The history of a country is more often than not represented also by the many twists and turns that its national currency must endure, as well. When the country is also racked by decades of turmoil, economic strife, and foreign occupations, the stories become entwined even deeper still. Afghanistan is one nation where this correlation has been more pronounced, but, hopefully, there are positive signs of stability, if the past few years can be used as a guide for future prospects.
The Afghani (International Code “AFN”) is the national currency unit of Afghanistan, and although its origins reach back to 1925, its current version replaced the former issuance during the crossover period from 2002 to 2003. The currency now floats on the global foreign exchange (“Forex”) market and has a current valuation of 52.4 Afghanis to the U.S. Dollar. Since the “redenomination” of the Afghani took place, the exchange rate has fluctuated within a range of the current value and 42.0, a dramatic improvement over previous performance when hyper-devaluation prevailed.
The first Afghani (“AFA”) came into being in 1925. At the time of its issuance, the Afghani coin contained nine grams of silver, and, based on this silver content, it was roughly equivalent to 1.1 rupees, the popular silver coin that proliferated in regional markets at the time. Over its entire history from that point forward, free market forces, except for brief periods when the central bank attempted to fix the exchange rate, have determined the Afghani’s exchange value. The “fixing” was an attempt to smooth out seasonal fluctuations and lead to more orderly cross-border commerce.
During those “fixed rate” times, however, a “dual exchange rate regime” arose. The government might transact cross-border commerce based on the “fixing”, but supply and demand forces in the bazaars of Kabul devalued the currency for personal use. The “gap” between the two rates might be small during stable times, but gyrate wildly when civil strife or war was the order of the day.
From the seventies up until 2002, social upheaval, a Russian occupation, foreign interference, and civil war racked the country. Eventually, the Taliban seized control in 1996, but the currency had and would go through a period of hyperinflation. Warlords, political parties, foreign powers and forgers contributed to the overall crisis by printing their own banknotes, resulting in rampant devaluation. Most notes were declared worthless, and before the new Afghani was issued in 2002, one U.S. Dollar was equivalent to 42,000 of the old “AFA” Afghanis.
The new Afghani, “AFN”, was exchanged for old “AFA” currencies at varying rates, depending on the region, but the net effect was to drop three zeroes from the prevailing exchange rates at the time. One USD$ would then buy only 49 of the newly minted “AFN” Afghani. As confusing as this may sound, the populace did begin to gain confidence in the new currency. Inflation moderated, and exchange rates stabilized.
On the positive side, the economy of Afghanistan is now recovering after decades of political strife and conflict. The country, however, remains one of the poorer nations in the world and depends heavily on outside support. There are many challenges to overcome, but from the perspective of the national currency, prospects appear to be moving in the right direction.
When there is relative stability in a nation’s currency, foreign investment, both from donor nations and from private industry, can easily flow into a country to help rebuild infrastructure and return some semblance of a growing industrial sector. In a phrase, the new Afghani will help lead the nation to new levels of prosperity.
By Tom Cleveland