What will happen to Afghanistan’s frozen funds?

Account holders queue outside a bank in central Kabul on 15 August, 2021, after the Taliban seized power. (Credit: Keystone/Agence VU/Andrew Quilty)

In January, the trustees of a Swiss foundation set up to manage $3.5bn (CHF3.34 billion) in frozen Afghanistan central bank funds will meet again after gathering in Geneva for the first time last month. Dr Shah Mehrabi, co-chair of the foundation and chair of the audit committee of the Afghan central bank, spoke to Geneva Solutions about the outcome of their initial meeting, the future of the funds, and the fateful day last year when everything changed.

On 15 August, the day the Taliban seized power in Afghanistan, Shah Mehrabi received a phone call.

The Afghan-American citizen, who chairs the audit committee of the Da Afghanistan Bank (DAB), the Afghan central bank, learnt that its acting governor had flown out of the country amid the turmoil, along with several other of the country’s top-ranking officials.

With no one left in charge, and though in the United States himself, Mehrabi was tasked with deciding what actions to take to protect the bank’s reserves and shield its financial system from collapse.

“In one way or another, the vault had to be secured. So, the first thing I did was to form the audit committee, which went inside the vault and counted all the reserves that we had in the central bank – the amount of gold, Afghanis, US dollars, euros, Indian and Pakistani rupees, and so on,” he told Geneva Solutions.

The vault was then sealed with the committee’s signatures and the central bank was closed until the Taliban reopened it again a few days later when another full accounting of its assets took place, Mehrabi said. But the bank’s monetary policy activities, which are meant to help steer the country through even the most dire economic situations, have not been the same since.

Among the biggest restrictions the DAB faced by international governments was the freezing of its foreign assets. Around $9.1bn stored in Europe, the United Arab Emirates, and the US, where the bulk of it (some $7bn) was held, was put out of reach of Afghanistan’s new de facto rulers.

Deprived of its dollar-denominated reserves, the central bank cannot carry out its main responsibility of keeping currency exchange rates stable and inflation in check, although reserves held at the DAB in Kabul have given it some room to carry out its functions over the past year, Mehrabi said.

“On top of this, the DAB needed new banknotes, but that was also blocked,” he added, further exacerbating the country’s liquidity crunch. (An order of fresh notes preceding the Taliban, which had been put on ice, was finally released in November). “So, a shortage of US dollars, shortage of Afghanis notes, and international sanctions, all created a crisis in the banking sector.”

Hampered by international restrictions on its banking sector, Afghanistan’s already crumbling economy went into freefall, fanning its humanitarian crisis and with Afghans continuing to bear the brunt, said Mehrabi. He has been advocating for the frozen funds to be returned to the DAB to stabilise the economy – under tight conditions and controls.

“Afghans have gone through extreme hardship that could easily be reduced and mitigated if central bankers were allowed to access this money and to use it for the purpose of bringing stability to this crisis,” he said. “Because there are many factors that contribute to poverty and inflation is one of the main ones.”

A new foundation, a way forward?

In September, US president Joe Biden announced the creation of a new foundation to manage half of the frozen funds ($3.5bn) after signing an executive order in February to transfer them abroad “to benefit the people of Afghanistan”. The other half, left on deposit at the Federal Reserve Bank in New York, is tied up in ongoing lawsuits brought by the victims of the 9/11 attacks.

Neutral Switzerland was chosen as the location for the new Afghan Fund, with Mehrabi appointed as one of four trustees of foundation’s board, together with another Afghan economist and a representative from Switzerland and from the US.

The new fund, held at the Swiss Bank for International Settlements (BIS),  “will protect, preserve, and make targeted disbursements of that $3.5 billion to help provide greater stability to the Afghan economy,” the administration said.

The decision comes after something of an unusual financial, foreign policy and counterterrorism conundrum for the US government. The issue was how to free these funds to help the people of Afghanistan without them falling into the hands of the Taliban – a sanctioned terrorist group not recognised as a legitimate government.

Mehrabi has proposed this could be done by giving the Central Bank of Afghanistan limited, monitored, and conditional access to a sum per month roughly equal to half of what it would have typically auctioned off in the past to maintain price stability.

As he explained in a column for Al Jazeera in January 2022, “the US would have the ability to verify how these funds are used via one of the independent international auditing firms that are still operating in Afghanistan”. If any illicit activity was discovered, the disbursements could be stopped immediately.

Another problem relates to the independence of the DAB from the government, as well as its doubts over whether it is able to carry out its functions properly after many of its employees left the country following the Taliban’s takeover.

“The United States is concerned that there is not enough capacity at the central bank and more specifically in the area of anti money-laundering,” Mehrabi said.

In its statement in September, the US said: “To rebuild confidence among the international financial community, DAB must demonstrate that it has the expertise, capacity, and independence to responsibly perform the duties of a central bank”.

An independent monitoring company based in Afghanistan has been hired, at the request of the US and approved by the DAB, to assess its performance.

Meanwhile coming up with a plan on how to work with the DAB to rebuild confidence measures and disburse the funds will be the task of the new board. However, Mehrabi said this was still far from being agreed.

Instead, November’s meeting was focused on administrative and legal procedures for the newly established fund, such as the hiring of auditors, beginning the recruitment process for a secretary to the fund, and designating Mehrabi as co-chair of the fund alongside former Afghan central bank chief, Anwar Ahady.

The trustees also discussed the $36 million in interest accrued by the fund, with the BIS expected to put forward proposals in the coming months on how best to invest this.

The next meeting will take place in January, when there is expected to be more of a  focus more on the “substance” rather than “form”.

“Our main agenda will be mostly looking how to build economic conditions that will enhance growth for the people, and how to allow central bank to perform its main function of bringing price stability overall and eliminate extreme volatility and I think it’s very important that we do that,” Mehrabi said.

Alexandra Baumann, ambassador and head of the prosperity and durability division at the Swiss Federal Department of Foreign Affairs, and one of the trustees of the foundation, told Geneva Solutions in a statement: “Transparency is imperative for Switzerland as is the allocation of the funds, which will benefit the Afghan people.”

“Ultimately, the assets should be returned to the Afghan Central Bank,” she said, adding the before this can be considered, it “should demonstrate its independence from political influence, its implementation of robust AML/CFT regulation (Anti-Money Laundering/Combating the Financing of Terrorism) and allow for a third-party monitoring of its activities, thus demonstrating it is willing and able to act in the best interest of the Afghan people”.