The Islamic Republic of Afghanistan since September 11, 2001 has been at the centre of attention within the world today. The international coalition has successfully defeated the previous Afghanistan government ruled by the ‘Taliban’, a hard-line Islamic movement that took power in 1996. Previous to the terrorists attacks on the United States in 2001, only Saudi Arabia, Pakistan and the United Arab Emirates recognized the Taliban government, long viewed by the majority of the world community as a supporter of international terrorist activities. The Taliban who ‘harbored’ Saudi born terrorist Osama bin Laden have payed a heavy price for their sponsorship. The Taliban today are out of power and many of its leaders including its leader Mullah Mohammed Omar are now dead or missing. Some moderate Taliban leaders however have been appointed by Afghanistan’s current President Hamid Karzai to key civilian posts as moderates will also play a key future role in the governing of a new civilized Afghanistan. Today, Afghanistan with the backing of the U.S. military and NATO troops are still fighting elements of the al Qaeda terrorist network and the former Taliban regime.
After 26 years of war, civil war (1992-96) and Soviet occupation that began in 1979 after a 1978 communist coup, a UN study suggests Afganistan with its 30 million people is one of the worst countries in the world and riskiest for children to grow up coinciding with an average Afghani lifespan of only 43 years now as 50 percent of the population live below the poverty line. Afghanistan faces many challenges including diseases - health issues, environmental concerns, landmines, clean water as it is a landlocked nation. However, under the new democratically elected government and intelligent leadership of its President Hamid Karzai, Afghanistan may prevail in the long run, but it will be difficult.
Recent positive developments include the successful Presidential election, a new police force & building of a national army, Universities are now open, 4.5 million kids are going to school, new construction including the development of the new Hyatt Regency Hotel in Kabul. The majority of the programs and the nationl budget are being funded by foreign aid with massive internationl aid from several donor countries. This is a quite a different picture from 5 years ago, but war continues in sections of the country as security concerns remain with terrorists still at large. Much of the economy is informal - barter is prevalent and a popular way to facilitate transactions, what future lies ahead for the new Afghan afghani? Below is a summary analysis of BankINTRO.com’s research on how it relates to its national currency, the new Afghan afghani.
POLITICS: Afghanistan achieved independence in 1919 from the United Kingdom. Political risks include the whereabouts of al Qaeda leader Osama bin Laden that are unknown, he may still be alive thus playing a vital role in the persuit of destablizing the elected Afghani government of President Karzai. A new United Nations backed transitional government was sworn in on December 22, 2001 in the capital city of Kabul with Hamid Karzai the interim leader. On October 9, 2004, Hamid Karzai was democratically and formally elected President with the official ceremony of power taking place on December 7, 2004. Today, President Karzai has the international backing and financial support to get Afghanistan functional. Karzai’s government has immediately attended to the health & food crisis, water & energy shortages, rebuilding of infrastructure & institutions (foreign aid agencies & grants) and to help provide for a sound government. A national constitution was approved in January 2004. Afghanistan’s government and security forces have firm control of the capital city of Kabul and the centre of the country while about a dozen warlords rule the rest of it where lawlessness prevails, particularly in the south and south-east of the nation. Afghan plolitics has had a history of power-struggles and bickering. Political risk is high even today with distant warlords continuing to grumble about the power-sharing accord and new government coalition.
The country of Iraq is similar to Afghanistan - very fragmented with different ethnic groups including the Kurds located in northern Iraq, the Shiites in southern Iraq and the Sunni Muslim within the Baghdad region. Within Afghanistan, the challenge for the new government will be to maintaining peace. Afghanistan is a country that maybe better broken up than exist as a whole, it is a 19th century country leftover from Russian and British empires. Different factions include the Northern Alliance which are Tajik based, the Uzbek warlords, the Taliban including the moderates, conglomerates representing former King Zahir Shah delegation, the Popolzai tribe in Southern Afghanistan and the Pashtun ethnic group. Perhaps the Tajik area of Afghanistan should rejoin Tajikistan, Uzbek region rejoin Uzbekistan and the Pashtans getting their own area of regional autonomy within an expanded Pakistan. Ethnic representation is estimated as follows: Pashtun at 42 percent, Tajik at 27 percent, Hazera at 9 percent, Uzbek at 9 percent, Aimak at 4 percent, Turkmen at 3 percent, others at 7 percent. At present, there are tensions between the ethnic Tajiks and the Uzbeks. However, amongst the 34 provinces of Afghanistan and all ethnic groups, Sunni Muslims account for 80 percent of the population while Shi’a Muslims are at 19 percent.
