Afghanistan’s currency, the Afghani, has recently emerged as one of the strongest performers globally, even surpassing the Indian Rupee against the US Dollar. As of 2024, the Afghani stands at approximately 77.09 per US Dollar, compared to the Indian Rupee at over 83 per US Dollar. This development, while surprising given Afghanistan’s challenging economic and political conditions, highlights a combination of strategic measures and external support that contributed to this outcome. Here’s how Afghanistan achieved this and what India can learn:
Key Factors Behind the Afghani’s Strength:
1. Strict Monetary Policies:
– The Taliban banned the use of foreign currencies, including the US Dollar and Pakistani Rupee, in domestic transactions. This policy helped curb dependence on external currencies and reinforced the use of the Afghani.
2. Control Over Dollar Outflows:
– Stringent restrictions on the outflow of US Dollars from Afghanistan reduced dollar shortages and maintained a stable currency supply.
3. Aid and Influx of Cash:
– Humanitarian aid from the United Nations, amounting to billions of dollars, played a significant role. Regular cash shipments ensured liquidity, indirectly supporting the currency’s value.
4. Crackdown on Illegal Trading:
– Criminalizing online currency trading and imposing severe penalties created a controlled financial ecosystem, reducing speculative pressures on the Afghani.
5. Dollar Smuggling and Hawala Networks:
– While unconventional, dollar inflows through smuggling and the informal Hawala system provided additional support to the currency.
Why the Indian Rupee Lags:
1. Trade Deficits:
– India’s high reliance on imports, particularly for energy, leads to a persistent trade deficit, weakening the Rupee.
2. Global Economic Pressures:
– Rising US interest rates and geopolitical tensions have heightened the demand for the US Dollar, affecting emerging markets like India.
3. Currency Policy:
– The Indian government and RBI have not implemented stringent currency management measures comparable to Afghanistan’s, leaving the Rupee more vulnerable to external shocks.
4. Economic Dependency:
– Unlike Afghanistan’s forced economic self-reliance, India’s open economy is more exposed to global currency fluctuations.
Lessons and Implications:
While the Afghani’s rise highlights the effectiveness of strict monetary controls, its sustainability remains questionable given Afghanistan’s economic fragility, low GDP growth, and heavy reliance on external aid. For India, addressing structural economic challenges such as trade deficits, promoting domestic manufacturing, and optimizing currency management could strengthen the Rupee over time.
Afghanistan’s currency success underscores the importance of decisive monetary policy but also serves as a reminder of the risks tied to an over-controlled economic environment.
