How will the US use financial leverage with the Taliban government in Afghanistan?

The US is divided internally over how to use financial leverage against the Taliban government in Afghanistan, as many experts warn the South Asian nation faces economic and humanitarian disaster.

Some U.S. policymakers say that blocking the Taliban from accessing international reserves and aid risks further harming the Afghan people, while many conservative lawmakers say that financial pressure on the group should not be abandoned.

The debate in the US has major implications for Afghanistan, as the US effectively acts as a gatekeeper to the global financial system. It is the most aggressive enforcer of sanctions against the Taliban and the most powerful member of the World Bank and the International Monetary Fund. Both organizations have suspended support for Afghanistan since the Taliban returned to power.

In a statement on Twitter last August, the then Governor of the Central Bank of Afghanistan, Mr. Ajmal Ahmady, said that of the Central Bank of Afghanistan's $9 billion in reserves, about $7 billion was held at the US Federal Reserve.

“We are seeing a cash crunch hitting Afghanistan at a time when it can least afford it,” said Elizabeth Threlkeld, deputy director of the South Asia Program at the Stimson Center, a Washington think tank. “This is a challenge for a future Taliban government and for policymakers in Washington and elsewhere.”

Cutting off the Taliban’s access to development aid and foreign exchange reserves is a “double-edged sword,” because any leverage Washington gains over the Taliban will “hit the pockets of the Afghan people at a difficult time,” Threlkeld said.

According to the World Bank, international aid accounted for more than 40% of Afghanistan's gross domestic product in 2020. The Taliban's return to power coincided with inflation, the shutdown of basic services, a large-scale exodus from Afghanistan... as well as the dissolution of the Afghan National Defense and Security Forces - one of the largest employers in the country.

The US Treasury Department has signaled that aid groups can operate in Afghanistan with exemptions from sanctions targeting the Taliban, but some Democrats say a clearer solution is needed.

“The Taliban has been a Specially Designated Global Terrorist (SDGT) since 2002. Now, as the Taliban consolidates power, the legal restrictions that come with this designation are having a significant humanitarian impact, potentially significantly hindering critical aid operations in Afghanistan during this time of crisis,” a group of Democratic lawmakers led by Senator Dianne Feinstein of California said in a letter to Treasury Secretary Janet Yellen last week.

Depends on Taliban actions

US Secretary of State Antony Blinken emphasized on September 8 that the Taliban will have to find a way to gain international recognition through practical actions, and according to the US, this will not be easily achieved overnight.

Last week, conservative lawmakers in the US urged the Biden administration not to “unfreeze” funding for the new ruling force in Afghanistan.

Taliban soldiers at the Afghan presidential palace in Kabul. Photo: AP - Zabi Karimi

“We can and should establish alternatives to support the Afghan people, rather than allowing these resources to be used to bolster the Taliban’s oppressive regime,” Republican senators Marco Rubio and Rob Portman wrote in a letter to Treasury Secretary Yellen.

These senators opposed the release of the Afghan Central Bank's reserves, and said that the US should "intervene" at the IMF to ensure that $450 million in Special Drawing Rights (SDR) reserves remain frozen.

Adnan Mazarei, a senior fellow at the Peterson Institute for International Economics in Washington and a former deputy director at the IMF, said it would be difficult for the Taliban to immediately access the Afghan government's reserves, because things don't happen automatically when there is a change of government.

“There needs to be international recognition and understanding of the economic policies and practices of any new government,” said Mr. Mazarei.

The controversy in the US became more intense after the Taliban announced a new cabinet with many hardliners, even those who are being punished for being on the global terrorist list. Notably, among them, the new interior minister is the one who is most wanted by the US.

The new cabinet also excludes women, religious groups and other ethnic minorities, a move that appears to contradict the Taliban’s pledge of an “inclusive” government after taking over Kabul in mid-August.

“The legitimacy and support for the Taliban remains controversial. Sanctions must be imposed immediately to deny the Taliban access to financial resources. Anything that can be done to deny terrorist access to resources should be applied in this case,” said Richard Goldberg, senior adviser to the Foundation for Defense of Democracies, a Washington-based think tank.

Different approaches from country to country

Peterson Institute researcher Mazarei said that different countries will resume aid programs to Afghanistan in different ways because the legitimacy of the Taliban is still controversial among countries.

Russia has expressed opposition to freezing Afghan funds, warning that the economically squeezed Taliban would have to seek revenue from the drug trade.

Meanwhile, Pakistan – which is bearing the brunt of the refugee crisis and has taken in more than 3 million Afghans – has proposed a Marshall Plan-style fund for Afghanistan.

Taliban leaders have asked their members not to celebrate their victory. Photo: AP

“Europe is more at risk from the influx of refugees from Afghanistan than the United States. So they have an incentive to quickly restore aid to Afghanistan,” Mr. Mazarei said.

Regarding the new interim cabinet in Afghanistan, Mr. Mazarei said: “Unfortunately, they have established a very ‘Taliban-style’ government. It is not as inclusive as they claimed. I predict that they will not be able to quickly address the concerns of the international community, either on security or on human rights.”