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The Afghani Currency Defies the Odds, Climbs Around 9% This Quarter

by Rahil M
0 comment

In an unexpected turn of events, Afghanistan’s currency, the afghani, has risen to the top of the global currency ranking this quarter, outperforming currencies from more economically stable nations.

This remarkable ascent comes as the country grapples with dire humanitarian challenges, international sanctions, and a deeply troubled political landscape.

Afghanistan, a nation plagued by poverty and one of the worst human rights records globally, has experienced a currency resurgence that has caught the attention of economists and experts worldwide. The afghani’s remarkable climb of approximately 9% this quarter outpaces other currencies, including the Colombian peso. Year-to-date, the afghani has surged by about 14%, ranking it third among global currencies, trailing only the Colombian peso and Sri Lankan rupee.

Several factors have contributed to this unexpected currency revival. The ruling Taliban regime, which took control of Afghanistan two years ago, has enforced strict measures to stabilize the afghani. These include prohibiting the use of foreign currencies, such as the US dollar and Pakistani rupee, in local transactions and imposing stringent restrictions on the movement of US dollars out of the country. Online trading has been declared illegal, with severe penalties for those who violate these rules, including imprisonment.

These currency controls, coupled with cash inflows and remittances, have bolstered the afghani’s value. One significant source of remittances is the United Nations, which has been sending planeloads of US dollars into Afghanistan to assist the impoverished population, with sums reaching as high as $40 million per shipment. These inflows, alongside other economic factors, have contributed to the currency’s surprising rise.

However, this currency revival masks the grim reality on the ground. Afghanistan remains largely cut off from the global financial system due to international sanctions. Unemployment is rampant, and two-thirds of households struggle to afford basic necessities. Inflation has spiralled into deflation, leaving the economy in a precarious state.

Despite these challenges, there are signs of cautious optimism regarding Afghanistan’s economic future. The World Bank forecasts that the country’s economy will cease contracting this year and could see growth between 2% to 3% until 2025. Nevertheless, there are substantial risks associated with a reduction in global aid as the Taliban escalates its repression of women.

Foreign exchange activities now largely occur through local money changers, known as “sarrafs,” who operate in markets and shops throughout Afghanistan. The Sarai Shahzada market in Kabul serves as the de facto financial hub of the country, facilitating daily transactions worth tens of millions of dollars.

Due to financial sanctions, remittances are primarily transferred via the Hawala money transfer system, a centuries-old practice widespread in regions including the Middle East. Hawala plays a crucial role in the financial landscape of Afghanistan, particularly for money changers.

The United Nations estimates that Afghanistan requires approximately $3.2 billion in aid this year, yet only a fraction of that amount has been deployed to date. Last year, the UN allocated nearly $4 billion as half of Afghanistan’s 41 million people faced life-threatening hunger.

The afghani’s strength has been a double-edged sword for the Taliban administration. On the one hand, it has helped mitigate inflation pressures for essential imports, such as oil, particularly as global crude prices approach $100 per barrel. On the other hand, Afghanistan’s cash-strapped Taliban government seeks investment in the country’s vast mineral resources, estimated to be worth up to $3 trillion, including lithium. Several countries, including China, the UK, and Turkey, have secured contracts to develop significant iron, ore, and gold mines. In addition, a deal with a Chinese company for oil extraction was inked in January.

China and Pakistan in May, agreed to extend the Belt and Road Initiative to Afghanistan, potentially attracting billions of dollars for infrastructure projects. Furthermore, a US business delegation co-hosted a conference in Kabul in September to attract global investors, indicating a thaw in relations.

While the afghani’s resurgence offers a glimmer of hope for Afghanistan’s economic stability, the humanitarian situation remains dire. The release of $3.5 billion in frozen foreign exchange reserves by the US was put on hold due to concerns about the central bank’s independence from the Taliban and deficiencies in anti-money laundering controls and counter-terrorism financing.

The United Nations has cautioned that a 30% decrease in foreign aid this year would reduce per capita income to $306 dollars, marking a drop from 2020 levels. The sweeping restrictions on women’s rights have also provoked internal dissent within the Taliban regime, with some members openly criticizing their leader, Haibatullah Akhundzada.

A UN report in October revealed that the Taliban committed over 1,600 human rights violations, including instances of torture, from January 2022 through the end of July. Additionally, the Islamic State has once again made Afghanistan a base for planning global attacks, according to a 2023 Pentagon assessment. The terrorist group has intensified its activities in Afghanistan, including the assassination of a deputy governor and a mosque bombing.

Despite the afghani’s surprising rise, political stability remains a decisive factor in determining the currency’s future trajectory. If the Taliban’s control over Afghanistan wanes, the currency could face renewed turmoil. For now, Afghanistan’s currency defies the odds, offering a temporary glimmer of economic hope amid the nation’s ongoing challenges.

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