Will China save the Afghan economy?

Afghanistan’s economy is collapsing. The Taliban’s forceful seizure of power led to a curtailment of almost all foreign aid, a devastating development for a nation overwhelmingly dependent on international assistance. Widespread drought, pervasive corruption, the perennially inadequate use of the country’s human capital, and a population largely unvaccinated against COVID-19 have exacerbated this longstanding problem of foreign financial dependence. The novel economic challenges that have arisen since the Taliban’s takeover compounded these long-time difficulties. These have included massive capital flight, a brain drain among younger technocrats, and the widespread application of international sanctions.

Western governments have agreed to provide humanitarian and other emergency aid to the Afghan population, but only if these funds stay out of the Taliban’s hands. The Taliban control of the country’s major institutions — including the armed forces and the secondary and higher education systems — has meant that the sanctions originally adopted to punish and weaken the Taliban and their leading members, are now adversely affecting the general population. Moreover, the Taliban need money under their control to govern effectively and satisfy the country’s key stakeholders. The group hopes that China may help fill this gap through investment, trade, loans, and other revenue-producing activities, but substantial obstacles lie along this path.

Economic breakdown

Since wresting control from the U.S.-backed government in Kabul in August 2021, Taliban leaders have faced tremendous economic challenges. Some of these have been perennial problems burdening all recent Afghan governments, while others have emerged or become exacerbated after the extremist group seized power and proclaimed a reconstructed Islamic Emirate of Afghanistan.

For the past two decades, the Afghan economy has become dependent on billions of dollars of foreign governmental and non-governmental aid. The Afghan government has needed external funds to cover almost all its major expenditures. Previous Afghan leaders had hoped that foreign trade and investment would decrease their reliance on foreign aid, but these expectations never panned out. Per capita GDP has stayed low while poverty has remained pervasive. Water shortages, food insecurity, and fuel and electricity shortfalls have persisted. Afghanistan’s strained public health system has proven unable to cope with COVID and other natural and war-related challenges. The Taliban insurgency has generated millions of foreign refugees and internally displaced people. The violence, along with Afghanistan’s poor infrastructure and landlocked location, have also hindered foreign investment, tourism, and transportation, notwithstanding hopes to exploit the country’s mineral resources and potential pivotal location athwart possible east-west and north-south transit corridors. Conversely, narcotics trafficking based on Afghan opium and its derivatives, such as morphine and heroin, have flourished. Cannabis and methamphetamines have also become lucrative exports.

The Taliban’s seizure of power has created additional challenges. The group and its leading members are under numerous international sanctions that hinder their access to international travel, finances, and contacts. The Taliban’s newly proclaimed emirate, some of whose leading figures populate terrorist watch lists, has yet to be recognized by Western countries. Even Russia and China have withheld recognition pending evidence that the Taliban will prevent external terrorism, curtail narcotics exports, and meet other criteria. The U.S. Treasury has denied the new regime access to Afghanistan’s central bank reserves, which are held in U.S. financial institutions, primarily in the Federal Reserve Bank of New York. Under Western pressure, the World Bank and the International Monetary Fund (IMF) have also halted monetary disbursements to the Afghan government. The resulting liquidity crisis has made it difficult for Afghanistan’s public and non-governmental entities to sustain essential public services. Even if formally employed, many of their workers have not received wages for months. Food and fuel prices have also soared. In September, the UN Development Programme (UNDP) forecast that as much as 97% of the population could fall into poverty next year. In October, the Food and Agriculture Organization and World Food Programme warned that more than half the Afghan population already faced acute hunger.

