Afghans Try to Revamp an Unruly Economy

KABUL, Afghanistan —  After this country’s first steps toward political union, the new Cabinet is mapping out an ambitious plan for economic unity, senior government officials said Sunday, including a new currency and a banking system aimed at persuading foreigners and Afghan emigres to bring and keep their money here.

The details and timing of the new afghani remain a secret, but a high-ranking government official said the national currency would replace a hodgepodge of new and old Afghan notes and reduce the need for the welter of foreign currencies--U.S. dollars, Pakistani rupees and Emirati dirhams--now used for major transactions.

Currently, the nation is limping along without a formal banking system and with business and consumer transactions carried out exclusively in cash. Visitors are forced to bring large amounts of paper money because credit cards aren’t accepted and checks can’t be redeemed. A law being drawn up would pave the way for banks to open for business.

“One of the main reasons we are undertaking the exercise of introducing the new afghani is to reform the banking system. This will be the main focus of a lot of attention in the next few days,” said Omar Samad, a spokesman for the Foreign Ministry.

“The process will take time ... before all the old money is collected and exchanged with new money,” Samad said. “You will obviously need to keep the economy going at the same time. We do not want anyone inside or outside of Afghanistan who may hold large, huge reserves of afghanis to cause any kind of [speculative] mishap.”

Meanwhile, the country is struggling from day to day to pay its employees. Finance Minister Ashref Ghani has warned that if international donors fail to live up to pledges of $1.8 billion in aid this year he might be forced to cut back the nation’s already minuscule $460-million annual budget.

“Under this kind of system, you divide a limited pie among a large number of claimants, none of whom is satisfied,” Ghani, 53, a former World Bank social scientist who has also taught at Johns Hopkins University in Baltimore, said in an interview Sunday.

Vowing to balance the budget without borrowing or printing extra currency, he said that he will make further spending cuts if the promised aid fails to materialize in time.

Over the long term, Ghani is confident that, with a responsible economic policy, Afghanistan can generate enough revenue from mining, oil and gas production, and agriculture to prosper and significantly improve the health and well-being of its people. It’s the country’s immediate needs, amid the chaos and devastation resulting from decades of war, that concern him.

“Afghanistan was freed from a reign of terror due to a partnership of Afghans and the coalition,” he said, referring to the U.S.-led effort that drove out the hard-line Islamic Taliban regime last fall. “Rebuilding Afghanistan is also an issue of partnership with the international community. Redevelopment and prosperity can only be achieved through this partnership.”

Perhaps the most pressing reason for fiscal stability is to make the currency uniform. In some parts of the country formerly controlled by the anti-Taliban Northern Alliance, one version of the afghani circulates that is worth approximately 80,000 to the dollar. In the south, where a different, government-produced afghani circulates, its official value is closer to 40,000 to the dollar.

The two bills are virtually identical, but Afghans by necessity have learned to look carefully to see the subtle differences. Only foreigners, it appears, sometimes make costly mistakes.

Another problem with the current cash mixture is that there is no way for the central bank to determine how much national currency is in circulation.

“We have several currencies, not a single one,” a government source said. “Our currency has lost its value and the respect of the people.”

Because they have so little value, the current bills are also cumbersome to use. The biggest bill in circulation, a 10,000-afghani note, is worth only 25 U.S. cents, and a stack of them worth $100 would snugly fill a school lunch box.

The source said the current plan is to have the currency float freely and not be pegged to either the dollar or the euro. This source said the currency would be backed by Afghanistan’s reserves--which include $200 million in gold held by the U.S. Federal Reserve Bank in New York plus additional gold and hard currency inside Afghanistan.

But the source said confidence in the currency would spring not so much from the reserves as from the “prudential fiscal management” of the new government, which has pledged to be open and accountable in all its financial dealings.

“Currency is psychology,” the source said.

Meanwhile, a package of banking legislation is being drafted that will permit the licensing of new private banks, and two international banks will be invited to set up shop in Afghanistan, Ghani said. Half a dozen banks have been proposed.

A banking system both fuels and lubricates an economy. The availability of credit is a major factor in economic growth and opportunity.

Samad, the Foreign Ministry spokesman, said the World Bank and International Monetary Fund stand ready to help create the Afghan banking system.

Afghanistan is also joining a worldwide funds-transfer system for banks, known as SWIFT, that will allow normal bank transfers to the country for the first time since the Taliban took over in 1996.

This, in turn, will allow better-off Afghan families in exile to come home, secure in the knowledge that they will be able to receive remittances from friends or relatives overseas, said Noorullah Delawari, a former California banker who is now an advisor to the central bank.

A retired Afghan American executive from La Canada Flintridge, who for years directed the international banking division of Lloyds Bank California in Los Angeles, Delawari returned to Afghanistan earlier this year after more than three decades abroad with the hope of establishing his own commercial bank.

Upon learning that the banking laws were not yet written, he allowed himself to be drafted as an advisor to the Finance Ministry.

“It is a privilege to be able to come here and do things which are significant,” said Delawari, 58.

One potential source of liquidity for the new banking system is the wealth of Afghan citizens who are now abroad.

Delawari estimated that about 200,000 Afghans remain in Pakistan in part because they receive remittances totaling $30 million to $40 million a month from relatives in the U.S., Europe and elsewhere.

If reliable banks opened in Afghanistan capable of receiving international transfers, he said, those people would feel free to leave Pakistan and relocate permanently in their native land, bringing their relative wealth--desperately needed at home--with them.

Rumors are already circulating on the streets here in the capital about the imminent introduction of a new currency. Abdul Mobin, plying his trade among the other denizens of the money-changing district in the main bazaar, expressed skepticism about the government’s ability to carry off this conversion.

“I am 100% confident they can’t do it right. There is no good information system or transportation. And people have no education about how to manage money,” he said.

Also, Mobin said, Afghanistan’s “enemies” would work to undermine the country’s monetary stability. The afghani lost 5% of its official value against the dollar Sunday, and Mobin said it is not unusual for it to fluctuate wildly.

But he had a gloomy prediction for the new currency, whenever it is issued.

“It will lose value.... We don’t have an economy. We need to have an economy to have a stable currency,” he said.

On the table in front of him, Mobin had a stack of afghanis about 3 feet high and 2 feet wide.

“You see that mountain of money?” he asked. “It is not even worth $1,000.”