Problems

Afghanistan's economy has been thrown into disarray by recent political developments. The Taliban took power in Afghanistan in August 2021, wreaking havoc on an economy that was already struggling to develop. Rapid reductions in international grant support, loss of access to offshore assets, and financial linkage disruptions are all expected to result in a significant contraction of the economy, increased poverty, and macroeconomic instability. The prospects for sustainable finance are bleak in Afghanistan, when the entire fiscal situation is unstable and the nation’s banks are struggling to stay afloat [1].

Responses

Key policies and governance approach

In order to access multilateral financial resources, Afghanistan should establish an accredited national implementing agency. Accreditation and financial management will necessitate dependable systems within the Ministry of Finance (MoF) to administer these special accounts in collaboration with the Ministry of Foreign Affairs (MoFA) of Afghanistan [2].

 

Initiatives and Development Plans

The development objective of the World Bank’s Access to Finance Project for Afghanistan is to strengthen institutional capacity to improve access to credit for micro, small, and medium-sized businesses. The first component of this project is to improve access to financial services for micro and small businesses. This component aims to provide continued support to the microfinance sector through Microfinance Investment Support Facility for Afghanistan (MISFA), as well as, supporting MISFA to take on a broader role as a catalyst for innovations to increase access and usage of financial services from the lower end of the market (notably micro and small enterprises) as per its new strategic plan. It has the following three sub-components: (i) strengthening of the microfinance sector through MISFA; (ii) targeting the ultra-poor; and (iii) strengthening of MISFA.

The second component aims to improve access to financial services for small and medium enterprises (SMEs). The aim of this component is to increase commercial bank and microfinance institutions (MFIs) lending to SMEs in Afghanistan and thus facilitate access to financial services for SMEs. It will support the expansion of the Afghanistan credit guarantee facility implemented and managed by Deutsche Investitions- und Entwicklungsgesellschaft mbH (DEG), which has supported SME lending in Afghanistan since 2006. This component will include support to the credit guarantee facility to provide coverage to MFIs lending to the lower end of the SME market. It has the following two sub-components: (i) supporting the expansion of the Afghanistan credit guarantee facility; and (ii) providing technical assistance to the Afghanistan credit guarantee facility and partner financial institutions (commercial banks and MFIs) [3].

Opportunities

The new interim administration will need to work on developing a workable relationship with its development partners and neighbouring countries. Attaining the recognition of the international community to run a legitimate government will be a stepping stone to ensuring sustainable finance. In the interim, sustainable finance will depend on utilizing foreign aid appropriately, particularly from the EU and the Afghan support package. In the longer term, the Government will need to create the enabling conditions for long-term, inclusive, and sustainable economic growth, as well as full and productive employment and decent work for all people.