ECONOMY: the bombardment by the United States during fall 2001 coupled with previous decades of war, 10 years of Soviet occupation and the lack of political stability have decimated the Afghani economy. With the installment of the new government of President Karzai, it is estimated that $50 billion USD will be required to rebuild the country over the next 10 to 15 years. From 2002-04, the United States alone pledged $2 billion USD for re-construction, monies towards farming - seeds, schools, repairing water systems, basic infrastructure, education and health care.. In 2004, $8.2 billion USD equivalent was pledged by international donors for the 2004-07 period. Donor countries have included the likes of the European Union, Japan, Canada Saudi Arabia and the United States.
Agriculture employs two-thirds of the Afghani labor force and represent 50 percent of national output. Livestock and opium production are other industries of interest. Afghanistan currently has no oil production coupled with minimal natural gas production. Remittances are worth approximately $50 million USD/year from Afghanis living abroad. Major industry components for Afghanistan’s economy consists of agriculture, construction and foreign assistance.
Other industries of importance include Afghanistan’s potential with its rich mineral resources such as natural gas, petroleum, coal, copper, zinc, iron ore, sulfur, gold, etc. Tourism is also another potential revenue generator although it is still early days here. Both landmines and security are key issues. The Afghani govenrment has committed itself to rebuilding its landmark famous Buddha’s that were destroyed by the former Taliban regime in 2001. They may rebuild one of the statues and keep the other as a reminder of the destruction displayed. The Buddha statues were carved 1600 years ago and stand 175 feet tall. In the future, Afghanistan will see the transition from the informal to formal economy, greater tax revenues expected as the country modernizes. With greater economic opportunity and security, Afghanistan may see the continue return of refugees who fled during the war and Taliban era. Approximately 2.5 million refugees have returned while one million still live abroad in Iran and Pakistan.
Economic Statistics
As measured by purchasing power parity, 2003 GDP stands at $21.5 billion USD with corresponding GDP/Capita at $700 USD. GDP growth rates include year 2002 at 25 percent, 2003 at 16 percent, 2004 at 8 percent, year 2005 is forecasted at 10 percent, 2006 at 9.7 percent. Inflation rates include year 2003 at 10.3 percent, 2005 estimated at 10 percent, year 2006 at 5 percent. Large trade shortfalls within the formal economy with 2005 current account deficit projected at 3.5 percent of GDP. External debt is at $8 billion USD. Major trade partners include India, United States, Pakistan, South Korea.
POSITIVE: considerable mineral wealth potential. CONCERN: rainfall drought impacting with food shortages - famine, earthquakes, farmers in Jalalabad are growing opium as wheat crops takes too much water, one of the world’s highest infant mortality rates, literacy rates are low at 36 percent, few phones, high army desertion rate.
BANKING SYSTEM: infancy, reform, modernizing. It was alleged that the former Taliban regime raided the central banks reserves before it was swept from power. The nation’s central bank, Da Afghanistan Bank (DAB) founded in 1938 went on a massive printing spree during the 1990’s funding government spending ultimately resulting in hyperinflation. Under the former Taliban regime, the banking system collapsed. Under President Karzai, new banking legislation was introduced during the fall of 2002 when the new afghani currency was incepted. The new note is the old afghani minus three zeros which will reduce a lot of paper and thus easier to carry out transactions. Afghanistan’s central bank reserves were measured in year 2002 at $200 million USD in gold held by the U.S. Federal Reserve Bank in New York. The vision for the Afghan central bank is to provide for monetary stability which will then set a platform to attract foreign investment. The drug trade uses an informal financial network to launder its proceeds.
REGIONAL ANALYSIS: Pakistan, Iran, Turkmenistan, Uzbekistan, China, Tajikistan
Potential for armed conflict between India and Pakistan is continuously prevalent risk for the region. Domestic political risk within Iran is high. Overall, Afghanistan exists in a very volatile part of the world. Smuggling of consumer goods from Afghanistan into Pakistan and vice versa is a lucrative trade for many Afghanis. If Afghanistan can ultimately develop a mineral production industry, China is a logical close market for export.
