Afghanistan central banker sees currency drop, capital controls

Afghanistan’s new Taliban-led government faces a series of shocks that probably will lead to a weaker currency, faster inflation and capital controls, according to the nation’s exiled central bank chief.

The Afghani, as the tender is known, likely will see renewed weakness after it reached a record low last week, Ajmal Ahmady, governor of Da Afghanistan Bank, known as DAB, said in an interview for Bloomberg’s Odd Lots podcast. That could spur a pickup in consumer-price increases by making imports more expensive, he said.

With the vast majority of the central bank’s more than $9 billion in assets frozen by the U.S., Afghanistan faces a potential economic crisis, Ahmady said. That comes on top of Covid-19, a regional drought and displaced people that was already creating hardship.

“It’s a really challenging situation,” Ahmady said by phone from an undisclosed location where he fled as the government fell. “We were trying to manage three shocks, and now I think they’re gonna have to deal with a fourth.”

Ahmady, 43, is a Harvard University graduate who briefly worked at the U.S. Treasury Department as an economist.

As the U.S. prepares to complete the military withdrawal that led President Ashraf Ghani to flee to the United Arab Emirates as the Taliban rolled into Kabul, Afghanistan’s economy and banking sector lie in tatters. Almost three-quarters of the country’s nearly 40 million citizens live in rural areas, while a majority of lenders are in the three major cities, according to World Bank data.

The Afghan currency isn’t accepted for cross-border trade, leaving the nation dependent on U.S. dollars and an informal transfer system known as hawala. The centuries-old trust-based method of moving cash that underpinned international trade throughout the Middle East and South Asia before the advent of modern banking remains a central part of life in Afghanistan.

The International Monetary Fund last week said that the new government is cut off from using fund reserve assets set to be allocated to its 190 member nations on Monday, depriving the Taliban of almost $500 million.

The Taliban will “probably try to go out to other countries to replace the U.S., and maybe China, Pakistan, or other regional countries to find some sources of finance,” Ahmady said. “But it’s a tough situation.”

Ahmady said that he thinks the people of Afghanistan are very disappointed in the U.S. and the nation’s willingness to negotiate a deal with the Taliban. The deal that the Trump administration reached in Doha, without the participation of Afghanistan’s government, gave the Taliban legitimacy, was the wrong approach and paved the way for the group’s return to power, he said.

“It would have been better for the U.S. to simply have left and said, ‘We are no longer here, we leave, and we are removing our troops,’” Ahmady said. “Instead, there was an agreement that was pursued and signed in which they discredited the Afghan government, in which they came and forced the Afghan government to release 5,000 prisoners, some of whom were Taliban, some were murderers, some of whom were major drug dealers.”