Failing Kabul Bank Threatens Already Weak Economy

Politics turns on public finance; public finance turns on politics.  Afghanistan is no different than the United States, or the United Kingdom on those terms. So it comes as a dismaying shock that the government of Afghanistan might have to bail out its largest and most important private bank.

Kabul Bank has taken losses as large as $900 million, a number three times the previous estimate according to the New York Times.  This news has had rippling effects throughout Afghanistan and internationally.  For instance, contract wages for Afghan security forces have been paid out through Kabul Bank. Were it to fail, the U.S. and NATO would not be able to pay out the wages of the forces that have-ostensibly-kept Helmand and Kandahar Province from falling to the Taliban.

The economy Afghanistan is more or less an informal beast hiding in grey shadows.  Kabul Bank was thought one of the few successful enterprises that until recently had given a de jure market for investors and shareholders some room to play with their assets–partially, one might assume for the macro-growth of the local economy.

It turns out that gross mismanagement, incompetence and fraud has wiped out over $900 million in assets.  Keeping Kabul Bank open and alove will require massive government intervention when the Kabul government is already reeling from a strained and slashed budget.

The problem here is two fold: news of the banks impending failure might force a run on deposits in smaller solvent and banks in Afghanistan. This would destroy the growing banking system in Afghanistan, thereby forcing larger public interventions that would drain money out of the public coffers, money that is hardly available.

A run on Afghanistan’s banks would put pressure on Afghanistan’s international backers to bail out those banks.  They would be forced to fund most of the government intervention into Afghanistan’s banking sector.  And this move would not remain a local phenomenon.  For, if Afghanistan’s nascent private sector went bust, one of the ingredients in the recipe that might allow the U.S and NATO to leave Afghanistan to Afghan hands, would also fade into dust.  As before, for at least some extended time, Afghan security forces would not be paid.  The subsequent facts on the battle ground might then be quite startling.

All this might throttle any confidence any investor might have in a booming, economically independent (or nearly so) Afghanistan, now a country with one of the largest deposits of invaluable base metals in the world, estimated at nearly $1 trillion.

It is unlikely that international backers might deepen their commitment to Afghanistan, as might be required, if Afghanistan’s banking sector fails.  Indeed the Times reports that the International Monetary Fund (IMF) has not renewed a much needed assistance program that has for long helped keep the government peddling along slowly. Indeed, many donor countries only fund projects that the IMF clears. If the IMF keeps its hands off Afghanistan’s public finances, so will many foreign donor governments.

Secondly, as investigations go forward, it seems increasingly likely that most of the missing $900 million has gone off into the hands of a small coterie of private investors and asset-holders.  Consider that one of the main investors in Kabul Bank is none other than Mahmoud Karzai, President Karzai’s brother.  Private, clientelistic exchanges is well-known as the grease that helps run the work of the Karzai administration, the means through which it functions.  It is likely that Kabul Bank lent large sums of money to public leaders for contracts they drew up in their private roles.  There seems little hope of recovering any of that outstanding money.

Indeed, demonstration of that fact might ultimately paralyze the Karzai government.  It seems that it is one thing if Hamid Karzai and his family take bribes; altogether something else if they use the entire economy of Afghanistan as their personal fiefdom.