The impact of Global Financial crisis on Afghanistan

The global financial crisis has already greatly damaged developed economies and the economic slowdown is yet to continue in most developing countries. Governments across the World injected huge amount of cash into financial markets and brought interest rates to record level low, but many economists believe that the worst is yet to come. The World seems to be trapped in deep financial crises with major Stock markets around the globe down by more than 40% from their recent high while several major Investment banks have collapsed and many other rescued by their national government’s bailout packages. Key indicators of the global economic activities such as shipping rates are dropping at shocking rates.

What does this all mean for Afghanistan and how Afghanistan would be affected by the global financial crisis?

The impact of financial crisis may have not yet heavily felt in Afghanistan primarily because our economy is not fully integrated with the modern global economy and global financial markets. This financial isolation may be to Afghanistan’s benefit, keeping the economy away from the immediate effects of the economic meltdown across the world. The World Bank's country manager for Afghanistan Mariam Sherman is also positive about the economic outlook of Afghanistan and feels that “the global financial crisis is unlikely to have great damaging implications for Afghanistan primarily because the financial sector of Afghanistan is relatively small and has no major role in financing economic activities, and has also very limited international exposure".

However, the analysis of Sherman does not mean that we may completely escape the shocks of “once-in-a-century credit tsunami” as termed by Alan Greenspan. Like many other developing countries, Afghanistan may possibly face new challenges and there could be long-term direct and indirect consequences of the global financial crisis.

The single major and immediate direct risk is Foreign aid. Afghanistan is a highly aid dependent country and relies heavily on foreign aid for 90 percent of government budget. As also pointed by Sherman that any cuts on aid by donor countries, which themselves are in deep financial crisis can adversely affect the inflows of aid and that would be challenging for Afghanistan.

Canada and some European countries are facing increasing economic problems at home and many question, whether they will pour billions of dollars at a time when they are strapped for cash with increasing criticism from their public that there are few signs of success in Afghanistan. It is however, the US that provides more than half of foreign aid and if this crisis worsens further in America, where President Obama is struggling to cut back on an ever increasing budget deficit, then many experts believe that foreign aid might be slashed down and Afghanistan would have to bear the brunt of a global crisis.

Another area that can possibly be affected is the foreign investment in Afghanistan. Foreign direct investment in Afghanistan has been increased year-on-year and has been enjoying steadily growth since 2002. Foreign investment in Afghanistan may fall as many companies and investors face huge cash shortages and there may also be the possibility of slashing funds from ongoing projects. The worsening security situation in the country may further create challenges for the Afghan government.

The indirect consequences will be that Afghanistan’s exports may decline as imports of the recession hit economies would fall. Export growth is already slowing markedly in several developing countries.

Remittances from Afghan expatriates, communities and workers abroad may also decline mostly in recession affected rich countries. Afghanistan has received over $3.3 billion from its expatriate community in 2006 alone while $500 million come from Iran annually. If countries like Iran, Germany, Netherlands, Canada, Britain, Saudi Arabia, Australia, Turkey and India with sizeable Afghan population plunge into extend financial crisis, the affect would surely be felt at home in the form of less remittances being sent to Afghanistan.

Afghanistan is not exposed to other potential risks faced by many other developing countries such the sudden withdrawal of foreign capital from several developing countries which has caused dramatic falls in their exchange rate. While other developing currencies rise and fall, the Afghani remains stable at around 52 to the dollar which is about the same since the start of financial crisis which is again partly due to US support of the Da Afgahistan Bank / Central Bank.

There is also the risk of unemployment in the case of prolong financial crisis and cuts in foreign aid which could also have social effects such lower growth translating into higher poverty, more crime, corruption, less spending in the public services and even more difficulties meeting the strategic Development challenges of Afghanistan.

As the global financial crisis are becoming viral and the goal to increase more troops and financial funding may become even tougher for Afghanistan. The Afghan government and International Community now more than ever, need a clear financial strategy as well as military strategy if it is to “win” this struggle in Afghanistan.