September 15, 2022
On August 10, more than 70 economists, including Nobel laureate Joseph Stiglitz, former economy minister for Argentina Martín Guzmán, and myself, sent a letter to President Biden with a simple ask: return Afghanistan’s central bank assets, deposited at the Federal Reserve Bank of New York, to Afghanistan’s central bank, Da Afghanistan Bank (DAB).
In the letter, we describe how the seizure of the reserves is contributing to mass death and starvation:
Seventy percent of Afghan households are unable to meet their basic needs. Some 22.8 million people — over half the population — face acute food insecurity, and 3 million children are at risk of malnutrition. Reports abound of desperate Afghans forced to sell their own organs to afford food for their families. The International Rescue Committee warns: ‘the current humanitarian crisis could lead to more deaths than twenty years of war.’ … Without a functioning central bank, the economy of Afghanistan has, predictably, collapsed. The people of Afghanistan have been made to suffer doubly for a government they did not choose.
Since that time, the Biden administration has moved forward with a plan to transfer half of the reserves to a private foundation based in Switzerland, under the control of an international board of experts, and deposit them with the Bank of International Settlements — an international organization composed of central banks. The other $3.5 billion will remain in the United States for potential compensation in a lawsuit brought against the Taliban by some of the families of victims of the September 11 attacks.
Not only is this plan inadequate to the needs of mitigating Afghanistan’s humanitarian disaster and restoring a functioning economy, but its presentation as a practical compromise elides fundamental issues regarding DAB’s nature and duties as a central bank. In this piece, I will try to answer some critical questions. What is the role of central bank reserves in a contemporary functioning economy? To whom do these reserves ultimately belong? How rational is it to constitute a parallel private foundation assigned to perform the duties of a central bank?
The Central Bank of Ecuador’s Struggles Against Asset Seizures
To begin with, I want to explain why — despite having never set foot in Afghanistan — this is a particularly important matter to me.
I was general banking director of Ecuador’s central bank at a time of many geopolitical threats to Ecuador’s sovereign assets. Since then, I have monitored how various countries’ central banks have faced similar, and more sophisticated, threats.
My country’s own history with the arbitrary seizure of its central bank’s foreign assets began in 1931, a mere four years after the foundation of the Central Bank of Ecuador. Under a US advisory mission known as the Kemmerer Mission, the central bank became the sole money issuer and handled the storage of private banks’ gold reserves. But instead of storing this gold in its vaults, it shipped it to the Bank of England so that potential trading transactions could be settled more swiftly. In 1931, the Bank of England unilaterally froze and then confiscated my country’s gold for no other reason than a supposed currency crisis. Many years later, it returned the monetary equivalent in devalued British pound notes — but not the physical gold.
In 1987, in the context of the Third World Debt Crisis that severely harmed Latin America, Ecuador suffered an earthquake that broke its only oil pipeline, halting petroleum exports and thereby its primary source of hard currency income. At the time, the Ecuadorian central bank had its reserves deposited in Citibank, in New York. Following the earthquake and default, Citibank unilaterally decided to seize Ecuador’s reserves, undercutting the then-upcoming debt relief product of restructuring.
In 2006, the year I joined the central bank, the administration of Dr. Alfredo Palacio penalized the Occidental Petroleum Company for breaching Ecuadorian law, and its contract, after it transferred a part of its concession rights to a Canadian firm without prior authorization. Occidental immediately filed an investment arbitration claim against Ecuador, which threatened Ecuador’s assets.
I knew that many Latin American and African countries that had faced similar arbitration cases or lawsuits had seen their central bank foreign reserves face a risk of attachment or seizure by supposedly neutral foreign courts or arbitration tribunals. After having carried out a detailed study of multiple financial centers’ domestic laws and jurisprudence with regard to sovereign immunity, I assembled an interdisciplinary legal-financial team and designed a multilayered strategy to protect our central bank reserves located abroad. This strategy is still in place and has successfully prevented all attempts at attachment, despite a string of investment arbitration threats, most recently from a tax-dodging Bahamas-based extractive-oriented French oil company, Perenco.
How a Central Bank Works: DAB Asset Seizure in Context
While Ecuador has managed to protect itself, I have, since my time in office, witnessed a new generation of judicial asset seizures of other nations’ central bank reserves. These range from seizures in defense of vulture fund speculators to seizures related to financial sanctions in the context of war, and include the most arbitrary case of all central bank reserves seizure I know of: Da Afghanistan Bank’s reserves at the New York Fed.
Economist Mark Weisbrot, Co-Director of the Center of Economic and Policy Research, has written about the devastating human impact of the decision to freeze DAB’s foreign assets. I have previously written on the macroeconomic imperatives behind the need to unblock Afghanistan’s reserves. Four dozen members of the US Congress have called for an unfreezing of these reserves.