U.N. Secretary-General Antonio Guterres, expressing alarm that “the economy is breaking down,” called on the Taliban to allow international financial institutions to inject cash through the provision of direct aid to recipients. Many highly skilled Afghans have already fled the country. Partly to limit the influx of Afghan refugees, but mostly due to fears that the Taliban victory would facilitate regional terrorism, countries bordering Afghanistan have tightened their border and customs controls, further isolating the Afghan economy. Western aid donors have focused on mitigating the immediate humanitarian crisis through providing emergency assistance to those suffering from food insecurity. They have sought to sustain targeted monetary flows by exempting from sanctions those international organizations, such as U.N. agencies and NGOs like the International Red Cross, that are meeting basic human needs. In mid-October, the UNDP established an emergency program called ABADEI and a special trust fund to support community-level activities that complement humanitarian emergency projects. Through the new initiatives, member governments could release frozen funds directly to Afghan families, bypassing Taliban-controlled structures. The recipients can include small and micro businesses under threat of collapse, cash payments for workers on small infrastructure and natural disaster mitigation projects, and payments to sustain the basic income of vulnerable Afghans such as the elderly and those with disabilities. On Oct. 20, Germany made the first contribution to the new U.N. Special Trust Fund for Afghanistan, pledging some 50 million euros.

Western leaders have been wary of giving money directly to the Taliban for fear of rewarding their illegal seizure of power and non-inclusive treatment of women and religious minorities. They also have eschewed measures that might strengthen the Taliban’s authority. Western governments have suspended all development assistance until Taliban policies that currently violate global norms meet certain benchmarks, such as equal treatment of women and religious minorities. Foreign donors need female employees to ensure that assistance providers can access all communities; according to some local cultural norms, only women are permitted to directly engage with women and girls.

Whatever benign statements Taliban leaders make in public, their policies are not meeting these benchmarks. In order to receive more Western economic aid, the Taliban would need to adopt a more inclusive government, a less draconian justice system, and other measures that contradict their core ideology. Accepting the West’s demands could also threaten the Taliban’s internal cohesiveness since their main militant rival, the local branch of the so-called Islamic State, known as Islamic State-Khorasan Province (ISKP), has competed for Afghans’ allegiance, including attracting Taliban defectors, by offering a more radical ideology. To gain a more reliable revenue stream while minimizing factional strife, the Taliban are also looking to non-Western countries, with more flexible criteria, for aid. When Chinese, Russian, Iranian, and Pakistani representatives met in Moscow on Oct. 19, they urged the entire international community to render generous humanitarian and economic assistance to Afghanistan — "with the understanding that the core burden of post-conflict economic and financial reconstruction and development of Afghanistan must be shouldered by troop-based actors which were in the country for the past 20 years.” Since neither Russia, Pakistan, nor Iran have historically been generous aid providers, China naturally emerges as the Taliban’s preferred potential foreign donor.

China to the rescue?

In principle, a natural economic partnership exists between a financially impoverished but resource-rich Afghanistan and a resource-hungry but increasingly wealthy China. Not only are these deposits situated near to China, but their entry through its western provinces would promote more balanced geographic development within China. Yet, China’s economic ties with Afghanistan have lagged substantially behind those it enjoys with many other Eurasian countries.

Bilateral commerce has mainly consisted of China’s importing Afghan raw materials while exporting consumer goods. After the Afghan government opened its natural resource sectors to foreign investment in 2007, several Chinese companies negotiated major contracts, including some for exploring and exploiting local hydrocarbon deposits. The most prominent project was the purchase of a controlling stake in the large, multibillion-dollar Mes Aynak copper mine in Logar Province by the Metallurgical Corporation of China. Afghan and Chinese officials hoped the success of the project, which was guarded by NATO troops, would spur additional foreign investment. But corruption, permit problems, underdeveloped Afghan domestic legislation, and acute local security threats (which included the killing or kidnapping of some local Chinese workers) kept these projects mothballed for years.

Afghanistan has formally been a member of Beijing’s Belt and Road Initiative (BRI). Yet, in practice, the main railways, highways, and energy infrastructure built in Eurasia with Chinese investment have bypassed Afghanistan to traverse more stable routes. Chinese businesses saw Afghanistan as a security risk rather than an economic opportunity. They were able to find cheaper and more reliable investment opportunities and natural resource supplies elsewhere. China and Afghanistan physically connect through the Wakhan Corridor, a narrow strip of rugged land running from northeast Afghanistan to western Xinjiang. But Chinese authorities have kept this conduit closed to most commercial traffic, partly to keep Afghan-based terrorists and drug smugglers from entering China through the corridor.

