KABUL: The most pressing challenge awaiting Afghanistan’s new leader may not be the worsening violence, fractured US relationship or declining aid, but an international blacklist hanging over the country’s banks.

At issue: Afghan banks’ failure to do enough to combat money laundering and terrorist financing.

The Financial Action Task Force (FATF), an international money laundering watchdog, says Afghanistan has failed to implement its recommendations and will be blacklisted unless laws that meet global norms are passed before it meets on June 23-27.

This could cut off its banks from the global financial system, disrupting up to $10 billion worth of annual imports by the time the next president takes power.

If the blacklist is enforced, all sectors of the aid-dependent economy will be put under further strain, market players say.

“The Afghan economy will be in crisis. It would seriously affect traders, government revenue and even employment,” said Afghan International Bank’s CEO, Khalil Sediq. The new laws are being rushed through parliament but even if both houses pass them in time, outgoing President Hamid Karzai seems likely to block their passage, according to banking executives who met him recently.

“The president does not want any changes to the law,” said one CEO who attended the closed-door meeting.

“He believes this threat of blacklisting is another ploy by the West and the US to put pressure on Afghanistan.”

A spokeswoman for Karzai’s office declined to provide details from the meeting but said the president’s decision would be made in the national interest.

Karzai’s final months in power have been marked by a growing hostility towards the United States, particularly his refusal to sign a security deal allowing US troops to stay in the country beyond a 2014 deadline for foreign combat troops to leave.

The drawdown of foreign forces coincides with an upsurge in insurgent attacks over the past 18 months.

Afghanistan’s nascent economy is already under massive stress, with domestic revenue down sharply this year, and international institutions forecasting GDP growth to fall from a high of about 14 per cent in 2012 to about 3.2pc in 2014.

At the same time, foreign donors, who fund the lion’s share of the budget, are pulling back amid concerns over rampant government corruption and growing insecurity as foreign combat forces pack their bags.

Many Western banks already refuse to deal with Afghanistan because of weak regulation, fearing they may inadvertently be embroiled in money laundering or terrorist financing.

Afghan banks route payments through Turkey or China instead, but this loophole has been gradually closing since FATF downgraded Afghanistan to “dark grey” in February.

Published in Dawn, June 12th, 2014