The Value of the Afghani Currency Following the Fall of the Islamic Republic
Afghanistan, being in the category of underdeveloped countries, counts as a country with unstable economies around the globe. In these two decades, Afghanistan's economic basis has been based on foreign and international donors, which make up 75% of the economy. Basically, there are a few key reasons why the Afghani currency did not dramatically lose its value when the Islamic Republic of Afghanistan collapsed in August 2021 after the Taliban takeover:
1- Central Bank Reserves
The Congressional Research Service (2023) reports that Afghanistan has had a severe economic downturn and a humanitarian crisis ever since the Taliban retook power in August 2021. Some analysts have focused particular attention on the U.S. hold on assets of the Afghan central bank (Da Afghanistan Bank, or DAB) that are deposited in the United States. They claim that this is one of the key elements influencing the humanitarian and economic circumstances in Afghanistan (para. 1). A DAB financial statement from June 2021 said that the overall amount of international reserves was approximately $9.5 billion. Seven billion of these dollars were placed in the Federal Reserve Bank of New York; the remaining amounts were either held in Afghanistan or deposited in foreign financial institutions (para. 3). The Da Afghanistan Bank (central bank), with substantial foreign currency reserves and assets, kept the country's currency stable even after the collapse of the Islamic Republic government of Afghanistan at the time. This provided backing for the domestic currency.
2- Continued Use of Afghan Currency
Despite the regime change, the Afghani continued to be used as the main currency within Afghanistan for transactions and salaries. There was no immediate replacement currency introduced. Afghani, although the currency of conflict-ridden Afghanistan, has emerged as the best-performing currency even after the collapse of the previous regime. According to the article "Afghan currency best performing in this quarter; global aid, Taliban-imposed curbs behind surge," it is assumed that “Afghanistan is likely to secure more inflows of foreign currency, as the Taliban seeks to use the country's vast natural resources, including the reserves of lithium, to mop up investments” (Mint, 2023, para. 5). It shows that analysts also believe that the monetary limits imposed by the Taliban are also the reason behind Afghanistan's strength. The ultra-conservative government has stepped up its efforts to import money into the nation from abroad, forbidden online trading, and prohibited the settlement of domestic transactions with dollars or Pakistani rupees (Mint, 2023, para. 9).
3- Capital Controls
Strict capital controls and limits on money transfers out of Afghanistan prevented a mass exodus of money that could have drained currency reserves. Reuters asserts that in the latest attempt to protect limited U.S. dollars, the central bank of Afghanistan has instructed banks to only pay out remittances in local currency. This is a high-risk but necessary step to keep the Afghan currency on track. “Under the leadership of acting central bank governor Haji Mohammad Idris, a Taliban loyalist who has no formal financial training, the central bank has been moving to restrict dollar outflows amid a pause in foreign aid and a scramble by some Afghanis to get savings out of the country” (Reuters, 2021). Over the years, remittances in hard currency have been a significant source of foreign funding for Afghanistan, but since the Taliban took control of the nation, dollar availability has decreased, which adds more to the sustainability of Afghan currency in the depth of the economic and humanitarian crisis within the nation.
4- Relative Stability
While the political situation was chaotic, there was no outright war or economic collapse initially after the Taliban takeover. This avoided the dynamics that often trigger hyperinflation. Basically, relative stability has been observed in the most efficient way in which Afghanistan’s economy has improved and stabilised a bit. From 2001 to 2021, the United States appropriated nearly $837 billion for Afghan security forces and the war effort in Afghanistan, according to estimates from the U.S. Department of Defense. This included funds for equipping and training the Afghan National Army and Afghan National Police, as well as conducting U.S. counterterrorism operations against groups like al-Qaeda and the Islamic State. Since the past two decades, Afghanistan has been involved in internal conflict in which the Taliban had a more destructive role in stepping down the country’s economy, but after the Taliban took control of the country, there has been no investment in military operations, and even this ruling government, with some restrictions that are still imposed by the Taliban over Afghan citizens, is still going forward. Since the Taliban took control of Afghanistan in August 2021 and the U.S. military withdrew, direct U.S. spending on Afghan security forces has ceased. However, the Biden administration has worked to free up $3.5 billion in Afghan central bank reserves frozen in the U.S. to potentially be used for broader economic and humanitarian assistance for the Afghan people. So while billions were spent annually on the war effort previously, those funds have been cut off since the Taliban takeover, with efforts now focused on potential humanitarian aid utilizing a portion of the frozen Afghan reserves.
5- International aid flows
The continuation of some international aid flows, even if reduced, provided an income source for Afghanistan and helped prop up the exchange rate. Over half of Afghanistan's population is estimated to rely on foreign assistance for survival, and the UN is in charge of managing billions of dollars in international aid intended for the country's hungry and impoverished citizens. These flows are still being monitored under the administration of the Taliban. “The report casts doubt on the world body’s ability to control the flow of aid, including about $2 billion from the United States alone since August 15, 2021, when the Islamic Republic collapsed.” Also, “Afghanistan represents the biggest single-country appeal, with $3.2 billion this year (down from an earlier $4.6 billion)." (O'Donnell, 2023). Additionally, according to Mint (2023), the August 2021 political transition in the West Asian country caused a humanitarian crisis, and the UN has contributed $5.8 billion in aid and development. Of the total, $4 billion were transferred in 2022, when it was estimated that about 2 crore Afghans would go hungry to the point of death. These international and western donors and aid significantly affected the Afghan currencies to ensure they didn’t lose their value and availability even after a dramatic and humanitarian crisis that was left by the collapse of the Islamic Republic of Afghanistan.
However, the value of the Afghani did decline moderately by around 25% in the year after the Taliban takeover due to economic dislocation. But it did not suffer a complete crash initially due to the factors mentioned above providing temporary stability to the monetary system. Longer-term stability remains a major question under Taliban rule.