From 2001 to 2021, between the years of Taliban rule, the Chinese government provided modest development aid to Afghanistan. Combined with loan forgiveness and customs-duty waivers, the assistance funded the construction of some hospitals, schools, and several high-profile reconstruction projects such as an irrigation complex at Parwan and a conference hall in Kabul’s presidential palace. Though the precise amounts and projects supported by China over the past two decades remain obscure due to a lack of transparency, these sums clearly lagged considerably behind the billions of dollars donated to Afghan institutions by the United States, European governments, and even India. In other words, since the Chinese aid totals were substantially smaller than those provided by Western governments, the Chinese could free ride on Western economic (and security) assistance. Just as Chinese security benefitted from NATO’s military exertions in Afghanistan without contributing to them, so Chinese companies obtained effectively subsidized trade and investment opportunities in Afghanistan thanks to other countries’ support.

Chinese policy makers had wanted to see a negotiated peace settlement among the Taliban and other Afghan actors, supported by other states that would agree to preserve Afghanistan’s neutrality and collectively contribute to the country’s political development and economic reconstruction. This scenario would have established a more favorable environment for constraining regional terrorism and narcotics trafficking while facilitating Chinese investment and the construction of infrastructure connecting Afghanistan with China and the rest of Eurasia. Beijing has nonetheless accepted that the Taliban have achieved a decisive military conquest and will likely remain in power for years. The experience of Iran, North Korea, and Venezuela demonstrates that regimes can survive for years even when their people are under tremendous international economic pressure.

Chinese officials today are therefore considering how to pursue their economic and security objectives regarding Afghanistan in an environment of reduced Western financial and military assistance, with a Taliban-led regime that lacks the cadre of professionals found in recent Afghan governments. Meanwhile, relations between Beijing and Washington have worsened, reducing the prospects and value of potential Sino-American cooperation regarding Afghanistan. Furthermore, China’s economic challenges, the COVID pandemic, and other setbacks have deprived the BRI of momentum, decreasing the prospects that Afghanistan could play a major role in it.

Chinese firms presumably would still like the Taliban to assure their access to Afghanistan’s natural resources and the economic infrastructure needed to bring these resources to China. For such Chinese investments to occur, Beijing demands assurances that the Taliban will not target Chinese workers or investments in Afghanistan or sponsor Uyghur militants or other foreign terrorism movements. According to the Chinese government, when he met with Chinese Foreign Minister Wang Yi in July, Abdul Ghani Baradar, the head of the Taliban Political Commission, pledged that, “The Afghan Taliban will never allow any force to use the Afghan territory to engage in acts detrimental to China.” Indeed, the Uyghur cause has never been central to the Taliban’s beliefs and support structures. Though the Taliban are indebted to the international jihadist movement for past financial and other operational assistance, their closest allies have been militants affiliated with al-Qaeda and the Pakistani security services. Though some Uyghurs have fought with the Taliban, the largest and most formidable Uyghur combat units have fought with the various anti-Assad militia groups in Syria. Sacrificing the Uyghurs to have good ties with Beijing would be as easy for the Taliban as for many other regimes.

At this point, Beijing’s best hope is that “the international community” will collectively support Afghanistan’s economic recovery. Like their Russian counterparts, Chinese officials have called on Western governments to release the frozen funds held in their banks and provide substantial development and humanitarian aid to Afghans. The more aid other governments supply to Afghan recipients, the fewer expenditures China will need to make for these purposes. Conversely, the Chinese government will rely mostly on Pakistan, Russia, and the prospects of Chinese economic and diplomatic ties with the Taliban government to advance its security goals of denying Taliban support to anti-Chinese militants.

In the near term, China’s most significant interests in Afghanistan are primarily related to security. Above all, Beijing is concerned with how adverse developments in Afghanistan could promote instability in the neighboring countries of Central Asia, Pakistan, and China itself, especially its western province of Xinjiang. For the next few years, these security objectives, rather than any illusive and relatively modest economic gains from investment and trade, will primarily determine China’s future economic engagement with the Taliban government.

Richard Weitz is senior fellow and director of the Center for Political-Military Analysis at Hudson Institute. The views expressed in this piece are his own. 

Photo by Oliver Weiken/picture alliance via Getty Images