Taliban back in power 

Ejected from power in 2001 by the U.S.-led coalition as part of their fight against Islamic terrorism following the September 11 attacks, the Taliban regained control of the country in August 2021. Following the process initiated in late 2018, the United States signed the Doha Agreement with the Taliban in 2020. This agreement stipulated a U.S. commitment to withdraw its troops in exchange for the Taliban's commitment to prevent terrorist groups from operating and to open talks with the Afghan government for a permanent cease-fire. On April 13, 2021, President Joe Biden announced the withdrawal of U.S. troops by September 11, 2021. However, on August 15, the Taliban seized Kabul and overthrew the Islamic Republic of Afghanistan as President Ashraf Ghani fled. After overseeing emergency evacuation flights of foreign nationals and Afghans who had worked for the coalition, the United States officially withdrew on August 30, when the Taliban declared victory. However, since then, a series of bombings, including by the Islamic State Khorasan Province (ISKP), suggests that the Taliban interim government, established on September 7, will have difficulty maintaining control and security in the face of both extremist groups and rebels. The Taliban regime has not been recognized by any state as of the end of 2021. In particular, it is accused of trampling on the rights of women who are prevented from working and girls who are deprived of schooling. The domination of the Pashtuns in the government and administration at the expense of other ethnic groups is also a grievance. This non-recognition is accompanied by the suspension of development aid, which the country had broadly relied on. One of the main consequences is the severe food crisis (60% of the population faces extreme levels of hunger, according to the United Nations).

A severe economic and social crisis

Even before the Taliban took power, poor security, growing uncertainty, and recurrent drought, coupled with the COVID-19 pandemic, had been undermining confidence and growth, while already high poverty and unemployment had been increasing. The abrupt halt in the flow of aid in the form of grants, including dollar banknotes (previously 40% of GDP), has led to the afghani depreciating against the dollar by 30% between the end of 2020 and the end of 2021. To address this, the government is auctioning dollars and has imposed a cap on cash withdrawals (USD 400 per family per week). The value of the currency is expected to fall further in 2022 until the economy stabilizes at a much lower level of activity. Insufficient liquidity and the inaccessibility of foreign currency accounts domiciled abroad are crippling the banking system. This is compounded by soaring inflation fueled by the depreciation of the afghani and falling imports: food and fuel prices more than doubled in 2021.

Furthermore, the drought resulted in a 20% year-on-year increase in the price of wheat in 2021, a 30% increase in the price of flour, and a 70% increase in the price of cooking oil. The purchasing power of Afghans is deteriorating, per capita income could fall by almost a third to around USD 350 by 2022. Many Afghans, especially in the public sector, work for no pay (70% of teachers). Household consumption (80% of GDP) could contract by 40%. The restriction of women's employment may inflict an additional economic loss of 3 to 5 percentage points of GDP. For their part, the Taliban launched a food-for-work program in Kabul in October, offering wheat in exchange for work to more than 40,000 unemployed men, intending to expand it to other regions gradually. Nevertheless, it is estimated that unemployment could double by 2022-23.

In the absence of a resumption of development aid, is the country heading for a sovereign default? 

The authorities intend to curb the rising budget deficit in 2022 by adopting a 10% rate of VAT, which could generate net revenues of 1.2% of GDP and phase out pandemic-related expenditures. The Taliban are generating increasing revenues (up to 60%) from poppy cultivation and opiate trafficking (6.6 billion in 2021). Finally, the country is continuing to receive international humanitarian aid that the UN requested in early January 2022. A record amount of USD 5 billion was provided in an emergency. The World Bank released in December 2021 a humanitarian aid of USD 280 million in through the special fund for the reconstruction of the country (ARTF). However, the public debt, which has been mainly external and very low, is expected to increase because of financing the deficit with debt instead of grants. In addition, although the country received USD 10 million in debt service relief from the IMF in 2021, financing this could be complicated. A sovereign debt default cannot be ruled out. The inaugural Sukuk (sharia-compliant bond) issue, scheduled for early 2022, would enable the government to tap into considerable domestic savings and eventually catalyze the development of a domestic debt market. Large inflows of grant aid primarily covered the current account deficit. With the suspension and freezing of foreign exchange reserves by the U.S., estimated at over USD 9 billion (15 months' worth of imports), the country is now struggling to pay for its imports and is being forced to reduce them. Once again authorized by the United States since December 10, 2021, Expatriate remittances are a welcome source of funding. As part of the Troika Plus, the United States, China, Russia, and Pakistan are holding talks with Taliban leaders, aware that deterioration would have repercussions on neighboring countries and beyond (terrorism, drug trafficking, population exodus).