Afghan economy: a hard landing ahead

July 5, 2012

If you go to the run-down Desh bazaar in central Kabul – which sells everything from widescreen Samsung televisions to used shoes - it doesn’t matter what currency you use to pay for your shopping. They will accept the afghani, the US dollar or the Pakistani rupee. 

But if you were to go further east to Jalalabad near the border with Pakistan, you will probably end up paying for everything in the Pakistani currency,  or kaldhar, as it is known in Afghanistan from the Taliban period.  In fact,  the shopkeeper – who buys all his goods from Pakistan – might even insist you pay in  rupees rather than afghanis. An Afghan colleague who was coming through Jalalabad on his way back from Pakistan said the restaurant where his family stopped for lunch refused the afghani. And just as a large swathe of Afghanistan near the border with Pakistan uses the rupee, in the west the Iranian rial  competes with the afghani.

Ten years after Afghan authorities relaunched the afghani, its use remains limited. It is not uncommon for small landlocked nations to use a bigger neighbour’s currency.  But the everyday usage of foreign currency in large parts of Afghanistan, despite the threat of fines by the central bank, reflects a lack of confidence in the currency and the economy as the country enters its most uncertain period yet.

The afghani has been more stable than its peers in the west and the east, with the Pakistani rupee having lost near half its value to the dollar reflecting the country’s own precarious economic health. But the afghani has been artificially pegged and reflects the funds that poured into what is called the donor-drunk economy. As the West begins to wind down its military engagement and inflows dry up, the currency is expected to come under real pressure.   

Affluent Afghans are already cashing out, with about $4.6 billion having left Kabul airport alone in suitcases and handbags, according to central bank governor Noorullah Delawari. Those who can’t stash funds abroad keep dollar accounts at banks in Kabul – including a central bank employee who said it was a confidence thing. “We have gone from a time when say, you had 1,000 afghanis in your account and then there is a decree to remove three zeroes, your account is down to 1 afghani. Its psychological, it erodes confidence.”

Confidence is in short supply in Afghanistan as 2014 nears when most of the foreign combat troops in the country will leave.  And it’s hard to see how Afghanistan – which relies on foreign aid for 90 percent of its budget – can escape a hard landing when its Western backers are embroiled in financial crises at home.

The war economy is unravelling, Leif Rosenberger from the U.S. Army War College Strategic Studies Institute, wrote in an October 2011 article. Between now and 2014 more than 150,000 foreign troops and some 30,000 foreign contractors will leave. USAID has cut its budget for Afghanistan by half which means the bubble economy created by the huge inflow of aid over the past 10 years or so is going to dry up.

Rosenberger, citing U.S. Treasury assessments, says Afghan GDP could fall by 13 percent, about the same as happened to the United States during the Great Depression. The worst case scenario could be a fall of 41 percent which means mass unemployment and perhaps more fodder for the Taliban as they seek to wrest control of more parts of the country.

This month, donor nations are meeting in Tokyo to consider ways to stabilise Afghanistan during a 10-year period following the Western withdrawal in 2014. Some amount of confidence is returning, officials say, following a NATO summit in Chicago last month when allied nations committed themselves to sustaining Afghan national security forces.  Central bank governor Delawari said real estate prices in Kabul that had fallen all through to the NATO summit and even during the meeting itself, have since come back up. But these deals are still done in dollars and it would need a lot more to convince Afghans of a stable future.

And when Afghans can barely be convinced to use the afghani even to buy tomatoes, we have a measure of how little has been achieved in Afghanistan and its vulnerability to a very hard economic landing ahead.

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