Inflation to hit double digits as Afghanistan currency weakens, central bank chief says

Outgoing chief of central bank warns that Afghani will decline further against US dollar as international funds are frozen

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Afghanistan’s currency is set to weaken and inflation will rise after the collapse of the government and the Taliban seizing power, the country’s outgoing central bank governor says.

“Inflation will likely increase to double digits as the currency weakens and inflation pass-through is high,” Ajmal Ahmady, who left the country this week, told The National.

Afghanistan’s economy was already deteriorating before the US decided to withdraw from the country in the wake of the Covid-19 pandemic, the onset of a drought, declining trade, weakening donor aid, rising insecurity and uncertainty that eroded confidence.

Peace talks between the government and Taliban stalled in January over a future governance system and transition plan, while tensions between the previous cabinet and parliament delayed the approval of the 2021 budget, which was rejected twice.

That backdrop prompted the International Monetary Fund to lower its growth forecast in June to 2.7 per cent this year from a previous 4 per cent estimate. The fund had projected inflation would increase to 5.8 per cent by the end of this year.

The Afghani, the country’s currency, weakened to 100 to the US dollar before falling back to 86.04, according to the website of the central bank Da Afghanistan Bank. That is still above the 80-81 level it was at before the situation in the country escalated.

The “currency should decline with decreased donor inflows and, especially, if the US freezes international reserves”, Mr Ahmady, who also served as an economic adviser to President Ashraf Ghani before he fled the country on August 15, said.

The central bank foreign currency reserves were about $9 billion, he said.

“During [the] last days, I feared not only risks related to Taliban, but fear of transition period once there is no chain of command. Once [the] president’s departure was announced, I knew within minutes chaos would follow. I cannot forgive him for creating that without a transition plan,” Mr Ahmady said on Twitter.

“It did not have to end this way. I am disgusted by the lack of any planning by Afghan leadership. Saw at airport them leave without informing others.”

While the country’s banks had “sufficient liquidity” before the turmoil, non-performing loans, or bad loans, “are set to increase … but [banks] can likely manage with some recapitalisations”, Mr Ahmady, a graduate of Harvard Business School and the Kennedy School of Government, told The National.

The ratio of loan to deposits before the Taliban seized power was “very low”, he said.

The economy, which was largely dependent on foreign aid with domestic revenue sufficient to finance only around half of budgeted expenditures, is expected to deteriorate, Mr Ahmady said.

“Remittance flows are relatively small compared to donor inflows.”

Before the Taliban seized power, as a sign of support for Afghanistan’s development and reforms, international donors had pledged $12bn in civilian grants over 2021-2024 at a conference in Geneva in November 2020. That support was 20 per cent lower than what was pledged at a 2016 conference.

On Twitter, Mr Ahmad said he received a text message from someone telling him: “Taliban come to <area> and were looking for you. They were asking about Ajmal Ahmady DAB Governor.”

Asked what he planned to do next, Mr Ahmady said: “After seven years of government service, I look to rest with family and find a job in the private sector.”

Updated: August 28th 2021, 9:12 AM
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