Tuesday, August 17, 2021

What happens to the Afghanistan central bank's assets?

The Afghanistan story is a tragic one and I don't have much to add to it apart from my ability to read central bank financial statements and balance sheets. Here's a quick analysis of the balance sheet of Afghanistan's central bank, da Afghanistan Bank. And following that, I'll provide some thoughts on what this means for Afghanistan. As always, feel free to add your opinions and data in the comments section.

Da Afghanistan Bank issues the Afghan afghani, the currency symbol of which is the Af. 

At year-end 2020 the central bank had 781 billion Afs worth of assets, which comes out to around US$9.5 billion at the current exchange rate of US$1-to-86 Afs. That's a lot of resources. No doubt the incoming Taliban regime is keen to access this $9.5 billion. But it will be tough for the Taliban to do so.

Here is what the assets section of the central bank's audited balance sheet looks like, in Afs:

Source: DAB

(Note: For the rest of this article, I will assume that da Afghanistan Bank's 2020 year-end numbers are similar to those prevailing as it is taken over by the Taliban.)

In what follows I'm going to analyze the four biggest components of da Afghanistan Bank's balance sheet: gold reserves, foreign currency cash reserves, due from banks, and investments.

1. To repeat, da Afghanistan Bank lays claim to 781 billion Afs worth of assets. Of this amount it reports holding 703,000 troy ounces of gold, worth 101.77 billion Afs, or 13% of da Afghanistan Bank's assets. At the current gold price, this comes out to a whopping USD$1.25 billion.

But a quick peek at the notes to the financial statements reveals that da Afghanistan Bank's gold is held on the other side of the world, at the Federal Reserve Bank of New York. With the Taliban taking over the central bank, my guess is that this gold will be frozen by the U.S. government. That is, the incoming Taliban regime won't be able to access a single ounce of the yellow metal.

2. The next big line item on da Afghanistan Bank's balance sheet is foreign currency cash reserves. A glance at the notes to the central bank's financial statements reveals that this refers to actual physical banknotes. This stock of currency seem to be held at the Presidential palace and the central bank's head office as well as its branch offices. Most of it U.S. dollars:

Source: DAB

The central bank presumably holds a big stock of U.S. banknotes because it also offers U.S. dollar accounts to locals, and account holders surely want to withdraw money in physical form to make payments. Afghanistan is mostly a cash economy.

At year-end 2020, da Afghanistan Bank held 34 billion Afs of foreign physical cash, or US$400 million. That's not as big as the gold line item, but it still accounts for another 4% of da Afghanistan Bank assets.

My guess is that this US$400 million in cash was quickly whisked away by the outgoing regime on one of the many planes departing Afghanistan, probably for eventual deposit at the Federal Reserve Bank of New York. So that's another big chunk of central bank assets wrested away from Taliban control.

3. Having dealt with gold and physical cash, the next line item is Due from banks and financial institutions. This amounts to 254.7 billion Afs (US$3.2 billion), or 33% of da Afghanistan Bank's assets. Looking through the notes to financial statements, much of this is comprised of various types of deposit accounts held at foreign banks:

Source: DAB

It is likely that these bank deposits are protected from the incoming Taliban regime, depending on the jurisdiction of the bank. If deposits are held in U.S. banks, I suspect they will have already been frozen. But if they are socked away in a place like Switzerland, perhaps the Taliban will be able to use them? I don't know enough about international politics to be sure. If the U.S. quickly institutes some sort of sanctions regime against da Afghanistan Bank, then even neutral foreign jurisdictions will have to lock down the assets of a Taliban-led central bank.

4. The fourth and last line item is investments, best described as a portfolio of U.S. government securities. These investments comprise the biggest chunk of da Afghanistan Bank's assets, summing up to 369 billion Afs (US$4.2 billion), or 47% of the total.

One more glance at the notes to the financial statements tells us that da Afghanistan Bank's investment portfolio is mostly managed by the Federal Reserve Bank of New York and the World Bank's International Bank for Reconstruction and Development (IBRD). A small chunk is run by the Bank for International Settlements. 

Source: DAB

If the chunk held at the Federal Reserve isn't already frozen, I suspect that it will quickly be rendered unusable. I don't know enough about the politics of the World Bank or the BIS to pass comment, but I'd bet that these institutions will also prevent the Taliban from getting access to the funds.

So let's do the math. Gold + foreign cash + due from banks + investments sums up to 760 billion Afs, or 97% of da Afghanistan Bank's assets. That's US$8.8 billion worth of funds. So effectively all of the central bank's assets is either already frozen or capable of being frozen.  

One thing I worry about is that a Taliban-led Afghanistan will quickly experience hyperinflation.

Here's the logic. Da Afghanistan Bank has issued around 293 billion Afs worth of Afghani-denominated coins and banknotes into circulation, for use by regular Afghans for payments. (That's around US$3.5 billion worth of cash). Banks and other customers hold another 106 billion Afs worth of electronic Afghani accounts at the central bank.

Up till now the Afghani notes and electronic deposits that the central bank has issued have been stabilized by its underlying investments, including the gold and dollars held at the New York Fed. Treasury securities yield income. So do bank deposits. Along with gold, these assets can also be used to repurchase issued Afghani currency, thus supporting the Afghani's value. 

But U.S. officials are justifiably worried about what other things the Taliban might do with those assets. What if the Taliban wants to sell $50 million of the central bank's stock of Treasury bills or gold ounces to buy more weapons? A blanket ban on accessing all of da Afghanistan Bank's funds will prevent the Taliban from using those assets to finance itself.

But with these assets being frozen, they can no longer be effectively put to work as stabilizers. And so the Afghani can only fall. In theory I suppose that the Taliban could find replacement backing, but in practice I doubt it has the resources to do so.

As far as developing nation currencies go, the Afghani has been fairly stable against the dollar for the last decade. Inflation has remained low. Freezing da Afghanistan Bank's assets hurts the Taliban, but it also means ensuring that a painful hyperinflation falls on regular Afghani people. This will be an abrupt departure from what Afghans have become used to, and a lot to bear on top of what they are already enduring.


  1. Thank you for this. I would be interested to hear any thoughts you have on how an (extremist?) Islamic state would operate their central bank? Is there any precedent from the short lived ISIS?

    1. As far as I know ISIS didn't have a central bank. They issued their own gold coins.

      I must confess that I don't know enough about the Taliban to be able to speculate about how they would operate their central bank. My guess is they would adopt standard central banking practices, assuming they have the resources, but I could be wrong.

    2. The Taliban got into the bank and found out the all there was were bits on a computer screen. Gold and Dollar, which would come really handy, nil! Knowingly, the Taliban made sure to preserve inherited infrastructure and now will try to negotiate human wrights for wrights of access to those bits.

  2. Thank you for this analysis. What is the logic of the hyperinflation story exactly? Is it that holders try to convert Afghanis into dollars but the central bank is unable to intervene to forestall the collapse. The currency depreciates and this causes a huge exchange rate induced inflation. Wouldn't the Afghani stabilise at some new value (therefore preventing hyperinflation...). Isn't there a missing piece involving monetary financing.