Exclusive: US and Taliban make progress on Afghan reserves, but big gaps remain – Reuters

KABUL/WASHINGTON, July 26 (Reuters) - U.S. and Taliban officials have exchanged proposals for the release of billions of dollars from Afghan central bank reserves held abroad into a trust fund, three sources familiar with the talks said, offering a hint of progress in efforts to ease Afghanistan's economic crisis.

Significant differences between the sides remain, however, according to two of the sources, including the Taliban's refusal to replace the bank's top political appointees, one of whom is under U.S. sanctions as are several of the movement's leaders.

Some experts said such a move would help restore confidence in the institution by insulating it from interference by the Islamist militant group that seized power a year ago but which foreign governments do not recognise.

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Freeing up cash may not solve all of Afghanistan's financial troubles, but it would provide relief for a country hit by a slump in foreign aid, persistent drought and an earthquake in June that killed 1,000 people. Millions of Afghans are facing a second winter without enough to eat.

While the Taliban do not reject the concept of a trust fund, they oppose a U.S. proposal for third-party control of the fund that would hold and disburse 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 on the creation of a mechanism that would include the trust fund, disbursements from which would be decided with the help of an international board, according to a U.S. source who also declined to be named in order to discuss the matter.

A possible model could be the Afghanistan Reconstruction Trust Fund, a World Bank-administered fund created to get donations of foreign development assistance to Kabul, the U.S. source added.

"No agreement has been reached yet," said Shah Mehrabi, an Afghan-American economics professor who is on the Afghan central bank's supreme council.

The U.S. State Department and Switzerland's Federal Department of Foreign Affairs declined to comment. The Afghan central bank did not respond to requests for comment.

U.S. Special Representative for Afghanistan Thomas West, speaking at an Afghanistan-focused conference in Uzbekistan on Tuesday, welcomed the dialogue.

"We have made it clear that a future recapitalisation of the (Afghanistan) central bank and the Afghan financial system is possible provided that reasonable and serious steps are taken to professionalise the central bank, to enhance its AML/CFT (anti-money laundering and counter-terrorist financing) architecture and its independence," he said.

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

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

The international community wants the group to improve its record on women's and other rights before officially recognising it.

The Taliban have promised to investigate alleged killings and say they are working to secure Afghans' rights to education and free speech within the parameters of Islamic law.

At talks in Doha last month, the Taliban submitted to U.S. officials their response to the U.S. proposal for a mechanism to free up Afghan assets, said Mehrabi, the Taliban official and a senior diplomat.

Experts cautioned that releasing funds would bring only temporary relief and new revenue streams were needed to replace direct foreign aid that financed 70 percent of the government budget before it was halted after the Taliban takeover.

But the exchange of proposals was seen by some as a glimmer of hope that a system can be created that allows for the release of Afghan central bank funds while ensuring they are not accessed by the Taliban.

Negotiations on the assets and other issues faltered after Washington cancelled meetings in Doha in March when the Taliban reneged on their promise to open girls' high schools. read more

"It is a positive move overall," that the Taliban did not reject the U.S. proposal, said Mehrabi, who added that he had not seen the Taliban counter-offer.

The Taliban official said the group was open to allowing a State Department-appointed contractor to monitor Afghanistan's central bank compliance with anti-money laundering standards, and that monitoring experts would be able to go to Afghanistan.

But the Taliban were concerned the U.S. idea could create a parallel central banking structure, the official added, and were not prepared to remove top political appointees including deputy governor Noor Ahmad Agha, who is under U.S. terrorism sanctions.

The U.S. source denied the proposed trust fund would amount to a parallel central bank.

Negotiations have focused on an initial release of $3.5 billion that U.S. President Joe Biden ordered set aside "for the benefit of the Afghan people" out of $7 billion in Afghan reserves held by the Federal Reserve Bank of New York.

The other $3.5 billion is being contested in lawsuits against the Taliban stemming from the Sept. 11, 2001, attacks on the United States, but courts could decide to release those funds too.

West in February said funds set aside by Biden potentially could be used to recapitalize a reformed central bank and the paralyzed banking system.

Afghanistan's economy went into freefall after the Taliban takeover, with the central bank's foreign-held reserves frozen, Washington and other donors halting aid and the United States ending deliveries of hard currency.

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

The World Bank says it has strengthened, although shortages of dollars and Afghanis persist. High unemployment and soaring prices, fuelled by drought, the COVID-19 pandemic and Russia's invasion of Ukraine, worsened the humanitarian crisis.

Experts said releasing foreign-held funds to the central bank would help it stem the crisis.

"You need a central bank regulating the value of the currency, regulating prices, ensuring liquidity for imports," said Graeme Smith, a senior consultant for the International Crisis Group. "This is not optional (or) people won't eat."

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Reporting by Charlotte Greenfield and Jonathan Landay; Additional reporting by Michael Shields in Zurich and Mukhammadsharif Mamatkulov in Tashkent; Editing by Mike Collett-White and David Holmes

Our Standards: The Thomson Reuters Trust Principles.

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Exclusive: US and Taliban make progress on Afghan reserves, but big gaps remain - Reuters