Afghani, the currency of a pariah nation called Afghanistan, is trading at 77 Afghani to a U.S. dollar. In comparison, Russian Ruble has depreciated to 99 to the greenback. This means the Afghani are more valuable than Ruble. Not bad for the ruling Taliban, who seized power about two years ago after the United States abruptly and hastily withdrew from the war in Afghanistan.
At its worst, the currency saw a plunge of almost 30% at the exchange rate – dropping to 124.2 against the U.S. dollar on August 16, 2021. The economy immediately collapsed after the U.S. pulled out. To make matters worse, the Biden administration had signed an executive order to freeze nearly US$9.5 billion in assets belonging to the Afghan central bank.
But the Afghani isn’t just performing better than the Ruble, but beats the U.S. dollar, Euro and Pound. Heck, it has emerged as the best performing currency in the September quarter – climbing 9% against the dollar. In fact, on a yearly basis, it has appreciated a whopping 14%. The best part is, unlike Russia, the Taliban did not even peg its currency against gold to strengthen the currency.
The World Bank has even projected the economy of Afghanistan to stop contracting this year, and starting to post growth of 2% to 3% until 2025. So, what had the Taliban done to make the country’s currency exchange rate skyrockets? Since it retook Kabul, the government has imposed currency controls – banning the use of the U.S. dollar and Pakistani rupee.
It has also made online trading illegal in an attempt to prop up the Afghani, and threatened those who violate the rules with imprisonment. More importantly, planeloads of U.S. dollar – up to US$40 million – arrived almost weekly from the United Nations to support the poor under humanitarian aid for at least 18 months since the end of American occupation in August 2021.
Essentially, the U.N. has assisted with US$5.8 billion in the form of aid and development. The currency controls and cash inflows have helped the Afghani appreciates. Foreign exchange is now traded largely via money changers – known as “sarrafs” – in open market in Kabul, the financial hub of Afghanistan. This is where tens of millions of dollars change hands every day.
The strict capital controls mean people can’t exchange Afghani for Dollar, creating high demand for the local currency. The aid money or dollar is used to support the currency, as well as to help make importing foodstuffs, such as wheat, more affordable for ordinary Afghans. While the strong currency saves life, including keeping inflation low, the future of Afghanistan is bleak.
Unemployment is rampant, where two-thirds of households struggle to afford basic items and inflation has turned into deflation. Typically, deflation is a sign of a weakening economy. Economists fear deflation because falling prices lead to lower consumer spending, which is a major component of economic growth. It could lead to a recession or even depression.
Despite Afghani being the currency champion, it is still among “the poorest two or three countries in the world”. According to the United Nations, approximately 18 million individuals – nearly half of the Afghan population – required assistance in 2021 and 2022. Thanks to sanctions that cut off the country from the global financial system, businesses have found it difficult to operate – contributing to high unemployment.
Investors who used to do business in Afghanistan are reluctant to send their money into the country again, terrifying of the US-led sanctions and the difficulties involved in international transfers. The sudden halt in international development funding “immediately led to a 40% contraction in the country’s economy”. International aid alone accounted for 45% of the country’s GDP and financed 75% of its budget.
Theoretically, the Taliban regime can peg the Afghani on par with the greenback. However, it would immediately collapse once the supply of U.S. dollars comes to a screeching halt. For example, if the human rights continue to deteriorate or the Taliban is found to sponsor terror attacks that harm American interests, the humanitarian aid could suddenly stop.
Already, the severe restrictions on women have caused discontent even within the Taliban administration, which could lead to political instability. Some members have openly criticized their supreme leader, Haibatullah Akhundzada, whose orders included prohibiting women from education, work, visiting public parks, using gyms, and traveling long distances without a male escort.
A recent UN report revealed that the Taliban extremists committed over 1,600 human rights violations, including torture, between January 2022 and July 2023 during arrests and detentions. Additionally, a 2023 Pentagon assessment indicated that the terror group Islamic State has once again established Afghanistan as a base for planning global attacks.
To make ends meet, dollars are being smuggled into Afghanistan from Pakistan to give a lifeline to the cash-strapped Taliban. The country’s central bank – Da Afghanistan Bank – has been auctioning up to US$16 million almost every week to support the currency. But this isn’t a long term solution. So, the Taliban is seeking investment into the country’s rich resources, especially lithium, estimated to be worth as much as US$3 trillion.
In May 2023, China and Pakistan agreed to extend the Belt and Road Initiative namely the China-Pakistan Economic Corridor (CPEC) to the isolated Afghanistan, potentially attracting billions of dollars in infrastructure projects. In April 2023, a Chinese company, Gochin, expressed its interest to invest US$10 billion in Afghanistan’s lithium sector – potentially creates more than 100,000 jobs.
In January 2023, a Chinese company signed a US$450 million deal to explore and develop oil reserves in northern Afghanistan. Bilateral trade with Pakistan was estimated at US$1.8 billion in 2022, a drop from US$2.5 billion in 2010. Meanwhile, bilateral trade with India in 2022 was about US$545 million, while China-Afghanistan trade was US$595 million.
However, Islamic State militants have threatened to target Chinese, Indian, and Iranian embassies in Afghanistan. In December 2022, a hotel in Kabul used by Chinese nationals was targeted by the ISIS terrorists. The threat of terror attacks has spooked potential foreign investments to the country. Taliban was told to take action against terror groups operating from Afghanistan.
Therefore, even though Beijing had in September 2023 made the appointment of a new Chinese Ambassador to Afghanistan, Zhao Sheng, China has still not made any commitment to formally recognize the Taliban administration. It is still waiting to see if the Taliban would tackle Islamic State Khorasan Province (ISKP), the ISIS’ branch in Afghanistan.
Source : Finance Twitter