Editor in Chief: Moh. Reza Huwaida Wednesday, July 17th, 2019

The factors behind Afghani devaluation


The factors behind Afghani devaluation

In few last year, Afghan currency has been steadily losing its value against foreign currency, especially against USD but recently it has suddenly fallen from 73 to around 77. This issue is not only a concern to the Afghan exchangers community but has affected the daily life of people. According to experts, there are different factors behind the problem such as insecurity, high demand of dollar, hoarding and over all the dollarized economic system in the region. Da Afghanistan Bank (DAB), Afghanistan’s central bank, blames the fall of the Afghan currency on the profiteers who are hoarding foreign currency.
He also cited the hike in the US value and high demand of the USD in Iran and Pakistan and decline in Iranian and Pakistani currency as other reasons behind the soaring USD value in Afghanistan. Other factors such as trade deficit, low domestic production and political instability and insecurity further contribute to the decline in Afghan currency. However, the official from DAB assured that profiteers involved in currency hoarding would be identified and brought to justice. We are capable to address the situation,” said Seddiq. He added that they do not have the legal right to control the currency but when hoarding or profiteering is involved they would interfere. He also announced offering USD 32mn to the market for keeping the Afghani currency stable.
Following this, officials in Herat informed that police have arrested some culprits who were engaged in smuggling US dollars to Iran. “Serious steps have been taken against the smuggle of foreign currencies in Herat province, fortunately, in last two or three months, 13 individuals have been arrested on charges of smuggling dollars to neighboring countries,” quoted from the provincial governor’s Spokesman Jilani Farhad.  According to the estimation of the provincial Money Exchangers’ Union, up to four million USD are smuggled to Iran every day in Herat province.
“Since the imposition of sanctions on Iran by the United States and the fall of Toman (rial) against other foreign currencies, a lot of Afghan citizens have been taking large quantities of dollars across the border,” as quoted from Bahulludin Rahimi, president of the Federation of Money Changers of Herat.
Also quoted from Head of exchangers union, dollars have also been transferred to Iran through legal channels by some individuals in Islam Qala – a border town in Herat province near the border with Iran. It increased after Iran’s rial has lost 40 per cent of its value since President Donald Trump’s decision on May 8 to pull the United States out of Iran’s 2015 nuclear deal with world powers and re-impose tough economic sanctions on Tehran.
Many Afghan traders are taking advantage of the cheaper rial and importing goods such as cooking oil, biscuits, foodstuffs and various non-alcoholic drinks that they can sell at a higher price at home. Increasingly however, the profit that can be made on arbitraging the difference in the exchange rate on either side of the border has been significant enough to make it a business in its own right.
As a result, everyone in Afghanistan is concerned about the fast depreciating value of the Afghani against dollar. They believe further decline in the Afghani may more intensely harm people’s lives and small businesses because they are the ones who use Afghan currency and pay the rising price for goods on the local markets. For example, about one month ago the price of one kg gas was about 50 Afghani but now it has increased up to 65 Afghani; A bag of 59 kg of flour was 1100af but now it is 1350 Afghani.
The economic commentators say that government must stop people from smuggling dollars to neighboring countries. Government needs to come up with a comprehensive policy to control forex bazars, because the decrease of dollars on the market poses serious harm to those with a low income. If this trend continues, there will be a huge shortage of foreign currency in the country and further devaluation of the Afghani. However, it seems too hard to control the trend because Afghanistan has a cash economic system.
Thus, economic experts believe that the insecurity, reliance on imports, the dependent economy, and the US economy growth are blamable factors for why the dollar value has increased against the Afghani. Afghanistan is an importing country and regularly the money goes out of the country while domestic exports are lower, it cannot return the paid money to the Afghan market. In fact, the currency policy is all economic policy which affects the supply and demand of currencies, in particular the exchange rate of domestic currency against foreign currencies. Other countries, rarely allow to use direct-policy (Direction Action) using the Auction tool, but the central bank has relied on this policy inappropriately.
By and large, the Afghan government needs to devise a long-term and comprehensive plan to increase national income, stop smuggling, and increase domestic production and exports to maintain the national currency stable. More importantly, we should note that the essential solution to increase the value of the Afghani against the foreign currency is to improve our economic strength and national. If we fail to pay attention to this important issue, we would regularly fail to control the trend as failed in the past. As a result, the high exchange rate will directly reduce the living standards of people and their purchasing power.

Mohammad Zahir Akbari is the permanent writer of the Daily Outlook Afghanistan. He can be reached at mohammadzahirakbari@gmail.com

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