.svg){kind=logo}
For the people of Afghanistan, the Taliban takeover in August 2021 meant that much-needed foreign finances, aid and remittances failed to be received. After years of internal unrest, Afghanistan has long struggled with widespread poverty. So the economic consequences following the return of the Taliban have been critical for many who were reliant upon foreign assistance.
Sustained internal conflicts, natural disasters and chronic poverty have led many Afghans to migrate. About 5.85 million Afghans are living abroad and continually send money back to their families and communities (Source). Diaspora remittances have long been a crucial source of income for many Afghans, with about 5% of the population living in households where remittances are the main income source (Source). Therefore, the money sent back by Afghans living abroad is a lifeline for many. In 2020, remittances to Afghanistan were estimated to be about US$787 million, equalling around 4% of GDP (Source). However, this number is likely to be much higher since it is based on formal transactions only. In fact, other sources estimate the actual figure to be closer to 18% of GDP (Source). This lifeline is now threatened.
Data source: World Bank 2021
Following the Taliban takeover, many countries reacted by imposing economic sanctions on different aspects of the Afghan economy. Therefore, since August 2021, more than four out of five households in Afghanistan have suffered a significant or complete elimination of income (Source). While many sanctions aimed to exclude aid and remittances from restrictions, the result of endeavouring to ascertain that no money falls into Taliban hands has put a complete stop on foreign inflows of funds. Another direct consequence of the sanctions is that banks lack funding, so withdrawals are extremely limited.
When speaking to remittance services providers, the return of the Taliban meant that, in the immediate aftermath, many remittance corridors to Afghanistan were forced to close. These were not operational again until December of that year. However, since resuming transactions, remittance services providers have witnessed an increase in remittance volumes compared to before. Still, there are some challenges; costs have risen, leading some providers to raise their prices, and certain areas are more difficult to access. For this reason, informal channels through which money can be transferred are still important.
Alternative transaction systems
Informal systems for financial transactions are nothing new to Afghanistan. A system called ‘hawala’ is commonly used to transfer money and has been for 200 years (Source). Hawala is an informal money transfer system built on trust and without the actual movement of money. Before the Taliban took control, 90% of Afghanistan’s financial transactions took place through hawala, with over 900 providers operating across the country (Source). Since only about 18% of adult Afghans have a bank account (Source), hawala transfer systems have been particularly important. This is even more so for those receiving remittances, as hawala is often used for this purpose.
But even hawala transfers have been reliant upon banks (Source). Therefore, the crippling impact that the sanctions have had on the banking sector also affects the informal hawala system. Since such transactions will be limited, and even as operators find new exchange channels, this will undoubtedly incur higher costs for the users.
Photo: Quantitatives (Unsplash)
However, a new trend is emerging: the increased use of cryptocurrencies for remittance transfers. According to a forex dealer, international cryptocurrency transfers to and from Afghanistan have risen by 80% following the Taliban’s return in August (Source). The decentralised nature of crypto safeguards it against the sanctions, and therefore many people now turn to online currencies to transfer money. Crypto transfers are much quicker, but the commissions are also generally lower than in formal and hawala systems. According to Chainanalysis’ Global Crypto Adoption Index, Afghanistan ranked 20th out of 154 countries in cryptocurrency adoption by ordinary people in 2021 (Source). This reveals a fast-growing trend of new crypto usage in Afghanistan, a use that is likely to continue even when regular banking services return to normal.
Still, widespread illiteracy and lack of internet access limit many Afghans from transferring funds through cryptocurrencies. Thus, while cryptocurrency adoption continues to increase worldwide, it will face serious challenges in Afghanistan. In the meantime, the use of regulated and unregulated channels is vital in ensuring that crucial remittances are received in the region. But, as always, there is a price to pay, in this case, an actual increase in the cost of sending money.
