President Biden’s executive order blocking more than $7 billion of Afghan foreign currency reserves held at the U.S. central bank left confusion and consternation in its wake. And no wonder: The administration was seeking to balance a complex set of legal, foreign policy and political considerations.

A line of people waiting outside a bank in Kabul, Afghanistan. August 29, 2021. (Jim Huylebroek/The New York Times)
A line of people waiting outside a bank in Kabul, Afghanistan. August 29, 2021. (Jim Huylebroek/The New York Times)

Released after months of delayed decision-making, the February 11 order came at a critical juncture for Afghanistan’s economic implosion and humanitarian catastrophe. It sought to make some of the reserves available again for Afghanistan — but not the Taliban — while the rest remains subject to federal lawsuits brought against the Taliban by U.S. victims of the 9/11 attacks. Here is a guide to what happened, what comes next and most importantly, what the U.S. government should do now.

What Was Done

Biden’s executive order was based on the declaration of a U.S. national security and foreign policy emergency stemming from the “widespread humanitarian crisis in Afghanistan … and the potential for a deepening economic collapse.” The executive order asserts that the preservation of property of Da Afghanistan Bank (Afghanistan’s central bank, or DAB) is “of the utmost importance to addressing this national emergency and the welfare of the people of Afghanistan.” DAB’s foreign exchange assets held by the New York Federal Reserve Bank, amounting to over $7 billion — frozen by the U.S. Treasury since August 15 — are to be blocked and transferred into a consolidated account, according to the executive order.

The administration will “seek to facilitate access to $3.5 billion of those assets for the benefit of the Afghan people and for Afghanistan’s future pending a judicial decision,” the White House stated.

The outcome of ongoing civil litigation by some of 9/11 victims’ families will determine what happens to the other half of the funds. One group of plaintiffs was awarded a summary judgment in 2012 of over $6 billion plus accumulated interest, against numerous disparate defendants — including the Taliban movement.  

The U.S. Department of Justice, in a February 11 statement of interest (SOI) to the court, argues that this award should be drastically reduced because the Terrorism Risk Insurance Act of 2002 (TRIA) “permits claimants to attach assets only to satisfy judgements for compensatory—rather than punitive—damages.” This would reduce the maximum size of any possible award by $4.7 billion, meaning the $3.5 billion-plus of reserves remaining subject to litigation would be more than sufficient to fully satisfy claims in cases currently before the court.

Reactions and Criticism

On the face of it, this seems like a heavy-handed exercise of U.S. power vis-à-vis a small country with a longer continuous history as an independent nation-state than most of its neighbors, one of the earliest members of the U.N., having joined in 1946. DAB itself has a longer history than most central banks, dating back to 1939 (barely a quarter-century after the U.S. Federal Reserve system’s founding).

Moreover, the optics of declaring a U.S. national emergency on account of the dire situation in Afghanistan and then leaving more than half the frozen DAB assets subject to potential award to U.S. citizens are troubling, especially since no Afghan nor the Taliban participated in planning or executing the 9/11 attacks. Understandably, criticism and outrage has been widespread.

Nevertheless, something had to be done — inaction could have led to implementation of court orders turning over all $7 billion-plus to 9/11 plaintiffs. Perhaps a different approach could have been taken. For example, the Justice Department could have weighed in on the merits of the court cases based on its own legal reasoning in the SOI. But there were no ideal or easy solutions, and the different legal interests and complicated application of various U.S. laws made for difficult choices and trade-offs.

What Happens Next

There is no way to predict the ultimate disposition of the money that remains subject to the court proceedings. If the plaintiffs fail, this portion of the reserves also could become available to benefit the Afghan people.

