US Troops Withdraw From Afghanistan
What Is The Economic Impact For Afghanistan and its Neighbours?
Firstly, this article is by no means discounting the severity of what is happening in Afghanistan, and i do not want to minimise current events to just “another event which impacts financial markets“. There is widespread coverage of events in the media, and my focus in this article is to simply highlight things from a different perspective which does not have the same widespread coverage.
Also, apologies for the long and extended summer break, but i am back now!
After close to 20 years of occupation, the Biden administration decided to withdraw all US troops from Afghanistan by the end of August this year. While some spectators have labelled the war in Afghanistan a failure, others have praised the decision to end US involvement in a never-ending war. All told, Brown University’s Costs of War Project estimates the total spending at $2.26 trillion and not to mention the endless counts of human lives that have been lost.
Afghanistan is not an investable economy (at least to outsiders in the west), and much of the domestic economic activity is funded by grants from rich nations. The Taliban have made efforts to maintain order, and assured locals that life will go on as “normal”. They have largely managed their controlled regions through revenue collection from opium sales, taxes, as well as toll charges for transportation through these areas. However governing the whole of Afghanistan with various interst groups, as well as different global actors will be considerably more complex. For starters Afghanistan is facing a shortage of US dollars, reserve assets in USD have been frozen, the IMF have suspended plans to distribute more than $400 million in emergency reserves to the country. This could mean an even weaker local currency (Afghani), and much higher inflation in the near future according former central bank chief Ajmal Ahmady. There is a great thread from him on how the DAB (Afghan Central Bank) operates and so much more (worth a read).
The neighbouring countries however are more investable, Pakistan is the largest market bordering Afghanistan (excluding China). Other nations are Tajikistan and Uzbekistan. Kazakhstan and Kyrgystan do not share a direct border with Afghanistan, but are fairly close in proximity. These countries have large and active Eurobond markets and are members of JP Morgan EM Bond Index. Pakistan and Kazakhstan have relatively small equity markets, and are also part of MSCI EM and Frontier Equity Index respectively.
Immediately after it become public that the Taliban had taken control of large parts of the country, and were nearing the capital city of Kabul, the risk premium for these Eurobonds increased (or put differently, investors demanded more return to compensate for the risk of holding these bonds, and hence prices fell). Tajikistan was most sensitive on the day, which i initially found very surprising as i would have expected it to be Pakistan. Below chart shows a proxy for the riskiness of the bonds of the countries, left hand side shows how much governments have to pay above what US treasury pays to borrow, and right hand side shows the actual return investors will receive.
Tajikistan will welcome up to 100,000 refugees, and have already started making provisions. The two nations share an 800mile border, similar cultural values, as well as ethnic groups and historical roots. Tajikistan was until 1991, officially part of the Soviet Union and although they officially supported Moscow during the 1980’s Afghanistan invasion, there were many Tajikistani rebel groups supporting the Mujahadeens. As a nation today, Tajikistan oppose Taliban rule, however several factions of pro Taliban groups still remain active in the capital Dushanbe and pose a large security threat.
Uzbekistan has made clear its stance on accommodation refugees, and have been capturing and returning refugees back to Afghanistan.
Pakistani government authorities have hosted, supported and funded different Taliban groups in the past, and will be pleased to see a pro-Pakistan government in Afghanistan. Taliban have broken ‘the shackles of slavery,’ says Pakistan PM Imran Khan. Previous Afghan President Ashraf Ghani’s government was more friendly with India and the US. There is a threat from the Pakistan based section of the Taliban (TPP), who continue to wage war against Pakistani security forces with the aim of taking control of the border regions in Pakistan and forming an independent state. Pakistan recorded economic losses of roughly $120bn from the US Afghanistan invasion in 2001 - 2015 due to spill over effects. Forgone FDI, increased spending on counterterrorism and higher interest payments were the main drivers.
From the perspective of bond investors, government budgets in the region were not set with the above variables in mind. Higher expenditure, lower revenues and increased geopolitcal risks spell trouble and ultimately cause a deterioration in the actual or perceived economic/financial stability and the ability to repay debt. The COVID19 pandemic has already put undue strain on the debt dynamics of many of these countries, but uncertainty is now magnified. Tajikistan is already on the IMF list of nations with high risks of debt distress) while Uzbekistan is in much better shape economically, with large foreign currency reserves.
The impact on trade is less clear and remains to be seen, I have seen some reports playing down the effects on cross border trade, but looking at the below numbers from the World Bank, i am not convinced. Afghanistan exports largely agricultural products and other foods. India is Afghanistans largest export destination (47% of total exports), and Iran (14% of total imports) is the largest importer followed closely by China (13% of imports) according to 2019 data.
Who will become the regions new super power? The disengagement of the US in central Asia, now means China or Russia could become more influential in the region. China seems to have a growing interest in the region, and officicials have already met with Taliban who are also in desperate need of investment to rebuild the country. Maybe Afghanistan will now become part of China’s belt and road initiative?
Check out Why did Pakistani officials cheer the Taliban takeover of Afghanistan? for a more consice analysis.