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Afghanistan’s banking system could collapse if not resolved quickly, warns UN

The United Nations Development Programme pushed for urgent action to prop up Afghanistan's banking sector due to worsening liquidity problems and a rise in non-performing loans.

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New Delhi: The United Nations Development Programme warned Monday that Afghanistan’s banking sector risked collapse due to worsening liquidity problems and a rise in non-performing loans, potentially adding further pain to its growing humanitarian crisis.

“Afghanistan’s financial and bank payment systems are in disarray,” the UNDP said in the report. A run on bank deposits “must be resolved quickly to improve Afghanistan’s limited production capacity and prevent the banking system from collapsing.”

A looming banking crisis adds to the woes of Afghanistan’s collapsing economy since the Taliban retook control of the country more than three months ago. It also comes as the Taliban’s foreign minister, Amir Khan Muttaqi, renewed calls on the U.S. to release the frozen funds of some $9 billion or risk triggering a mass refugee exodus.

The head of UNDP in Afghanistan, Abdallah al Dardari, said another key challenge is the loss of trade finance capacity given that “a large part of the food imports are financed through the banking system.” The UN and international NGOs need a functioning banking sector to bring in financial aid to address the humanitarian situation, he told Bloomberg News in an interview.

The World Food Program earlier said more than half the country’s population face acute hunger. Al Dardari said that Afghanistan will face rampant starvation unless the international community takes urgent action to help with the financial sector.

According to the UNDP’s analysis, the ratio of non-performing loans rose to 57% in September, from 30% at the beginning of the year, while total banking deposits are expected to end 2021 at 165 billion afghanis ($1.8 billion), a 40% drop from a year ago.

“Under current conditions, the NPL ratio appears to be increasing, which will likely lead to the collapse of MSMEs and the banking sector,” the UNDP said in the report, using the acronym for micro, medium and small enterprises. –Bloomberg

Also read: Unpaid Afghan diplomats struggle to hold fort, ensure ‘business as usual’ at embassies


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