Whether the plaintiffs are actually entitled to the funds presents a Constitutional question, the SOI says. They have sued the Taliban and the reserves belong to the Afghan state, yet as the SOI notes, “The authority to recognize a foreign government rests exclusively with the President and is not a matter for judicial inquiry … [and] the United States has not yet made a decision as to whether to recognize the Taliban or any other entity as the Government of Afghanistan.” Moreover, according to the U.S. law cited in the SOI, “a regime not recognized as the government of a state is not entitled to property belonging to that state located in the United States.”

Summing up, the SOI argues that the plaintiffs “must establish a theory of ownership by the Taliban that would not require this Court — either expressly or by implication — to make its own determination as to the identity of Afghanistan’s government.” But it is hard to see how Taliban ownership of DAB’s foreign exchange reserves could be established without such a determination.

Using Reserves to Benefit the Afghan People

Turning to the other portion of the reserves, U.S. law requires that a representative of Afghanistan certified by the U.S. Secretary of State sign off on transferring these funds. The first question is who will be chosen to do this? Also, would that party be willing to sign off, and if so under what conditions?

Second, a senior administration official indicated the United States will establish “a third-party trust fund — which will administer the $3.5 billion … and ensure that that money is used for the benefit of the Afghan people.”

Such an instrument requires careful design and sound financial engineering to ensure its credibility, effectiveness, timeliness, and accountability — not least to the Afghan people. The governance, management, financial arrangements, implementation and oversight and monitoring of such a trust fund will be crucial. Trust funds for conflict-affected countries have a mixed record around the world, including in Afghanistan, and many have failed outright. A notable exception is the Afghanistan Reconstruction Trust Fund, which may provide useful lessons. The proposed trust fund for the reserves would, however, be different—simpler with only one source of funds but also challenging, for example, to ensure the U.S. government stays arms-length from the trust fund’s decision-making, and the accountability to a number of different stakeholders.

Third is the question of what the $3.5 billion will be used for. The temptation to allocate most of the money for humanitarian help is understandable but should be resisted. The foreign exchange reserves Afghanistan has built up are a precious national resource, providing a valuable cushion to use as any country’s foreign exchange reserves should be used — for balance of payments, exchange rate, monetary policy management and support for the banking system ($900 million of the reserves represent foreign exchange reserves of Afghan commercial banks deposited with DAB).

The availability of even half of the total reserves for these purposes would provide an opportunity to make a start toward stabilizing the economy and private sector.

Moreover, particularly if a significant portion of the $3.5 billion goes for humanitarian purposes, it will risk dampening the enthusiasm of aid donors and reducing the assistance they otherwise would have provided rather than increasing the total. This concern could be alleviated if the reserves are utilized for non-humanitarian purposes.

Whatever their uses, the reserves should not be dissipated quickly let alone in one fell swoop. Rather they should be utilized gradually and purposefully. 

A Broader Perspective

Looking beyond the issue of foreign exchange reserves, the U.S. declaration of a national emergency is a bold, unusual exercise of presidential authority explicitly for the purpose of supporting the people and economy of another country. The spirit of this emergency declaration should more broadly energize the full set of U.S. government policies and interventions on behalf of the Afghan people. A strong demonstration of actions and results, which do not need to wait for the legal and other issues surrounding the frozen reserves to be sorted out, would go a long way to reassure critics of the February 11 actions that they were taken for the benefit of Afghanistan, as stated eloquently in the executive order.

The further relaxation of U.S. sanctions on February 25, allowing many commercial transactions and clarifying that Afghan government institutions are not subject to the sanctions against the Taliban, Haqqani network, and associated individuals, is a promising step.

More should be done, for example, to 1) increase and effectively deliver much-needed aid; 2) take practical and realistic approaches toward anti-money-laundering provisions (such as differentiating between preventing substantial material support to the Taliban versus more general anti-money laundering concerns where flexibility may be needed); 3) ease the cash crunch within the country through responsibly printing additional Afghani banknotes and innovative use of digital payments; and 4) preserve the Afghan banking system, which entails some form of central bank functionality, and begin to stabilize the macroeconomy.

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