'World's Best Performing Currency': Afghanistan's currency surges amid unique circumstances

Afghanistan’s currency, the afghani, has surprisingly climbed to the top of global rankings this quarter, despite being a poverty-stricken nation with one of the world’s worst human rights records. This unexpected rise is thanks to billions of dollars in humanitarian aid and increased trade with Asian neighbors. The Taliban, who took control of Afghanistan two years ago, has implemented various measures to strengthen the afghani’s position. They have banned the use of dollars and Pakistani rupees in local transactions, imposed strict restrictions on taking foreign currency out of the country, and made online trading illegal, threatening imprisonment for violators. Taliban’s Measures to Bolster Afghani These currency controls, combined with cash inflows and remittances, have boosted the afghani by approximately 9% this quarter, surpassing the 3% gain of the Colombian peso, according to data from Bloomberg. The afghani has seen a year-to-date increase of around 14%, making it the third-strongest currency globally, trailing only the Colombian peso and the Sri Lankan rupee. However, this rise in the afghani’s value hides the ongoing turmoil within Afghanistan, as the country remains largely isolated from the global financial system due to sanctions. Unemployment is rampant, with two-thirds of households struggling to afford basic necessities, and the nation is experiencing deflation instead of inflation, according to a World Bank report. The United Nations has been sending planeloads of US dollars regularly to provide support to the impoverished population, with sums as high as $40 million arriving every few weeks since the end of 2021. Kamran Bokhari, an expert in Middle Eastern, Central, and South Asian affairs at the Washington-based New Lines Institute for Strategy & Policy, warns that while the currency controls are working for now, the economic, social, and political instability in Afghanistan could undermine this short-term growth. In today’s Afghanistan, foreign exchange predominantly occurs through money changers, known locally as “sarrafs,” who set up stalls in markets or operate from shops in cities and villages. Sarai Shahzada in Kabul serves as the de-facto financial hub of the country, where millions of dollars change hands daily, and there are no trading limits, as per the central bank’s rules. UN Aid and Development Efforts Due to the financial sanctions, nearly all remittances to Afghanistan now flow through the ancient Hawala money transfer system, commonly practiced in regions like the Middle East. The UN estimates that Afghanistan requires approximately $3.2 billion in aid this year, but it has only deployed about $1.1 billion so far. The World Bank predicts that Afghanistan’s economy will stop contracting this year and might experience modest growth of 2% to 3% until 2025. However, it warns of risks associated with a potential reduction in global aid as the Taliban continues to oppress women. Anwita Basu, the head of Europe country risk at BMI in London, points out that tighter restrictions on foreign exchange transactions and gradual improvements in trade are driving demand for the afghani, which is likely to remain stable at its current levels until the end of the year. A stronger afghani can help alleviate inflationary pressures for essential imports, such as oil, especially as global crude prices approach $100 per barrel. Resource Investment Amid Financial Challenges Despite its financial challenges, the cash-strapped Taliban administration is actively seeking investment in Afghanistan’s abundant resources, including valuable minerals like lithium, estimated to be worth up to $3 trillion. Companies from China, Britain, and Turkey have secured contracts totaling $6.5 billion to develop large-scale iron, ore, and gold mines. Additionally, a deal with a Chinese company for oil extraction was inked in January. In May, China and Pakistan agreed to extend the Belt and Road Initiative to Afghanistan, potentially attracting billions of dollars for infrastructure projects. There are also signs of improved relations as a US business delegation co-hosted a conference in Kabul in September to attract global investors. Moreover, the smuggling of dollars from Pakistan has provided a lifeline to the Taliban in recent months. The Da Afghanistan Bank, the country’s central bank, auctions off up to $16 million almost every week to support the afghani. As currency pressure eases, the central bank has raised the limit for dollar withdrawals to $40,000 per month for businesses, up from $25,000, and $600 a week for individuals, up from $200 two years ago. On Monday, the afghani traded at around 78.50 per dollar. Humanitarian Challenges Persist However, despite these monetary developments, the humanitarian situation in Afghanistan remains dire. The US had initially planned to release $3.5 billion of frozen foreign-exchange reserves out of $9.5 billion but halted the process due to concerns about the central bank’s independence from the Taliban and deficiencies in anti-money laundering and counter-terrorism financing controls, as reported by the Special Inspector General for Afghanistan Reconstruction in July. The UN has cautioned that a 30% decline in foreign aid this year would reduce per capita income to $306, marking a 40% drop from 2020 levels. Furthermore, the severe restrictions on women have caused divisions within the Taliban administration, with some members openly criticizing their supreme leader, Haibatullah Akhundzada. Akhundzada’s orders have prohibited 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 committed over 1,600 human rights violations, including torture, between January 2022 and July 2023 during arrests and detentions. Meanwhile, a 2023 Pentagon assessment indicated that the Islamic State has once again established Afghanistan as a base for planning global attacks, and the group has increased its attacks within the country, including the assassination of a deputy governor and a mosque bombing. Islamic State militants have also threatened to target Chinese, Indian, and Iranian embassies in Afghanistan, according to the UN. The future stability of Afghanistan’s currency, the afghani, hinges on the political situation within the country. If the Taliban’s control falters, the currency is likely to suffer, warns BMI’s Anwita Basu.