formal exchange has existed and I think will continue to exist. The problem that they face is they're also reliant on dollars being sent to Afghanistan. They're relying on the banking sector. And so they're still operational, but there still continues to be a lack of resources for them now.

Beckworth: One more question on money in Afghanistan. So I came across a CNBC article at about the time of the fall that discussed the use of cryptocurrency in Afghanistan. And I can see a lot of challenges with using an access to the internet. Who's going to actually take it, but these are anecdotal of course, some stories of people, several of them, and how these people felt, their wealth was safer in cryptocurrency than in some paper currency. But what is your sense of that? Is cryptocurrency like taking off there? Is it seen as a viable alternative, or is it just kind of a few people here and there using it?

Ahmady: Yeah, I mean, I think maybe over the medium term, the story is it doesn't rely on centralized institutions and so it has potential, but in Afghanistan you just have too many bottlenecks. So there's very low internet usage. There's very low electricity if you're going to try to do Bitcoin mining and setting up a wallet and doing all these things requires some knowledge of how to do it. So I think it's some people who've managed to do this and who are interested in… perhaps have sent money using this means, but no means is it widespread at this point.

Beckworth: Okay. Well let's go to the economy now, the post-fall economy-

Ahmady: If I could jump in, one of the things that I think might be interesting for listeners to hear about is Bitcoin is something that is valuable in a context like Afghanistan because the banks are frozen or the international reserves can't enter the country. One of the things that we were doing at the central bank was really modernizing the payment's infrastructure of the central bank. And what I mean by that is we had a central switch and we had connected the central bank with our 12 commercial banks and with the telecom operators, as well as some payment institutions.

Ahmady: And the goal of all of this was to allow for someone to send money, to make interbank transfers, but also to be able to send money via mobile phone. And so we had actually completed the technical API integrations for all of this work and had been moving to create mobile wallets for every citizen in Afghanistan so that everyone would be able to send money through a simple text message. So the technical capabilities of that system, we had actually begun and we had begun marketing and rolling out the system. And unfortunately this was happening just as the Taliban were taking over. But I think we actually had a relatively modern payment system, our RTGS, a real-time gross settlement system that enabled mobile payments. And if we had some more time, frankly speaking, I think we could have made some significant changes.

I think we actually had a relatively modern payment system, our RTGS, a real-time gross settlement system that enabled mobile payments. And if we had some more time, frankly speaking, I think we could have made some significant changes.

Beckworth: So Afghanistan was actually ahead of the US on the real-time payment system front. I mean, I know the clearing house, a consortium of banks has a real-time settlement, but only I think half, maybe 60% of banks or users have access to and the Fed's now developing the Fed Now, which is going to be its version, but many countries, including Afghanistan, apparently beat us to the punch.

Beckworth: They got the real-time settlement. So that's interesting. And it also, I guess, speaks to the sadness of the loss of institutional capacity at the central bank because now this great effort is not going to be taken to fruition. There's going to be missed opportunity for people to have modern payment system access. So, yeah, that's very fascinating. So have you had any thoughts of going back or have you been asked by the Taliban to come help out at the central bank? I mean, any thoughts along those lines?

Ahmady: No. I don't think I have any intention of returning to work for the Taliban. I think for a few reasons, I don't think I would feel safe. I don't think I could work in that environment. Some of my staff are still there and I communicate with them and I try to be helpful where possible, but I don't see myself returning.

Beckworth: Okay. Well, let's go back to the Afghanistan economy, kind of the post-fall, we've touched on it already, but one of the big decisions that has really hurt Afghanistan was the IMF and the US Treasury deciding to lock up these Afghanistan funds. So this 9 plus billion we talked about earlier. Is there any prospect of that being opened up again or any talk of them getting a replacement for those reserves? What's the outlook there?

The Post-Fall Afghan Economy

Ahmady: I think realistically speaking, I don't see a scenario where those reserves would be unfrozen. I think the deputy treasury secretary was just being interviewed at the Senate and he made similar comments just a few days ago. And there's a few reasons for that. One is, the Taliban have made many commitments which they have not upheld half of... a number of the Taliban cabinet are on US sanctions lists. There's a number of reasons why I think it's unreasonable, but I think broadly speaking, if we wanted to put all the options on the table, you can have kept the assets frozen, the international reserves frozen for decades. And I think that's what's happened in Iran and some other places where the assets just stay there as frozen accounts for decades to come. And that's one scenario.