The case of Afghanistan raises a series of questions. Why did DAB have $7 billion of its precious reserves deposited at the New York Fed, of all places? How did DAB get to save such a large quantity of reserves to begin with? Whom did those reserves ultimately “belong” to? The Afghan government? The Afghan commercial banks? The Afghan banks’ depositors? The Afghan people?
To answer these questions, we must understand that a country’s central bank is called “central” because it settles payments among all the other banks in the country. It is the bank of banks. DAB is no different from any other central bank in that respect. All other banks in a country’s financial system, mainly private commercial banks, have accounts at the central bank. If a customer from Afghan bank A wants to transfer money to a customer at Afghan bank B, the central bank helps in the transaction by withdrawing funds from bank A’s account at the central bank, and crediting them to bank B’s account.
But what if a customer from Afghan bank A wants to send money to a manufacturer’s bank account (at German bank G) in Germany, to pay for the import of machinery for their textile business? Because bank G does not have an account at DAB, the pair of banks have to find another “central” bank to do that job. In this case, it would not be a domestic central bank, but a “common correspondent” bank. Often, transnational megabanks, such as J.P. Morgan or HSBC, can do the job. But if none of the megabanks have accounts for both bank A and bank G (or DAB and bank G), they have to iterate the search until they reach the last resort, the mother of all international correspondent banks: the New York Fed.
The United States dollar is the de facto global currency, and its issuing bank is thus at the top of the global monetary pyramid. Out of the 12 regional reserve banks of the United States, the NY Fed is the designated bank for international correspondent banking. Three-quarters of all international interbank transactions are settled at the New York Fed. This contemporary de facto condition also has legal roots: when the IMF was founded in 1944, its Articles of Agreement stated that the US dollar was to be the reference unit of account for all international trade.
So how does the Afghan businessperson pay for the machine purchased from abroad? The local businessperson must have money deposited at Afghan bank A before starting the transfer, bank A must have money deposited at DAB, and DAB must have money deposited at the NY Fed. The money at the NY Fed may, in a narrow sense, be the property of DAB, but as this example clearly shows, the role of this money is to cover international payments on behalf of the private banks’ customers.
This is what central bank reserves are for: to process both the incoming and outgoing payments of any one country’s financial system. While reserves legally belong to the central bank, their function is processing payments for the central bank’s clients and its clients’ clients. This is what central banks do. This role is usually assigned to central banks in their country’s constitution or domestic law because this is how the international payments ecosystem operates. Central banks don’t do this for profit; they do it because they have to.
To Whom Do the Reserves Belong?
In the case of Afghanistan, the shortage of correspondent banking relationships among its commercial banks makes DAB virtually the only possible formal channel connecting the Afghan financial system to the global economy. The central bank is not doing this on behalf of the government; it is doing it on behalf of commercial banks and their customers. It is not a government operation — it is a bank operation; the central bank is not an alter ego of its country’s government. When central banks operate abroad, they are exerting a legally mandated public role: jure imperii.
Just as DAB has to give up reserves when it pays for its clients’ customers’ imports, DAB increases its reserves with incoming transfers into Afghan customers’ bank accounts. Every time an Afghan refugee in Europe or the Gulf sends money to their family back home, DAB reserves increase — either directly when transferred via the banking system, or indirectly when the hawaladars’ cash makes its way to the financial system. With refugee remittances, export earnings, and aid from abroad, DAB was able to save a significant amount of reserves between 2002 and 2021. They are not a product of state-owned petrodollar windfalls, like many other countries in the region that decide to deposit their money in the New York Fed; these reserves represent hard-earned foreign exchange in truly difficult conditions.
IMF data from 2021 shows projected amounts of foreign aid for Afghanistan at $7.2 billion, only $2.7 billion of which were projected to reach the government’s coffers. This means that around $4.7 billion in yearly grants was expected to be transferred to the Afghan private sector, including nongovernmental organizations. Some of this money — that which is not consumed directly by imports or donors’ administrative overhead — eventually makes its way to the Afghan banking system. According to the IMF’s 2021 projection of Afghanistan’s Monetary Survey (see Table 1 below), 55 percent of the commercial banking system’s demand deposits and 80 percent of its savings and term deposits are in foreign currency. Banks keep a more-than-prudential 30 percent of their clients’ foreign currency deposits as reserve deposits in foreign currency accounts at DAB.
Over the last few months, foreign aid has had to arrive as planeloads of cash to be deposited at commercial banks, further increasing the cash dependency of the Afghan economy and weakening the US-promoted payments’ surveillance capacities. DAB has published photos of these arrivals:
Screenshot of August 2, 2022 Arrival of Foreign Aid to Afghanistan
Sources: DAB’s Twitter feed.
