June 20, 2012 / 8:52 AM / in 5 years

Afghans slow to warm to their stable currency

KABUL (Reuters) - Abdullah Kakar, an employee in the agriculture department in the eastern Afghan city of Jalalabad, converts most of his wages into Pakistani rupees each month except for a small amount to pay his electric bill, school fees and top up his phone card.

Everything else he pays for in the Pakistani currency, from tomatoes to the rent for his house, like millions of people in a swathe of provinces stretching from Nangarhar in the east down to Zabul and Kandahar in the south.

Most of the provinces share a border with Pakistan, but there are others, such as Ghazni in central Afghanistan, where the Afghan currency, the afghani, is competing with the rupee.

In the west, it is the Iranian rial that is freely used.

Ten years after the central bank withdrew three different types of bank notes and coins issued by warlords and relaunched the afghani, the administration is still struggling to enforce its use as the medium of exchange.

Part of the reason people prefer to hold foreign currencies is a nagging lack of confidence in Afghan money, fostered over decades of turmoil, even though the afghani has been remarkably stable against the U.S. dollar.

But that stability could be in question with the withdrawal of foreign combat forces by 2014. As the troops leave, taking with them some of the dollars and euros with which the country is flush, the afghani could come under downward pressure.

That could spell trouble if all civil servants and members of the security forces see the purchasing power of their afghani pay-packets wither compared with the cost of imports, including many staples.

Kakar, 32, said he had been using the kaldar, as the Pakistani currency is known in Afghanistan, his whole life and for many years he had known it to be the only currency.

“It is the currency that everyone uses. When I lend money to someone, it’s in kaldar. If I pay a bribe it’s in kaldar.”

The fact that he’s breaking the law is immaterial to Kakar, and everyone else, to the frustration of the governor of the central bank, Noorullah Delawari.

“The law requires people settle their daily business in the Afghan currency,” Delawari, who launched the afghani during his first term, told Reuters in an interview at his Kabul headquarters.

“But we have a limited number of people vis-a-vis the population to enforce that. It is a serious problem.”

The central bank has run a campaign to tell people that just as they salute the national flag, they must have respect for the currency.

When that failed, the bank ordered fines of up to 100,000 afghanis ($1,960) for anyone caught refusing to accept the currency, but like much else, its writ does not easily run across the nation that is battling a Taliban insurgency.

The afghani was trading at around 51.7 to the dollar this week while Pakistan’s beleaguered rupee closed on Tuesday at 93.88/94 and the Iranian rial was at 12,250.


Throughout the last decade the artificially pegged afghani has been far more stable than its peers to the east and the west, staying around 50 to the dollar while the rupee has lost slightly more than half its value in that period.

The rial is also down.

Yet people are sticking to the rupee, which under Taliban rule from 1996 to 2001 was the most prevalent currency, although in many parts of the country, including Kabul, the afghani has become the first choice.

But if you don’t have afghanis, shopkeepers - whether the man at a used-bicycle stall in a bazaar near the central bank, or the teenager selling Samsung television sets at his dad’s store - all accept the rupee without batting an eyelid.

“Dollar, kaldar anything is acceptable,” said Henayatullah, who sells state-of the art Japanese music systems trucked in from Pakistan in his shop by the side of an open sewage drain.

One reason for the prevalence of foreign currencies is that Afghanistan hardly produces anything, importing everything from cars to staples like eggs. When shopkeepers buy goods from Pakistan with rupees they want rupees back.

The value of Afghanistan’s annual trade is about $5 billion with barely 250 million of that from exports. The rest is imports, 68 percent of which come from Pakistan with which Afghanistan shares a largely open 2,430 km (1,500- mile) border, culture and religion.

Delawari says ultimately the solution for Afghanistan is to produce more of the goods it consumes, at least the daily staples which will bring down the use of foreign currency.

The other main reason Afghans prefer rupees and rials is worry about instability and the kind of currency upheavals that have sapped savings in the past.

“It’s not an economic issue, more of a political issue,” said another central bank official, who declined to be identified as he did not have permission to speak to media.

“We have gone through a time when say, you had 1,000 afghanis in your bank account, and overnight a decree is issued to remove three zeroes. You are only left with one afghani. It is psychological, it erodes confidence,” he said.

Central bank officials say new sources of income have to be found if the currency is to remain stable. The government has pinned its hopes on revenue from mining and transit fees from electricity running from Central Asia to Pakistan and India

“The best way to stop this is to have our own production and not depend on our neighbours for basic things,” said Delawari.

Editing by Robert Birsel

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