|The new Governor of the DAB, Abdul Qahir Idrees, is introduced to staff. [Source][Source]|
Last week I made the case that the Afghanistan's currency, the Afghan afghani, might hyperinflate. In this post I'm going to take a different tack. In a chaotic economy, the afghani—or at least some version of the afghani—may be one of the country's more reliable elements. I'm going to look to several exotic currency scenarios including that of the 1990s Iraqi dinar, which split into an unstable Saddam dinar and a stable Swiss dinar, as a possible template for what might happen in Afghanistan.
My blog post from last week was about the assets owned by Da Afghanistan Bank (DAB), Afghanistan's central bank. The Taliban, which just took over control of the country, discovered to its chagrin that most of the DAB's US$9.5 billion in assets are held overseas and controlled by the U.S. and institutions like the IMF. And now those assets have been frozen.
Here is the former central banker, Ajmal Ahmady:
This thread is to clarify the location of DAB (Central Bank of Afghanistan) international reserves— Ajmal Ahmady (@aahmady) August 18, 2021
I am writing this because I have been told Taliban are asking DAB staff about location of assets
If this is true - it is clear they urgently need to add an economist on their team
With a wedge being driven between the afghani banknotes that are circulating in Afghanistan and the New York-domiciled assets backing those notes, I went on to suggest in my post that the notes—now rudderless—could only fall in value.
What follows is my counter-argument, to myself.
Yes, the Taliban-controlled DAB has been cut off from its New York assets. But Taliban officials are about to learn (if they haven't already) that they have also been severed from the global banknote printing market. This means that the Taliban-controlled DAB can't issue any new banknotes. Cash is the dominant form of money in Afghanistan. With the supply of afghanis now fixed, and the demand for them rising over time along with population growth, Econ 101 tells us that the afghani's purchasing power should strengthen, or at least not fall by very much.
Like many other smaller countries, Afghanistan doesn't print its own notes. The DAB signed a contract in 2020 with the Polish Security Printing Works, Poland's state-owned money printer, to provide it with new cash. The first batch of new Polish-made afghani notes arrived earlier this year, with more due to arrive through 2022.
The Taliban's takeover makes it unlikely that subsequent batches will be delivered, at least not without U.S. approval. Thus the stock of afghani banknotes is locked with no timetable for unlocking it.
Nor can the Taliban-controlled DAB print up its own series of afghani banknotes. Banknote printing is a complex affair due to anti-counterfeiting features, exotic substrates on which notes are printed, and designer security inks. I doubt the Taliban can acquire high quality presses, materials, or the requisite expertise to operate them.
Might a rogue foreign printer produce notes for the Taliban?
This is where things get interesting. We can look to other countries like Yemen, Libya or Iraq for ideas about what might happen if this happens (more on these countries at bottom).
Say that a shortage of notes pushes the Taliban to try and secure new ones. The Taliban-controlled DAB might contact an ally such as Pakistan to get some new notes printed up in secret. The rogue Pakistani printer will probably do a better printing job than the Taliban would on its own, but it still won't be able to make perfect replicas of the Polish series (or prior series). And the Taliban may not want replicas anyways. It may ask for an entirely new note design to commemorate its coming to power. Once the Taliban has received the Pakistani-printed notes, it will proceed to put these not-quite-replicas into circulation.
Now the ball is in the U.S.'s court.
If the U.S. decides to publicly disapprove of the rogue notes, then people in Afghanistan will refuse to treat old notes and new notes as being fungible, or equal to each other. The old approved notes will be seen as being tied to the billions of assets held in rich New York, the new unapproved being linked to a destitute Taliban. So the unapproved notes will trade at a discount to approved notes. At that point Afghanistan will have two afghanis: a strong Yankee one and a bad Taliban one. (This would be a situation similar to the bad Saddam dinars circulating in 1990s Iraq. More on that later.)
The Taliban may react by trying to restore fungibility. Afghan citizens would be required to treat the two unequal banknotes as equals. That is, local stores and banks would be forced to accept both the new and old notes at par on pain of execution.
But these measures would only partly work. People would adapt by limiting all their official compliant purchases to be made using the weaker unapproved banknotes. They would hoard the good approved ones, perhaps for use on the black market (where they will fetch their true value) or for export to regions of Afghanistan that are not controlled by the Taliban, and where the Taliban's one-for-one afghani rule has no effect. (Much like how stable Swiss dinars circulated in Kurdish-controlled Northern Iraq).
So a strategy of rogue printing could very well mean the emergence of a strong and a weak afghan. (Some of you will recognize this as Gresham's law in operation). That sounds like sci-fi, but as I've been hinting at throughout this post, this sort of strange currency divorce isn't all that new. I wrote about Iraq's experience here.
The short version is that prior to the 1991 Gulf War, Iraqi dinar notes had been printed by a private printer, De La Rue. De La Rue's printing plates were manufactured in Switzerland. Cut off from De La Rue after the war, Iraq's leader Saddam Hussein had a new series printed up locally. These were known as the Saddam dinar and circulated at a discount to the Swiss dinar.
Yemen remains home to one of the world's oddest monetary situations. The entire Yemeni monetary system has split on the basis of the age of its banknotes, with pre-2016 notes being worth much more than newer notes.— John Paul Koning (@jp_koning) August 3, 2021
See chart below. Old rial notes are in blue, new in orange.
The possibility of a dramatic rupture of the afghani might be enough to get the Taliban to swear off the rogue printing option altogether. It may seek to work with the U.S. (i.e. submit to certain U.S. demands) in order to get access to both its Polish-printed notes and New York assets.
As for the U.S., it may agree to work with the Taliban-run DAB for humanitarian reasons, subject to certain conditions (i.e. limits on how banknotes can be issued). This compromise between enemies might lead to a surprising amount of stability for the Afghan afghani.
I've now written two blog posts about the Afghan afghani, both of them describing wildly different scenarios. What's evident is that the situation is a volatile one. It could proceed along any of vast number of arcs.