When the Taliban was ousted in 2002, the IMF country report said, “DAB’s assets held in foreign banks estimated at close to US$300 million, had been frozen during the Taliban years and therefore remained untouched,” and noting:
Gross foreign exchange reserves are currently estimated at over US$300 million, including about US$200 million in gold, but it is unclear whether all these funds indeed belong to DAB (or the government); little information is available on DAB’s liabilities. An audit of DAB’s accounts will be required to establish its true balance sheet. [emphasis added.]
Unlike in 2002, we now have specific details as to whom the reserves “belong,” and we have full information on DAB’s liabilities and balance sheet. Table 1 covers key information on the central bank’s reserves, its liabilities, and those of the banking system. Gross reserves were projected to reach $9.9 billion in December 2021.
|In Afghani billions||In USD billions|
|Central bank gross reserves||792.1||9.9|
|Main central bank liabilities||560.5||7.0|
|Government deposits at DAB||108.3||1.4|
|Bank deposits at DAB||124.8||1.6|
|Account holder deposits at commercial banks||638.8||8.0|
Source: IMF Staff Report: Central Bank Balance Sheet 2018–23, and Monetary Survey.
DAB’s reserves were projected to reach $9.4 billion by December 2021; these reserves back around 327 billion afghanis in cash, 32 billion afghanis and $0.95 billion in central government deposits, and indirectly back 449 billion afghanis and $2.4 billion of local financial system deposits. This is a crucial element.
The government’s share is not $3.5 billion, as the arbitrary decision by the Biden administration dictated. If the balance sheet approach shown above had been applied to DAB’s reserves at the NY Fed, the central government’s deposits at DAB at the moment just before they were blocked were at most 113 billion afghanis, or $1.4 billion.
This data shows that the lion’s share (90 percent) of DAB’s reserves back cash and deposits — and thus “ultimately belong” to the Afghan depositors, both people and businesses, not to the government. According to the IMF’s latest report, there are 12 banks operating in Afghanistan. Together they have over 4.1 million deposit accounts in 398 branches across the country.
These reserves must necessarily exist because of payment system settlement dynamics. DAB trusted the United States to hold the large majority of its reserves. In fact, early in 2021, on the basis of “recommendations of the IMF’s 2020 safeguards assessment,” DAB “constituted the executive risk management committee, and adopted a new investment policy, in line with which it reduced its placements at foreign banks” and “shifted more than $3.0 billion of international reserves from term and other bank deposits to liquid U.S. Treasury holdings.”
Parallel Entity to the Central Bank
The plan for half of the seized reserves, not set aside for potential compensation in the above case, is to place them under the control of a four-person board of trustees of a just-created private foundation based in Switzerland. The US government says:
In the long-term, the goal is for funds not used for these limited purposes to be preserved to return to DAB. The United States has made clear that we will not support the return of these funds until DAB: (1) Demonstrates its independence from political influence and interference; (2) Demonstrates it has instituted adequate anti-money laundering and countering-the-financing-of-terrorism (AML/CFT) controls; and (3) Completes a third-party needs assessment and onboards a reputable third-party monitor.
The criterion of independence from political influence and interference is highly questionable. Even a majority of directors at the US’s own Federal Reserve Board are nominated by the US president. DAB’s Supreme Council was volatile even before the Taliban took over. Many countries in the world have central banks whose head is designated directly by the head of state. In the case of DAB, its governing law already contains safeguards in terms of autonomy and undue influence.
With regards to AML/CFT, concerns that DAB’s controls are not sufficiently rigorous could also have been addressed without the private foundation mechanism. DAB has a scheduled regional FATF (Financial Action Task Force)-style Asia Pacific Group evaluation programmed for 2023. It would suffice to accelerate that visit and have other central banks or financial intelligence units in the region provide software and experts on site while the local staff is trained. The Taliban had apparently already agreed to third-party monitoring. Furthermore, any AML/CFT expert will agree that by pushing the Afghan economy to increase its dependence on cash (both afghanis and US dollars), as the planeloads of aid shipments of currency featured above show, the US request for payment surveillance becomes increasingly difficult, if not impossible.
Some analysts have argued that DAB lacks competent AML/CFT professionals to manage the money. Indeed, a portion of DAB’s competent staff left the bank amid fear and uncertainty during the government transition. But the head of DAB Audit Committee says that trained staff are eager to rejoin the bank, and starting a parallel private foundation “central bank” from scratch would be a terrible idea and a loss for US and Afghan taxpayer money invested in the necessary training over 20 years.
