Afghanistan’s Money Belongs to Afghans

(Bloomberg Opinion) -- For months, the U.S. has held onto about $7 billion that belongs to the people of Afghanistan. That money needs to be administered wisely.

After the Taliban swept to power in August, the U.S. blocked the country's foreign-currency reserves held at the Federal Reserve. Last month, President Joe Biden issued an executive order that created the impression that half of the frozen assets would go to the families of victims of the Sept. 11 terrorist attacks and half to humanitarian relief for Afghans.

In fact, it should go to neither: The money should be reserved for its intended purpose, to stabilize the Afghan economy.

To be clear, Biden's intentions were good. After the U.S. froze the reserves, a victims' group laid claim to all of the money as part of a default judgment they had won against the Taliban and al-Qaeda a decade ago. Biden's order cuts the amount they can pursue in half; the plaintiffs must still win their case in court in order to receive any payouts.

It's hard to see why they should. The reserves rightfully belong to the Afghan people, not the Taliban. (At least $500 million represent assets of Afghan businesses and individuals.) In any case, the U.S. government has already paid out more than $7 billion in compensation to Sept. 11 families. Moreover, exposing the assets to seizure could undermine the credibility of the Fed, where other central banks also hold money.

There's a better approach. At the root of Afghanistan's swelling humanitarian catastrophe is a financial crisis. After the botched U.S. withdrawal from the country, foreign aid, which accounted for more than 40% of Afghanistan's gross domestic product and 75% of the previous government's budget, halted overnight. The central bank reserves were frozen. Dollars and even new afghanis, which are printed overseas, stopped flowing into the country. Foreign banks pulled back to avoid U.S. sanctions, paralyzing trade and commercial activity.

Afghans have been left unable to access the money they have in banks and unable to earn more. Civil servants and many salaried employees haven't been paid in months. Meanwhile, without access to its reserves, the central bank can't hold the dollar auctions that previously propped up the afghani. Rising prices have made food unaffordable. More than half the population could go hungry this winter.

Certainly the U.S. should lead efforts to address this crisis. It should rally donors to meet the $4.4 billion aid gap the United Nations foresees for 2022. Having made clear that sanctions don't apply to legitimate commercial activity, the Treasury Department should more actively encourage banks to resume transactions with Afghanistan.

One thing Biden should not do, however tempting, is use the reserves to pay for food and medicine. Aid alone can't address Afghanistan's needs; it's critical to stabilize the currency and revive the banking sector so that economic activity can resume. That requires restoring confidence in the central bank, which will be impossible if its vaults are drained.

To do so, the U.S. and other major donors should first pressure the Taliban to appoint a technocrat to run the central bank and protect its staff from political influence. Strict monitoring systems should be established with help from the World Bank and International Monetary Fund. Then, small tranches of the reserves should be released so dollar auctions can resume; one of the bank's board members, based in the U.S., has suggested $150 million a month would suffice as a test.

It's true that propping up the economy could strengthen the Taliban's hold on power. Yet these relief measures can be swiftly terminated if the group tries to divert money directly into its coffers. And the U.S. would surely pay a higher price if Afghanistan collapses: Poverty and hunger would fuel refugee flows, create more space for terrorist organizations and leave a lasting moral stain on American credibility.

This administration has left itself few good choices in Afghanistan. It needs to make the best of what remains.

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