In the past two years, we have seen Afghanistani Afghani appreciate against USD and other currencies. This appreciation will have several economic implications for the country:
Import Costs: A stronger currency reduces the cost of imports, leading to lower inflation rates as imported goods would be cheaper. This can increase the purchasing power of Afghanistani consumers and businesses. In fact, inflation in the country decreased by more than 29 percent between Oct 2022 and August this year, which I think is mainly due to the lack of purchasing power among Afghanistani households and businesses.
Source: Trading Economics
Export Competitiveness: A stronger Afghani could make Afghanistan’s
exports more expensive and less competitive on the international market. This
could potentially lead to a decrease in export volumes, worsening the already
negative trade balance of our country.
Foreign Debt: If Afghanistan has foreign debt in USD or
other foreign currencies, the stronger Afghani will make it cheaper to service
this debt. This means it will reduce the country's debt burden.
Investment Flows: Assuming other things (specially
government institutions worked effectively), the rise in the currency could
also influence foreign investment. Investors would see the stronger currency as
a sign of economic stability, which could attract foreign direct investment. However,
we know that Taliban are not recognized by any country – they remain largely
distrusted across the world. Let us not forget that no single country has yet
formally recognized the Taliban regime in Afghanistan.
Remittances: Many Afghanistani families rely on remittances
from
family members working abroad, especially in the neighbouring countries such
as Iran and Pakistan. As a result of the stronger Afghani, sadly, the value of
remittances in local currency terms will decrease, reducing the income of
families that depend on remittances.
Given the concurrent deflation and appreciation of the
Afghani, Afghanistan’s economy faces significant challenges. With exports
becoming more expensive and less competitive, and the local value of
remittances dropping, there is increased financial stress on families and
businesses. This stress, in turn, reduces consumer spending, which will more than before worsen the
deflationary spiral. Addressing the low liquidity among households and
businesses is thus a critical issue for avoiding this crisis to deepen further.
