EXCLUSIVE US and Taliban make progress on Afghan reserves, but big gaps remain

KABUL/WASHINGTON, July 26 (Reuters) – US and Taliban officials have exchanged proposals for releasing billions of dollars from Afghan central bank reserves held abroad into a trust fund, three sources familiar with the talks said, giving an indication of progress offer efforts to alleviate the economic crisis in Afghanistan.

But significant differences between the sides remain, according to two sources, including the Taliban’s refusal to replace the bank’s top political officials, one of whom is under US sanctions, as well as several of the movement’s leaders.

Some experts said such a move would help restore confidence in the institution by shielding it from interference from the Islamist militant group, which seized power a year ago but is unrecognized by foreign governments.

The cash release might not solve all of Afghanistan’s financial woes, but it would bring relief to a country hit by a slump in foreign aid, a prolonged drought and an earthquake in June that killed 1,000 people. Millions of Afghans face a second winter without enough to eat.

While the Taliban do not oppose the concept of a trust fund, they do oppose a US proposal for third-party control of the fund, which would hold and pay out returned reserves, said a Taliban government source, who spoke on condition of anonymity.

The United States has been in talks with Switzerland and other parties about creating a mechanism that would include the trust fund, the disbursements of which would be decided with the help of an international body, according to a US source, who also declined to be named on the matter discuss.

One possible model could be the Afghanistan Reconstruction Trust Fund, a World Bank-managed fund created to bring foreign development aid donations to Kabul, the US source added.

“No agreement has been reached yet,” said Shah Mehrabi, an Afghan-American economics professor who sits on the governing council of the Afghan central bank.

The US State Department and the Federal Department of Foreign Affairs declined to comment; The Afghan central bank did not respond to requests for comment.

About $9 billion in reserves have been held outside Afghanistan, including $7 billion in the United States since the Taliban overran Kabul last August when US-led forces withdrew after 20 years of fighting the militants.

Foreign governments and human rights groups have accused the Taliban of human rights abuses, including extrajudicial killings, during and after the insurgency, and the movement has restricted women’s freedoms since regaining power.

The international community wants the group to improve its record on women’s and other rights before officially recognizing them.

The Taliban have promised to investigate alleged killings and say they are working to secure Afghans’ right to education and freedom of expression within the parameters of Islamic law.

“POSITIVE MOVEMENT”

At talks in Doha last month, the Taliban presented US officials with their response to the US proposal for an Afghan asset release mechanism, said Mehrabi, the Taliban official and senior diplomat.

Experts warned that the release of funds would bring only temporary relief and new revenue streams were needed to replace direct foreign aid, which funded 70 percent of the state budget before it was halted after the Taliban takeover.

However, the exchange of proposals was seen by some as a glimmer of hope that a system could be put in place that would allow Afghan central bank funds to be released while ensuring the Taliban had no access to them.

Negotiations on the assets and other issues stalled after Washington canceled meetings in Doha in March when the Taliban failed to fulfill their promise to open girls’ high schools. Continue reading

“It is an overall positive step” that the Taliban did not reject the US proposal, said Mehrabi, who added that he had not seen the Taliban’s counter-offer.

The Taliban official said the group is open to allowing a foreign ministry-appointed contractor to monitor the Afghan central bank’s compliance with anti-money laundering standards and that monitoring experts could travel to Afghanistan.

But the Taliban are concerned the US idea could create a parallel central bank structure, the official added, and are unwilling to sack senior political officials including Deputy Governor Noor Ahmad Agha, who is under US terror sanctions.

The US source denied that the proposed trust fund would amount to a parallel central bank.

FIRST INSTALLATION

Negotiations focused on an initial $3.5 billion release that US President Joe Biden ordered “for the benefit of the Afghan people” of $7 billion in Afghan reserves held by the Federal Reserve Bank of New York to be held.

The other $3.5 billion is being challenged in lawsuits against the Taliban over the September 11, 2001 attacks on the United States, but courts could decide to release those funds as well.

US special envoy for Afghanistan Tom West said in February that funds provided by Biden could potentially be used to recapitalize a reformed central bank and the crippled banking system.

The Afghan economy went into freefall after the Taliban takeover, with the central bank’s foreign reserves being frozen, Washington and other donors halting aid, and the United States halting hard currency supplies.

The banking sector virtually collapsed and the national currency, the Afghani, plummeted.

The World Bank says it has been strengthened, although shortages of dollars and afghanis persist. High unemployment and rising prices, fueled by drought, the COVID-19 pandemic and Russia’s invasion of Ukraine, exacerbated a humanitarian crisis.

Experts said releasing foreign funds to the central bank would help it contain the crisis.

“You need a central bank that regulates the value of the currency, regulates prices, ensures liquidity for imports… it’s not optional. People won’t eat,” said Graeme Smith, a senior adviser to the International Crisis Group.

Additional reporting by Michael Shields in Zurich; Editing by Mike Collett-White

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