KNOWLEDGE: Opium Industry & Growing Taliban / al Qaeda Insurgency
Opium trade is by far Afghanistan’s largest industry accounting for 60 percent of market GDP as for many Afghans, it is the only way for survival in a backwards primitive country. Historically, opium production goes way back to year 1932 with Afghani production then amounting to 75 tons. Afghanistan is presently the world’s largest opium producer with 207,000 hectares (year 2004) supplying 85 percent of the global opium supply. Financial proceeds from the opium industry were used to fund the Taliban and the al Qaeda terrorist network even with the Taliban outlawing opium production in July 2000 when production then declined dramatically. In 2001, estimates then had the equivalent of 280 tonnes of heroin potentially in the hands of Taliban/al Qaeda cells worldwide with a market value of up to $40 billion USD in Western markets. At present, a significant 1.7 million Afghans out of a total population of 30 million are involved in the opium industry (one in 10 of the labor force) with a great many citizens themselves addicted drug users. Afghanistan has now garnered the reputation as the world’s first ‘Narco-Economy’. For comparison, the country of Colombia with its illegal cocaine drug industry only represents 7 percent of its GDP.
Recently, several insurgency attacks and bombings have taken place in an effort to disrupt the new government from making progress. Are the Taliban and al Qaeda regrouping? The main difficulties presently occur in southern Afghanistan as some analysts believe that many opposition fighters are coming in from the Pakistani border. Recently, the U.S. Ambassador to Afghanistan stated that both Osama bin Laden and Taliban leader Mullah Mohammed Omar are most likely not in Afghanistan itself but rather in the mountains of Pakistan - Afghanistan border region. Further, it is also widely expected that the rise in violence with al Qaeda insurgency attacks is in response to the upcoming September 18, 2005 Afghani parliamentary elections. To counter these threats, there are presently 20,000 U.S led coalition troops plus 8,000 NATO troops stationed in Afghanistan to assist the 26,000 U.S. trained Afghan military.
CURRENCY: ISO symbol ‘AFA’, new Afghan afghani. At time of review on June 20, 2005, the new afghani had an exchange valuation of 42.785 AFA to the US-dollar (USD) and/or 52.127 AFA to the euroland euro (EUR). The new Afghan afghani was introduced on October 2002 whereby 1000 old AFA was redominated to 1 AFA, the afghanis is widely accepted. In Afghanistan today, other currencies such as the Pakistani rupee, the US-dollar and Emirati dirhams that also accepted for payment. The new afghani currency replaced two near identical afghani currencies that were in circulation, northern & Taliban money. The afshal afghani with about 50 billion AFA in circulation (2001) was the official currency in circulation and the dustum afghani has about 30 billion AFA in circulation. The exchange rate regime in place is that of a managed float.
CURRENCY HISTORY: during the 1990’s, the afghani has been in a state of collapse due to hyperinflation resulting in a steady free fall in value versus the US-dollar in relation to global purchasing power parity. December 24, 2001 the official exchange was at 4750 to 1 USD and by 2002, the new afghani was set at about 50 AFA to the USD. Up until 1996, the official rate was 50.6 AFA to the USD at which time it rose up to 2262.65 AFA to 1 USD and re-set in April 1996 at 3000 AFA. Market rates varied significantly to the official rates for the afghani, these include: September 11, 2001 at 80,000 AFA to the USD. On December 11, 2001 at 36500 to the USD. During the collapse of the Soviet Union in 1989, the afghani had a value of 120 AFA to 1 USD. Since then, massive depreciation and debasing of the currency has taken place. By the time Kabul fell to the Taliban in 1996, the afghani had a market value of 21,000 AFA to the USD. During September 2001, the currency hit a low of 144,000 to the USD. Other dates of interest include Janaury 1995 at a market rate of 7,000 AFA to 1 USD, January 1994 at 1,900 and year 1991 at 850. Other quotes had the Northern Alliance version of the afghani in September 2002 at 80,000 AFA to USD while the government version during this time was trading at 42,000 AFA to the USD.
CURRENCY FORECAST: appreciation is most likely with U.S./IMF international support. The currency will remain volatile, the long term outlook will depend on the success of the government and its ability to exploit energy reserves, gold, copper and other precious minerals to increase wealth coupled with Afghanistan’s ability to successfully act as a transshipment centre for access to large oil and natural gas reserves in the Caspian Sea for neighboring countries. If reconstruction is successful and a viable formal economy and political structure does indeed take hold, the afghani will increase in value. Other forces may include adopting ‘dollarizing’ another currency such as the Pakistanee rupee.
A major risk is the growing insurgency that may very well continue to get bigger, will the warlords renew the risk for outright civil war? The Karzai government is still too top heavy, more regional representation is needed to foster stability across the country. The future value of the afghani will be measured upon the success of state building versus the growing Taliban/ al Qaeda insurgency.
UPDATED: June 15, 2005
