By Praveen Menon and Jessica Donati
KABUL (Reuters) - The most pressing challenge awaiting Afghanistan's new leader may not be the worsening violence, fractured U.S. 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 U.S. 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 U.S. 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.
The last two men in the race to succeed Karzai have vowed to repair international ties, including signing the bilateral security agreement, but the final results of the second round will not emerge until late July at the earliest - over a month past the FATF deadline.
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 percent in 2012 to about 3.2 percent 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.
WESTERN BANKS PULL BACK
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.
Turkish banks have moved to close Afghan accounts and last month Chinese banks halted dollar transactions with most Afghan banks for reasons that remain unclear.
Chinese banks had been used as a gateway by Afghan banks to process dollar transactions with other parts of the world to pay for imports of everything from household goods to industrial machinery to university tuition.
The Afghan Chamber of Commerce and Industries says some commodity prices have risen 10-15 percent due to the imminent threat hanging over the banking system.
"The prices of goods and products will increase because traders will have to pass on the higher prices," said Afghan United Bank CEO Hedayatullah Yahya.
The impact could be greater still if traders fail to quickly negotiate deals to pay for orders in other currencies as shortages of some staples, like cooking oil, could hit as early as July, the start of the holy Muslim month of Ramadan.
"I used to route payments through banks in Afghanistan to import cooking oil from Turkey and Indonesia, but that is no longer possible because banks are not transferring my money," said one trader with imports of around $1 million per month.
How quickly the blacklist may be lifted under a new government is unclear.
"It's a million dollar question, " said Shehzad Haider, the former chief executive of Afghan United Bank, who is now based in Pakistan. "Both candidates will have to pass this amended anti-money laundering law at the earliest. They have no other choice."
(Additional reporting by Mirwais Harooni; Editing by Maria Golovnina and Jeremy Laurence)