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The Taliban takeover of Afghanistan impacts the economies of
that country's neighbors…Pakistan, Tajikistan, Iran, Turkmenistan,
Uzbekistan and India.
For most of these economies, the primary transmission of
economic stress will be a loss of exports to Afghanistan. The
Taliban lacks access to hard currency with which to pay for its
imports.
For Pakistan and Iran, there will also be an economic cost
associated with the influx of refugees.
Taliban control of Afghanistan also raises questions regarding
regional investment projects, including the TAPI gas export
pipeline, and security issues.
Our baseline expectations regarding the Taliban takeover of
Afghanistan are that the events will have the largest negative
economic impact on Pakistan and Tajikistan; a more moderate
negative influence on Iran and Uzbekistan; a potential slight
benefit to Turkmenistan; and a negligible effect on India.
The size and sophistication of the Afghan economy does not
suggest that the Taliban takeover in August 2021 will have a broad
international economic impact. However, the change will affect each
of the neighboring economies - Pakistan, Tajikistan, Iran,
Turkmenistan, Uzbekistan and India. The most easily measurable
impact will be on bilateral trade. However, the impact of refugees
and tangential security issues may weigh on neighboring countries'
public finances and operational capacity. Finally, there are other
considerations worth noting.
Foreign trade impact
Each of Afghanistan's neighbors ranks as a key source of
imports. However, the importance of the Afghan market in their own
total exports varies. In 2020, Iran, Turkmenistan and Uzbekistan
all exported between 6% and 7% of their total shipments to
Afghanistan - with energy a common, significant commodity for all
three. <span/>The Taliban is
keen to continue importing hydrocarbons from all three,
particularly gasoline and diesel fuel. Given the US troop
withdrawal, Afghanistan is freer to trade openly with Iran. Turkmen
and Uzbek natural gas and electricity exports are likely to be
uninterrupted moving forward.
However, continued imports will be dependent on Afghanistan's
access to hard currency, which may be severely constrained by the
US administration. As the Taliban's available hard currency
holdings are depleted, Afghanistan may no longer be able to pay for
these shipments. In any potential barter trade agreements,
Afghanistan has little to offer.
In Pakistan and Tajikistan, the share of total exports to
Afghanistan is smaller - both around 4%. Those two countries face
the same prospect of lost exports should the Taliban be unable to
pay for them. Though the impact on the economy as a whole may be
smaller, regional and sectoral impacts would occur; for Pakistan it
would be agricultural commodities, medicines, and construction
materials and for Tajikistan it would be primarily electricity and,
to a lesser extent, cement and aluminum. India's exports to
Afghanistan were a mere 0.3% of total exports in 2020.
The financial strain of refugees
A developing refugee crisis would have the heaviest social and
economic repercussions in Pakistan. The cost of processing,
housing, and supporting Afghan asylum seekers may be significant
for local governments, whose fiscal finances have been already
stretched by the COVID-19 pandemic. In July 2021 - before the
Taliban takeover - Pakistani government has estimated that hosting
an expected additional 700,000 "externally displaced Afghans" would
cost it USD2.2 billion over three years.
Refugee inflows to Iran have also been heavy. However, here we
believe the impact is likely to be short-lived. These Afghans
flowing into Iran are likely to seek asylum and integration in the
western world, particularly in Europe, via Turkey. Thus, migration
flows to Iran might be only transitory and have non-lasting effects
on the Iranian economic infrastructure. That is, unless Europe,
fearing the repeat of the 2015 Syrian migrant crisis, is reluctant
to take in a large number of refugees.
There are many fewer refugees currently in Tajikistan, though
any operation at all puts pressure on the country's already fragile
finances. A larger share of refugees entered India, with the
official number likely underrepresenting the total due to a complex
bureaucratic registration process. These inflows strain state-level
governments tasked with processing, accommodating, and supporting
them.
Reported EU plans to offer host countries large financial aid to
keep Afghan refugees within their territories will moderate the
impact on local public finances. However, with the actual amount of
refugees following the Taliban takeover likely to be significantly
higher than anticipated and last longer than likely the EU is
willing to fund, the refugee populations will put pressure on these
local finances the longer they linger. Other countries, including
Russia, have also offered aid to help offset costs to refugee host
countries.
Both Turkmenistan and Uzbekistan have closed their borders to
refugees and neither hosts any significant number of Afghanis.
Other economic impacts in the region
Pakistani political leaders have indicated that Islamabad is
apprehensive of recognizing the Taliban government unilaterally,
instead favoring a coordinated approach with other regional powers,
most likely China and Russia. This, however, would further
complicate Pakistan's already strained relations with the Western
allies, potentially threatening financial assistance and lending,
on which Pakistan has grown to heavily depend.
Tajikistan's long, mountainous, and poorly secured border with
Afghanistan is one of the major exit passageways for Afghanistan's
robust illicit narcotics production and trade. Given the Taliban's
likely difficulty in securing legitimate export earnings in the
face of widespread international sanctions, the narcotics trade
could be fanned as a source of alternative revenue. An uptick in
narcotics trade through Tajikistan would be disruptive to its
security and its political and economic stability.
Security issues also threaten Uzbekistan's current reform push.
Rising Islamic radicalism in the region would undermine the
country's burgeoning foreign investment profile and threaten the
hegemony of the Uzbek political outlook that facilitates the
reforms. While the Taliban has offered security assurances to the
Uzbek government, the Afghan government's ability to control allied
groups of foreign militants will critically impact Uzbek security,
and thus its investment environment.
Turkmenistan's overwhelming priority in its relationship with
the Taliban is the protection and/or potential advancement of the
Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline. Taliban
officials have publicly pledged to not only protect the TAPI
pipeline within Afghanistan but to actively develop this and other
regional connections. Unfortunately for the prospects of
jump-starting the TAPI project, other major impediments - the
project's financing, chief among them -- to its success remain
intact.
With contributions from Adad Ali, Kevjn Lim, and Alex
Melikshvili
Posted 27 October 2021 by Andrew Birch, Associate Director and
Hanna Luchnikava-Schorsch, Principal Economist, Asia Pacific, Global Economics, S&P Global Market Intelligence and
Jamil Naayem, Principal Economist, Economics & Country Risk, S&P Global Market Intelligence
The prism of country risk can make a unique and valuable contribution to our understanding of the ever-growing cybe… https://t.co/FTvIoLpBW6
May 23
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