Exchange Rate Mechanism in Afghanistan: Causes for Inflation

By F. Maria Bonaventure

The afghani is depreciating against the US dollar. It has dropped its strengthened value – by the central bank intervention – again and has crossed 100 against the US dollar. Although the political instability envisaged after the assumption of power by the ruling group, was supposed to erode the value of afghani, there are alternative aspects that strengthened the depreciation of the home currency against the US dollar.

Factors That Corroded the Afghani Value

Many factors may be involved in the devaluation of Afghanistan’s currency. These factors include sudden discontinuation of banking services and bullion market for a fortnight after Kabul fell on Aug 15, arrested inflow of foreign funds, freezing of assets by US and aid by donor countries, flight of foreign currencies to other countries, fear of political instability, migration of people and prominent individuals to other countries, and loss of faith on the ‘home currency.’

On Aug 15th, when the news spread all over that Ashraf Ghani has left Kabul and the opposing forces have taken over the presidential palace by noon, all chaos broke loose and the entire administrative staffs of banks fled the scene fearing wrath of the customers who could not withdraw the balances from their accounts and as already all the ATMs have become to a deadlock. The US dollar was not available, as all the customers demanded US dollars in particular. Another haven, the yellow metal, was not either available as the bullion markets also remained close.

The decrease in the value of afghani was gradual. Before Afghanistan fell, the afghani lost value because of the strong demand for US dollars through banking channels. The US dollar became deficient and was unavailable in provinces. They reported that in a closed meeting with the commercial bank’s CEOs, Da Afghanistan Bank (DAB) showed their weakness to make US dollars available in the provinces. DAB had also recommended the banks to make their own logistic arrangements for their foreign currency requirements in provinces by the first week of August, much before the opposing group assumed power.

On August 12, the US dollar reached an intraday high of 90 afghanis, which came back to 80 afghanis with DAB intervention. DAB brought in new features like currency SWAP and acquisition of Gold from commercial banks which were experiencing a huge withdrawal of their deposits. In order to assimilate hope and trust among the citizens and government employees, DAB decided to increase the sanction and disbursal of home loans, which was not taking place by providing interest subsidies.
Deposits were slowly and regularly withdrawn from bank accounts and converted into dollars throughout Afghanistan. DAB started rationing of US dollar supply to commercial banks in Kabul. Banks imposed restrictions on currency conversions and withdrawals from dollar accounts. In the fall of Kabul, the northbound journey of US dollar vis-à-vis afghani began.

What Transpired in Pakistan?

When Imran Khan assumed office in neighboring Pakistan, the Pakistani rupee (PKR) lost its value by 100%, touching a record low of 143 against the US dollar even when Khan was celebrating his 100 days in office. No reversal could be seen and even now the value of PKR is hovering around 177 against the US dollar. This happened despite the support of their international friends like the US, China, and Saudi Arabia. We can mention here that Saudi Arabia – the most important member of the Organisation of Islamic Cooperation (OIC) – recently lent $3 billion in cash to Pakistan to stabilize its economy.

As Pakistan’s experience shows, it will be tough to bring the depreciated value back under control if prompt; it does not take corrective action at once. While international recognition is important, for the present government, revival of the collapsing economy must also be a priority.

How to Control the Free Fall of the Afghani Value?

When the Taliban were in power in the 1990s, there was a common fear among Afghanistan’s citizens of committing crimes against humanity and fellow Afghans. The group is now under intense pressure to be recognized by the international community. The UN had deferred the proposal of a seat for them along with Myanmar. Hence, they cannot introduce severe punishments for the fear of losing international recognition and with their immediate requirement for unfreezing of assets by the US. The current regime also needs humanitarian help from international institutions and Donor countries. Both the European Union (EU) and the Organization for Islamic Cooperation (OIC) are looking for ways to extend humanitarian aid to the people of Afghanistan. The EU had also pledged 1 billion euros in help to the suffering people of Afghanistan.

Now it will be the prime responsibility of Da Afghanistan Bank to arrest the free-fall of the value of afghani and control the inflation. We discuss some ways in which DAB can enforce the same below.
Everyone knows that in Afghanistan, three foreign currencies, the US dollar, euros, and GBP — are widely traded alongside Afghanistan’s domestic currency. We must not make the foreign currencies available to the common people. All payments for any type of transaction – sales or purchases made within Afghanistan – must be only in afghani. All the payments by traders and bankers to service providers and landlords for services within Afghanistan should be dispatched only in Afghanistan’s domestic currency.

Contracts concluded within Afghanistan must be in the afghani currency. We must make the salary payments for locals only in afghani. These steps will increase the confidence of the common citizens in afghani.

If we introduce the above measures in genuine spirit, afghani will be the only currency found in circulation and available for circulation within Afghanistan. All foreign currencies should be with commercial banks only and preferably in Nostro accounts of the banks. We must encourage exporters to open dedicated foreign currency accounts for receipt of export payments and on receipt of the inward remittance in foreign currency, they must convert it into afghani, if there is no immediate foreign currency requirement by the Exporter. If the exporter needs foreign currency for procurement of raw materials, we may permit the exporter to use the foreign currency for payments only.
All importers must have their funds balance only in domestic currency. We may permit the importers to make payments for their imports in foreign currency by purchasing the foreign currency from the commercial bank with which they maintain accounts. The outflow of foreign currency must be strictly monitored and must be subject to DAB control. Periodical statements must be submitted to DAB for scrutiny. DAB must first realize that foreign currencies are commodities of much importance and are scarce.

We must curtail the currency auction which is in vogue at present. This may arrest the ‘Sarafi’ business, but in the long run will be beneficial for the economy of Afghanistan. This will improve the foreign currency reserves with the central bank, which may be another factor in strengthening the value of the afghani.

The Central Bank will be the custodian of foreign reserves and it must make all the government transactions in foreign currencies only through DAB. Although an inflation-free afghani would be beneficial for exports and detrimental for imports, it should reach the average for a better economy and stabilization of the afghani. If all these steps are taken fruitfully, it may help to stabilize the domestic currency, and the value of afghani against all foreign currencies will be dynamically determined by the Central Bank of Afghanistan.

Maria Bonaventure has served as Chief Operating Officer (COO) with Azizi Bank, Afghan United Bank (AUB) and Maiwand Bank. He has also served as senior international advisor with Exchanger Zone – Aryapool group.

The post Exchange Rate Mechanism in Afghanistan: Causes for Inflation appeared first on Hasht-e Subh Daily.

Source: Hasht-e Subh Daily

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