After a two-year hiatus, the Americans are back in Afghanistan. In September, Jeffrey Grieco as head of the US-based Afghan American Chamber of Commerce visited Kabul with a business delegation to examine prospects for investment. The credit goes to China, which signed its first FDI deal with Afghanistan early this year, thereby unsettling the Americans who have been closely watching Beijing’s movements in the region.
In January this year, China’s Xinjiang Central Asia Petroleum and Gas Company (CAPEIC) signed an international agreement with the Taliban government, making Beijing the first investment partner of Afghanistan after 2021. The 25-year-long, multimillion-dollar contract allows the firm to extract oil from the Amu Darya basin and develop an oil reserve in the country’s northern Sar-e Pul province. In April, another Chinese Company, Gochin, expressed its interest in investing US$ 10 billion in Afghanistan’s lithium deposits. The project involves the construction of a hydroelectric dam and the Kunar-Laghman Road infrastructure in eastern Afghanistan and also promises the generation of over 120,000 direct and a million indirect jobs.
Beijing was one of the first countries to establish a diplomatic channel with the Taliban leadership and proclaimed that it was prepared for a “friendly and cooperative” relationship with the regime. In October 2021, two months after the fall of Kabul, China’s Foreign Minister Wang Yi met with Afghanistan’s new Acting Deputy PM Mullah Abdul Ghani Baradar in Doha to officially articulate China’s support for the new regime. Thereafter, China hosted many Taliban ministers in Beijing in order to expand its strategic footprint in the region.
Chinese engagement with the current Taliban regime is driven by a multitude of factors. Firstly, the strategic vacuum in Afghanistan has given Xi Jinping another theatre to challenge the Western-led world order. Secondly, Beijing is trying to co-opt the Taliban to neutralise the threat from the Eastern Turkistan Islamic Movement (ETIM) – an al-Qaeda-affiliated armed group which supports the creation of “East Turkistan” in China’s Xinjiang province. Thirdly, China wants to integrate Afghanistan into its Belt and Road Initiative, thereby linking South Asia to Central Asia. Also, China has found a good opportunity to tap into Afghanistan’s natural resource wealth.
Afghanistan is one of the world’s most resource-rich countries on paper, with huge untapped deposits of copper, iron, coal, marble, lithium, cobalt, gold etc. Even though the country’s mineral wealth has been well documented since the 1970s, the economic potential of resources could not be exploited owing to persistent political instability and security concerns. The situation is unlikely to change under the present Taliban regime which lacks the technical expertise and financial capability to build a stable resource economy.
Disillusioned by the West, the Taliban 2.0 has been looking east for support. In September 2022, the Taliban signed their first major international deal with Russia for the supply of gasoline, diesel, and wheat to Afghanistan. Earlier this year, the shipment started arriving by road and rail through Central Asia. In February this year, a consortium of companies from Russia, Iran and Pakistan signed an agreement with the Afghan government to invest up to US$ 1 billion in the mining, and infrastructure sectors. However, Beijing has been the most assertive and proactive. Within a few months after the US withdrawal, Ziad Rashidi, the director of foreign relations in the Mining and Petroleum Ministry called for the revival of the 2008 copper extraction deal signed with a Chinese joint venture. In May 2008, a Chinese consortium made up of Metallurgical Group Corporation (MCC Group) and Jiangxi Copper Ltd signed a 30-year lease with the Hamid Karzai government to extract high-grade copper from Mes Aynak in Logar Province. But the project never took off. Efforts were made by Beijing to expand these deals in 2011 when China’s state-owned China National Petroleum Corporation (CNPC) and Afghanistan-based Watan Group came together for oil exploration in the Amu Darya basin. However, nothing materialised. After nine years, the deal has been brought back on the table with high hopes. As per a report by Kabul-based Bakhtar news agency, the deal is expected to bring in “US$250-300 million per year to state revenues, a 17 per cent increase, as well as US$ 800 million in fees”. The agreement entitles the Taliban to a 20 per cent partnership, which will later be extended to 75 per cent. Notwithstanding the optimism surrounding these deals, there are concerns and apprehensions on both sides.
Given China’s track record in project implementation, the Taliban spokesperson clarified that if the Chinese company fails to initiate the project within one year, “the contract will be automatically terminated.” On the other hand, China is aware of the threat posed by the Islamic State, most evident in the December 2022 attack on a hotel frequented by Chinese nationals. Besides investment deals, Beijing offered full tariff exemption to 98 per cent of Afghanistan’s exports into China, thereby offering a greater market for Afghan products in July last year.
Amidst global isolation, Kabul sees these investments and support from Beijing as a partial recognition of its regime. For China, the lack of international competitors makes it an ideal situation for Beijing to make inroads in a land where the US and USSR failed.
