Insecurity threatens Afghanistan with economic crisis

KABUL Mon Mar 12, 2012 8:46pm IST

A U.S. soldier keeps watch as Taliban militants, part of a group of a hundred Afghan Talibans, hand over their weapons as they take part in the Afghan government's reconciliation and reintegration program in Laghman province March 12, 2012. REUTERS/Parwiz

A U.S. soldier keeps watch as Taliban militants, part of a group of a hundred Afghan Talibans, hand over their weapons as they take part in the Afghan government's reconciliation and reintegration program in Laghman province March 12, 2012.

Credit: Reuters/Parwiz

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KABUL (Reuters) - Security fears ahead of a NATO combat force pullout in 2014 may prompt wealthy Afghans to keep shifting billions of dollars to safe havens in Dubai and elsewhere, threatening the country's economic survival, the deputy central bank governor warned.

In an interview with Reuters, Khan Afzal Hadawal said confidence in the economy had eroded to such a degree over more than a decade of war that Afghans were hand carrying up to $4 billion a year out from Kabul airport alone -- an amount almost equal to last year's state budget.

The government recently stepped in and set a $20,000 limit on the volume of money that could be moved out that way, hoping to shore up Afghanistan's fragile finances and commercial banks.

"If you want to develop the banking system you have to channel this money through the banking sector so you get accurate data on how much money is leaving the country," said Hadawal.

Sitting in his office in the run-down Kabul central bank building, he said those large amounts of cash will keep flowing out if security remains precarious in Afghanistan, one of the world's most turbulent nations.

The cap on physical cash will not prevent the country's rich transferring their money through banks to cross-border safe havens.

"The measures will not stop the money from going out," said Hadawal. "We definitely prefer them to invest inside the country. Everything depends on security. If it doesn't improve nobody will invest their money where there is no security."

U.S. plans to wind down the war make people like Hadawal nervous. The Americans want to replace large combat formations with advisors, and perhaps special forces, as foreign combat troops prepare to withdraw at the end of 2014.

Ill-equipped Afghan forces will be charged with taking control of security.

If they fail, Afghanistan could face civil war or prolonged instability again, in which case foreign investors might pull out, and rich Afghans rush to get even more of their money out of the country.

Asked if 2014 was too soon for foreign combat troops to head home, Hadawal said: "There are a lot of things that need to be done. We still need foreign assistance."

SUITCASES FULL OF CASH

Hadawal estimated that Afghans have been moving up to $8 billion in cash in suitcases and carry-on bags from Afghanistan's airports every year.

"The $8 billion being taken out is double the total assets of the (central) bank," said Hadawal.

A U.S. government audit report last year found it was almost impossible to track where much of the billions of dollars spent on security and development projects in the last decade had gone given the country's dysfunctional financial tracking system and poor bank oversight.

Wealthy Afghans have for years locked their money into safe havens and property elsewhere, with Dubai and its man-made Palm Jumeirah island being favoured locations, with an estimated $8 billion stashed away in the Arab emirate.

In 2009, ahead of the last Afghan election, millions of dollars -- much of questionable origin -- made its way out of the country in suitcases and even on pallets loaded into aircraft, according to police at Kabul's main Airport.

Former vice president Zia Masood was stopped entering Dubai carrying cash worth $52 million and released without question, according to a cable from the U.S. Embassy in Kabul that appeared later on the website Wikileaks.

The outflows, and an expected sharp drop in foreign aid, the backbone of Afghanistan's budget, could take a heavy toll of the Afghan economy, said Hadawal.

U.S. economic and humanitarian aid to Afghanistan fell from $4.1 billion in 2010 to $2.5 billion in 2011. U.S. aid will be even lower this year as Washington shifts to sustainability projects, which they say require lower levels of funding.

The eventual withdrawal of foreign forces whose hard currency trickles down to the economy could also hurt finances.

"At this stage you see we are dependent on foreign aid. If it stops and security does not improve, the economy will not be sustainable," said Hadawal.

"If security remains the same we can't even put an ATM out in the provinces because we fear that someone will blow it up and take the money."

(Editing by Daniel Magnowski)

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