Fears that the reserves will go “to the Taliban” ignore how banks work and operate, and completely ignore central bank accounting. DAB cannot “turn over” the foreign exchange reserves to the Taliban. First, were a DAB boss to arbitrarily order the central bank to wire millions of dollars from a NY Fed or BIS account to a nongovernmental Taliban-owned account somewhere in the world, AML/CFT bots at correspondent banks would detect it right away, it would fall under sanctions, and the wired money would immediately be frozen.
Second, it is crucial to understand that the government is an account holder at the central bank; i.e., the government’s treasury account is on the liability side of the central bank’s balance sheet, while the reserves are on the asset side. It cannot wire reserves to an account on its own ledger. The central bank may thus credit the treasury account — usually in its own currency — in what is traditionally called “monetary financing.” This does not require any ex ante level of reserves. However, DAB historically has committed to a no-overdraft rule that impedes it from crediting the government with endogenously created money.
When the government spends, money flows within the Afghan banks through the central bank’s payment systems. DAB reports:
After almost ten years of efforts, DAB connected the [Afghanistan Payments System, APS] with all banks, payment institutions, and [electronic money issuers]. We seek to connect all ministerial payment systems to the APS before end-2021. As a result, we saw a sharp growth in retail electronic transactions in 2020 and expect this trend to continue over the coming period. Furthermore, our wholesale payments system, [Automated Transfer System, ATS], became fully operational in December 2020. It is now connected with all banks and the [Ministry of Finance]’s [Automated System for Customs Data], [Standard Integrated Government Tax Administration System], and [Afghanistan Financial Management Information System], allowing for interbank transfers between customers, tax and customs payments to be made through any bank branch, and soon via mobile web applications. Government salary and contractor payments can now be made electronically and settled in real-time using our Real Time Gross Settlement system. Initial data indicates that payments through the ATS can grow from essentially zero in 2020 to more than 20 percent of [Gross Domestic Product] by end-2021, increasing the transparency of financial flows which were previously cash based.
All these transactions are on the liability side of the central bank’s balance sheet; reserves are not needed. If these connections remain in place, the level of AML/CFT surveillance over government-originated domestic payments is straightforward and should be enough to monitor potential transfers “to the Taliban.”
But, if government contractors need to buy inputs from abroad, reserves become absolutely necessary. In a scenario without access to international reserves, DAB would be forced to sell the few (cash) US dollars it has on hand in exchange for many afghanis, so that those businesses can acquire goods abroad with cash. This supply and demand imbalance causes a currency depreciation and a loss in purchasing power for the Afghan people and businesses. This is, in fact, what happened: the afghani suffered a massive devaluation immediately after the asset freeze. It has since recovered, thanks to an (apparently unenforced) ban on foreign currency, cash withdrawal limits at banks, and a paradoxical lack of supply of physical afghani bills, precisely because the central bank lacked access to its reserves and couldn’t pay the European currency printers and the shipping services required for the bills to be flown to Afghanistan.
The fact that the US government announcement claims that the private foundation will perform functions “to promote monetary and macroeconomic stability” including “paying for essential central banking services like SWIFT payments” confirms that it is a parallel structure to the central bank. This, in fact, deprives DAB of its core central banking functions.
The decision to block the Afghan central bank from accessing its reserves — reserves that ultimately belong to people and businesses — has directly and significantly contributed to the current humanitarian crisis that the head of the World Food Programme describes as “hell on earth.” As I have argued elsewhere, the facts are simple. The Biden administration has chosen to seize and privatize Afghanistan’s reserves; it does not contribute to restoring its core central banking functions to DAB. A working economy requires a functioning central bank, and a functioning central bank requires total access to its foreign reserves. To help end “hell on earth,” the Biden administration should release the full $7 billion directly to the central bank of Afghanistan.
The author thanks Dan Beeton, Michael Galant, Guillaume Long, Alex Main, Mark Weisbrot and Aileen Wu for invaluable comments, suggestions, and editorial work.
 Hawala is a millennium-old institution of network-based money transfers. A hawaladar is a Hawala agent and is labeled a “money service provider” by international organizations. The IMF’s 2021 report explains that DAB buys local currency to provide dollars to hawaladars via foreign exchange auctions.
 Despite the fact that the IMF data on Afghanistan’s balance of payments excludes estimates of incoming foreign exchange from the export of opiates, UNODC estimates $425 million for 2021. A 2002 IMF report reasoned that about half of those earnings would be held in cash or banked abroad — and thus do not make their way to the official reserves.
 The August 2020 Financial Transactions and Reports Analysis Center of Afghanistan list reports 13 banks, while the IMF’s 2021 paper reports 12 banks after a merger of two of the banks.
 The procurement and transport of new afghani notes from a Polish printing press have allegedly since been resolved.