Exchange Rate Mechanism in Afghanistan: How It Affects Inflation?

The value of the afghani against the dollar has dropped lower than ever as one dollar is exchanged for 123 afghanis on Monday, reported

On Da Afghanistan Bank (intervention on Tuesday, afghani stabilized at 114 against .

While the USD – afghani rate is reported as 123 yesterday (14/12/2021) in Sarai Shahzada, Kabul, the value of afghani vis-a-vis USD is 104 as per, an internationally approved money converter. Reports also indicate that there had been a free outflow of USD to the neighboring countries through “Hawala” and “unauthorized modes by road” over which the Central Bank of Afghanistan had no control which caused the scarcity of USD in Afghanistan as the USD wiped away from the country.

Now, we will analyze the issues related to foreign exchange in depth.

What is foreign exchange?

Foreign Exchange includes any foreign currency that is in circulation within the country and will also include all claims and bills payable abroad through bank transfers and remittances and any funds or bills held in foreign currency accounts by banks with their correspondent banks located abroad.

Thus, exchange rate denotes the price or the value at which one currency is exchanged for another currency. The exchange rate is dynamic , depending on various factors.

The major players in currency markets are The central bank of any country is the custodian of the foreign exchange reserves, playing the prominent role in the exchange rate mechanism of any country by purchasing or selling currencies. The commercial banks also play a major role in the currency market as it is only through these commercial banks, corporates and individual customers, foreign exchange transactions and transfers by the way of remittances are entered into. In a country like Afghanistan, the unorganized market, Sarafs, also play a major role in transfer of funds both within and outside the country.

The basic factors determining exchange rates in a country are

Exchange rate is also determined by technical reasons like government controls which may lead to violent exchange rates variation. It may be seen in the case of Afghanistan that the value of USD has moved from 90 afghanis to 100 afghanis and above on date. This is mainly due to the flight of capital from lower yielding currencies to higher yielding currencies.

Another major factor that causes major variation in the exchange rate is due to “Speculation”. In anticipation of devaluation, the currency dealers will sell afghani and buy USD for buying back the USD at a cheaper rate at a later date. It could be presumed in the case of Afghanistan, that the value of USD is being affected by the negative economic factors “speculation and hoarding.”

How the value of USD affects the price rise of commodities?

Traders in Afghanistan import the basic necessaries of life, like food commodities and fuel from neighboring countries by settling in USD, the major “convertible currency.” As the Traders are purchasing the goods in USD, the price that the Traders fix for them at the time of sales in Afghanistan is exorbitantly high, as the local sales are made in afghani, the value of which has greatly depreciated against USD.

Another factor, causing the price rise of essential commodities, might be due to

Ways suggested for controlling the exchange rate

Under the earlier regime, DAB with the support of Financial Transactions and Reports Analysis Center of Afghanistan (FinTRACA) introduced various measures to control money changers. By controlling the money changers (Sarafs), DAB could maintain the exchange rate under control within Afghanistan. Now it is presumable that the Taliban has shifted their stand towards the Sarafs. It was visible from the way DAB officials called for a meeting of the money changers union to bring the highly depreciated value of afghani under control which has yielded an adverse effect.

Hence the correct approach for the Taliban government could be to curtail the circulation of the three foreign currencies (USD, GBP & Euro). The inward remittances received in foreign currency must be maintained in the form of reserves with DAB. Commercial banks must be permitted to maintain their foreign currency accounts only in their nostro accounts – be it with DAB or other correspondent banks. Afghani should be the only currency available for circulation with the general public and traders.

Importers must be permitted to make their remittances only through approved banking channels by submitting proper supporting documents.

For this purpose, DAB must approve and issue licenses to commercial banks to perform the role of Authorized Dealers (AD). Commercial banks with poor CAMEL rating of 4 and 5 should be desisted from performing foreign exchange transactions and participating in currency auctions. As all commercial banks render the services of Western Union and Money Gram, banks with poor CAMEL rating may be permitted to transact only purchase transactions. Sale transactions of foreign currency must not be permitted to them. Stringent action – be it financial or legal – must be initiated against the violators of the prescribed norms.

As forex markets function globally from Monday to Friday, commercial banks of Afghanistan must be permitted to carry out forex transactions with restrictions only to serve the local purposes. Dummy deals or transactions must not be permitted to be carried out on Saturdays and Sundays.

Licenses may be issued to Money Changers to deal in foreign currency who meet the approved norms of FinTRACA in connivance with Financial Action Task Force (FATF). DAB may take the guidance and advice of earlier director general who have adequate experience and exposure towards this. Here it must be noted that foreign exchange operations undertaken without any boundaries or controls will have an adverse effect on the movement of the exchange rates and the value of the currency in a violent manner. Strict guidelines must be brought in to curb the currency transactions undertaken by money changers.

If the Taliban government could not implement the above-mentioned methods to control the exchange rate and thus, the price rise of commodities, the final option left in the hands of the Finance Ministry will be only to opt for the unscientific and primitive “Fixed rate”. This fixed rate will be set by DAB for the “Foreign currencies” on a daily basis and therefore, could curb the volatility in the exchange rate mechanism.

By adapting to the above-mentioned methods, DAB may be in a position to play a major role in deciding the exchange rate and curtail the spiraling inflation in Afghanistan.

The post Exchange Rate Mechanism in Afghanistan: How It Affects Inflation? appeared first on Hasht-e Subh Daily.

Source: Hasht-e Subh Daily

Related Articles

Back to top button