Afghanistan’s Political Economy: According to a UNDP study, Afghanistan’s economic output fell by over 20 per cent after US troop withdrawal in 2021, thereby making Afghanistan one of the world’s poorest nations. In 2022, there were 34 million people living in poverty, up from 19 million in 2020. Growth continues to remain below the levels needed to escape the cycle of poverty. While GDP is expected to grow by 1.3 per cent in 2023 and 0.4 per cent in 2024, these estimates are below the population growth rate, which is expected to exceed 2 per cent.
The banking system has been totally incapacitated and roughly US$ 7 billion of Afghan central bank funds are still being held in American institutions due to anti-Taliban sanctions and pending lawsuits against Taliban members by the victims of September 2001 terrorist attacks in the US. Prior to August 2021, Afghanistan’s economy was 75% dependent on foreign aid but after the Taliban take-over, Afghanistan’s Central Bank called “Da Afghanistan Bank” was cut off from the international financial network, thereby severely affecting the flow of international funds.
Even though the UN poured over US$5 billion in the form of aid and assistance, the fund transfer is being carried out by informal, unregulated, and unreliable hawala networks. Thus, despite a massive inflow of funds, Afghanistan faces a major liquidity crunch due to inequitable distribution. This has made life worse for the Afghan people who are the latest collateral damage in the great geopolitical game. To address this issue, the United Nations Development Programme and the UN Capital Development Fund started testing a digital payments system in March 2022 to enable end-to-end fund transfers. By April 2022, more than 15,000 persons in need across nine provinces of Afghanistan had received more than US$1 million. However, such temporary arrangements do not make up for the absence of formal financial institutions in Afghanistan.
Macro-economic Shocks
Headline inflation registered a sharp fall from 18% in June 2022 to 1.94% in March-April this year. While the sharp rise in price levels last year was driven by abrupt supply shocks and a decline in overall output, this year inflation eased on account of lean demand and increased domestic production in the country. The inflation rate for everyday items exhibited a similar pattern, with household inflation touching – 9.8% in April 2023 after reaching 51.7 % in June 2022. A news report by Afghanistan’s news agency Pajhwok labelled the steep decrease in inflation as a “positive” development. Nevertheless, deflation per se is not a good news. On one hand, a steep fall in prices has reduced revenues and profits for businesses thereby resulting in negative business sentiment and further job cuts. On the other hand, a sharp fall in food prices and consumer items has not translated into relief for the common people. As per London-based Save the Children, there is no food shortage in Afghanistan. “Markets are full” and price levels are reasonable. However, joblessness and steep fall in wages/salaries explain the paradox of plenty which has forced millions of Afghans below the poverty line.
The economic situation is further complicated by high unemployment in the country, with over 30% of the country’s population rendered jobless after 2021. Within six months of the Taliban takeover, approximately half a million people were pushed out of their jobs. Eighty per cent of households across Afghanistan experienced income reduction since 2021. Economic desperation has forced nearly 1.6 million Afghan children, as young as six years of age, into the labour force. There has also been a notable rise in organ trade and economic desperation has forced many families to sell off their young daughters to strangers in exchange for easy cash.
Battling Isolation: Trade and FDI
While the economic situation remains dismal, the Taliban administration has been able to sustain its economy based on taxes and trade. According to the latest report by the Afghanistan Analysts Network revealed that the Taliban collected over 187 billion Afghanis in revenues from taxes, customs and mining in 2022. While the revenue numbers are promising, very little is known about the administration and allocation of these funds due to a lack of transparency.
A World Bank report pegged the country’s overall exports between January and April 2023 at US$ 0.6 billion, registering a four per cent rise since 2022. The improvement was primarily on account of an increase in coal and textile exports from Afghanistan. Pakistan remains the largest export market for merchandise from Afghanistan, absorbing 63 per cent of its exports followed by India at 26 per cent. Food, fuel and minerals constituted the majority of the US$ 2.4 billion in imports during the January-April 2023 period. Iran continues to be the largest recipient of imports (21 %) from Afghanistan, followed by Pakistan (18 %), China (16 %), and the United Arab Emirates (13 %). Taxation, trade, and investments enabled the Taliban to run the country for two years. The economic pundits in the Western world call it a “new low-level equilibrium”, where the masses are living below the poverty line but more and more foreign investors are gravitating towards Afghanistan’s resource-rich economy. Let us cherish the illusion that the situation in Afghanistan is slowly stabilising!
Title image courtesy: The Diplomatist
Disclaimer: The views and opinions expressed by the author do not necessarily reflect the views of the Government of India and Defence Research and Studies
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