since the introduction of new Afghan currency (Afghani-AFN) in 2003, the use of foreign currencies in some provinces of the country has increased. Among others the Pakistani Rupee, Iranian Rail and the U.S. dollar have vast usage in Afghanistan markets.
The Iranian Rail is used in western provinces located in neighbourhood to Islamic Republic of Iran and the Pakistani rupee is widely used in eastern and southern provinces neighbouring to the Islamic Republic of Pakistan. In the same manner, United States dollar has dominated most of the Afghan markets and almost all large scale business deals are priced in U.S. dollars.
Despite several campaigns by the provincial authorities and the central bank of Afghanistan (Da Afghanistan Bank) to ban foreign currencies and to encourage the use of Afghani (AFN), the foreign currencies are still widely used across the country.
Recently, a trend of such campaigns are reinitiated by the provincial authorities in Paktia, Khost and Nangarhar provinces to ban the usage of foreign currencies and encourage public to use the Afghan currency. Even though, the local authorities at their respective provinces have imposed several penalties on the users of foreign currencies, it still seems that these campaigns will turn out ineffective again. Without tackling the root cause of the foreign currencies usage, these mere campaigns will not result in any positive outcome.
The central bank of Afghanistan is responsible for issuing money, controlling the value of Afghani and managing overall monetary policy. Therefore, the central bank is certainly responsible for finding proper sustainable solutions and proposing appropriate policies to pave the ground for the usage of AFN in local markets.
As it is a well-known fact that Afghanistan has an import-based economy and the country is hugely dependent on importing necessary goods from neighbouring and regional countries, the local companies and businesses pay in foreign currencies for their imports. Therefore, these individual businessmen and companies are facing currency exchange risk while selling imported goods in local currency in local markets. Moreover, to avoid currency exchange risk, these importers sell their imported goods in local markets in currency with which they purchased it from foreign markets. Also, the market players (whole sellers and retailers) are obliged to pay the importers on foreign currencies. Therefore, to keep themselves from exchange risk the market player replicate the same and further sell the goods to small businessmen on respective foreign currencies and finally the final sellers continue selling the goods to public on respective foreign currencies. All the players of aforementioned chain try to avoid currency exchange risk at their respective transactions.
So, the root cause of avoiding the usage of Afghani currency in local markets is the exchange risk that could possibly mope out the entire profits of an import based company/ businessman. Hence, this is the responsibility of the central bank of Afghanistan to develop policies and encourage the commercial banks to offer foreign exchange hedging facility to importers. Offering currency exchange hedging products will certainly protect the businessmen from foreign exchange risk and encourage them to sell imported goods on Afghani currency in local markets.
Then, the AFN priced goods will reach to the chain of wholesalers, retailers and end users with Afghani price tags and none of the above parties will be affected by currency exchange risk. Introducing foreign exchange hedging policy will certainly bring the issue of using foreign currencies in Afghanistan markets to an end and hedge all traders against foreign currency exchange risk. It is worth mentioning that, solutions are available to offer exchange rate hedging product both on conventional and Islamic methodologies.