Why the Afghani Currency is Weakening Despite Higher Exchange Value

In recent times, the Afghani currency, the Afghani, has traded at a higher exchange rate of 78.50 Afghanis per dollar compared to its counterpart, the Indian rupee, which trades at 83 per dollar. Despite this apparent strength, the Afghani has been weakening. Here are the key reasons behind this phenomenon:

Currency Controls and Restrictions

The Taliban government has implemented stringent measures to control the flow of foreign currency. They have banned the use of US dollars and Pakistani rupees for local transactions and have restricted the withdrawal of dollars. Additionally, the Taliban has imposed strict controls on the importation of foreign currency. These measures have led to a decrease in the demand for foreign currency, particularly for dollar transactions, and have contributed to the weakening of the Afghani:

Banning Imports: The Taliban banned imports, which reduced the need for foreign currency to pay for imports. Limited Exports: Afghanistan is currently exporting mainly goods that generate foreign Afghani currency, but the ability to print and use more Afghani currency is limited. Tight Monetary Policy: The Taliban has implemented a monetary policy to protect and stabilize the Afghan economy, which includes limiting the printing and distribution of the Afghani currency.

International Aid and Cash Inflow

Afghanistan has received billions of dollars in humanitarian aid from international organizations such as the United Nations. However, this aid is delivered in cash and converted into the local Afghan currency by the Taliban. This influx of cash is primarily used to purchase local goods and services, further reducing the demand for foreign currency and exacerbating the weakening of the Afghani:

Humanitarian Aid: The majority of the humanitarian aid is received in cash, which boosts local transactions but doesn't significantly increase the overall trade volume with foreign currencies. Local Spending: The Afghani currency is heavily used for local transactions, and very little is printed or used for international trade activities.

Illegal and Legal Money Flows

The demand for the Afghan currency often exceeds its supply. Some key factors influencing this include:

Hidden Wealth: Wealthy Afghans continue to hide large sums of money with a desire to move it to foreign jurisdictions, exacerbating the supply and demand imbalance. Political Influence: Large sums of money are held by politicians and bureaucrats, further fueling the demand for foreign currency to transfer wealth abroad. Hawala Traders: Hawala traders often engage in under-invoicing of exports and over-invoicing of imports, which increases the demand for foreign currency. Emigration and Remittances: While there has been a decrease in remittances due to restrictions, some remittances do still flow out of the country, further reducing the domestic currency supply.

These activities contribute to a greater demand for US dollars compared to the Afghan currency, particularly among Afghans who have a desire to leave the country or move wealth abroad, further weakening the Afghani:

Economic Efficiency and Exchange Value

When comparing the exchange rate and the economic efficiency of the Afghani and the Indian rupee, one must consider the exchange value and the resulting economic efficiency:

Economic Efficiency: 1 American dollar fetches around 68 Indian rupees, indicating that the Indian rupee holds more value in terms of economic efficiency. This suggests that the Indian economy is more efficient than the Afghan economy. Exchange Value: The exchange value of the Afghani at 78.50 Afghani per dollar shows that it is not as efficient as the Indian rupee when measured in terms of purchasing power.

In conclusion, the Afghan currency, despite its higher exchange rate, is weakening due to a combination of currency controls, limited international trade, and behavioral patterns among the population. This highlights the importance of economic policy, transparency, and broader economic reforms to enhance the stability and strength of the Afghan economy.