Ahmady: The other extreme is where they release all of the reserves. The issue with that is there's a number of… the regional countries that are calling for it, the Taliban are calling for it, but the problem is that would resolve issues in the immediate term, but you're not resolving the underlying issue. So it's quite likely that those reserves would last perhaps a year. And what would happen is you pay for imports to finance the trade deficit, people in the banking sector would withdraw their funds and likely send it abroad. So you would see a quick decline of that 9 billion and they would be taken out. And then you would be maybe a year from now, or two years from now, you'd be in a similar situation. It doesn't solve the structural issue. And I guess the third option is you would keep the assets frozen, but have triggers by which you would release them. But I again, understanding the US political system, I just see it hard to envision Biden paying… here's $9 billion to the Taliban and that being politically feasible within this context.

Beckworth: I think that's right. Let talk about sanctions since you brought it up. Sanctions are applied to countries like Afghanistan when the Taliban are in power, Iran, other places. One of the criticism of sanctions is that it hurts the people more than it does who it's aimed for, the leaders, the regime. What is your sense of that? Is it ineffective? Does it work? Is it a good application of policy by the US?

Economic Sanctions and Aid for the Afghan Populace

Ahmady: It's a complicated question. It invariably hurts the citizens of Afghanistan. And so that is true. It also hurts the government that's in place. And so it's a unique circumstance because I think in other countries such as Iran, they have exports, they have oil and natural gas that they're going to continue to export. So it'll hurt in some way or Iraq in the '80s. But Afghanistan is in a situation where I mentioned the trade deficit, so we have very large trade deficit and so in the absence of not only the international reserves, but the decline in international aid, that's going to enter Afghanistan, you're going to have a situation where GDP contracts significantly and inflation rises. And so I think one recommendation is for the international community to think through mechanisms by which aid can reach the people of Afghanistan, without having a touch point with the Taliban government. And in that way, if that were to be successful, I think that's one way you can resolve both issues, but it will be a challenging way forward.

I think one recommendation is for the international community to think through mechanisms by which aid can reach the people of Afghanistan, without having a touch point with the Taliban government.

Beckworth: Yeah. I'm trying to think how that would even work. Do you have some NGO go into the country or how would you bypass the government to directly reach the people?

Ahmady: So it's not unheard of. For example, A donor, the US government, the EU, the EU is for example announced a package of a billion dollars. So typically, they would provide budget support for the government of Afghanistan or another government. They can instead provide those funds to the United Nations, to large NGOs that have been operating in Afghanistan. The key issue here is, so for example, if you provided a UN agency such as the World Food Program, you can send that money to a UN bank account abroad and they could purchase wheat and then send it to Afghanistan. And therefore the goods would reach Afghanistan without touching the Taliban government.

Ahmady: The issue becomes with paying local staff to disperse, for example, that wheat there, because aid flows are not going into the country. The UN can open a bank account at a local bank, but they would actually have to make some sort of arrangement with a local bank so the bank would ship the dollars or the local currency to Afghanistan in much the same way that the central bank received those shipments. So I think it probably hasn't been done, but I think it's not unfeasible. And I think it's not a strategic problem, it's an operational issue that needs to be solved.

Beckworth: Okay, one last question about the state of the economy there. And that is the drought that is now hitting the Afghanistan economy. I've seen several articles. I'm looking at one from the Wall Street Journal titled, *Severe Drought Adds to Afghanistan's Woes, Endangering Millions as the Economy Collapses* and subtitled, “farmers who survived two decades of war abandoned land as water sources dry up." So it goes to a number of farmers who are having to go find other work, move their families. It also, interestingly talks about the Kajaki Dam in the Helmand Province, which is supposed to be a big hydroelectric power generating plant. And they completed it, it took years to complete, but now there's hardly any water there to generate electricity, which is ironic. So how consequential is this drought? Is there any hope on the horizon that's going to end soon or is this one of the climate change effects? What do you think's going on there?

The Dangers of Drought in Afghanistan

Ahmady: It's unfortunately ... Afghanistan is dealing with a situation that's in some ways unprecedented. We had a conference perhaps a month or two months before the downfall of the government. And even at that time, I made a presentation where I said, "Look, we have a triple shock in Afghanistan. We're dealing with COVID, which many countries around the world are struggling to deal with. We are dealing with conflict where that economic hardship on citizens of Afghanistan, and it's continuing to this day. And we're dealing with a drought and this is one of the worst droughts in over the past few decades." And so you had a triple shock even before this economic crisis hit. And unfortunately that's a situation that's going to make it very hard for Afghan citizens to deal with, both in urban areas because of the economic crisis, the freezing bank accounts, but in rural areas because of this drought. And so that's where I think it's imperative for the international community to be able to provide aid for Afghans in some way or form, over the next few months, especially as winter begins to set in in Afghanistan.

Beckworth: Well, our time is up our guest today has been Ajmal Ahmady. Ajmal, thank you so much for coming on the show.

Ahmady: Thank you very much for having me. It's a pleasure to be here and I look forward to the final result.

Beckworth: All right, thank you.

Photo by Chris Hondros via Getty Images