In a highly unusual development, the Afghan currency, the afghani, has experienced a remarkable surge in global currency rankings this quarter, surpassing numerous other currencies across the world. This unexpected rise can be attributed to the infusion of billions of dollars in humanitarian aid and the expanding trade partnerships with neighboring Asian countries, both of which have played crucial roles in driving this unprecedented growth.
Bloomberg reported that despite the country’s dire economic and humanitarian situation, the afghani has appreciated by approximately 9 per cent this quarter and will continue to appreciate by about 14 per cent over the course of the year, trailing only behind the Colombian peso and Sri Lankan rupee in global currency rankings.
The Taliban regime, which seized control of Afghanistan two years ago, has implemented stringent measures to maintain control over the afghani’s value. These measures include banning the use of foreign currencies like the US dollar and Pakistani rupee in local transactions, tightening restrictions on the movement of foreign currencies, and criminalising online trading. This has led to a significant increase in demand for the afghani, which has, in turn, driven up its value.
Bloomberg cited Kamran Bokhari, an expert in Middle Eastern, Central, and South Asian affairs at the Washington-based New Lines Institute for Strategy & Policy, who said, “The hard currency controls are working, but the economic, social, and political instability will render this rise in the currency as a short-term phenomenon.”
In the wake of financial sanctions, foreign exchange transactions in Afghanistan now predominantly occur through money changers, locally known as ‘sarrafs,’ who operate in markets and shops across the country. This decentralised approach to currency exchange has become essential as Afghanistan remains largely cut off from the global financial system due to international sanctions.
Moreover, remittances to Afghanistan are primarily facilitated through the centuries-old Hawala money transfer system, commonly practiced in regions such as the Middle East. This system has become integral to the operations of the sarrafs who handle the bulk of foreign exchange transactions.
While Afghanistan’s currency is on the rise, the humanitarian situation remains dire. The United Nations estimates that the country needs approximately $3.2 billion in aid this year, but only about $1.1 billion has been deployed so far, leaving millions in desperate need.
Despite the challenges, reports suggest there is optimism regarding Afghanistan’s economic outlook. The World Bank predicts that the economy will stop contracting this year and may even see growth of 2 per cent to 3 per cent until 2025. However, there are concerns about potential reductions in global aid as the Taliban intensifies its repression of women.
“Tightened restrictions on foreign exchange transactions and a very gradual improvement in trade are pushing up demand for the afghani,” Bloomberg quoted Anwita Basu, head of Europe country risk at BMI in London. She also added that the currency is likely to stabilize at current levels until the end of the year.
Additionally, Afghanistan’s cash-strapped Taliban government is actively seeking investment in the country’s valuable resources, including lithium and minerals estimated to be worth as much as $3 trillion. Agreements with Chinese, British, and Turkish companies to develop large-scale mining operations have been finalised, with further investments expected as part of the Belt and Road Initiative expansion into Afghanistan.
Despite the afghani’s recent success, it remains vulnerable to shifts in political stability. BMI’s Anwita Basu told Bloomberg, “Ultimately, political stability will make or break the currency – if the Taliban lose control at home, then the currency too will suffer.”