By: Ajmal Ahmady – Afghanistan Central Bank Governor
The COVID19 pandemic has been a common challenge that is threatening economies around the world. Given Afghanistan’s geographic location near to the affected countries, we expected Covid-19 cases to significantly increase. In fact, the World Health Organization’s (WHO) initial estimates showed that the significant percentage of population could be affected.
The Covid-19 pandemic has been a common challenge that is still threatening economies of all countries around the world. It has caused the nations to provide unprecedented monetary and fiscal support to their economies. Least Developed Economies have likewise been severely impacted – Afghanistan was no exception. Given Afghanistan’s geographic location near to other affected countries like China, India, Iran, the pandemic had a proportionally less impact compared to the mentioned neighboring countries.
At first, the pandemic led to the closure of borders which had a negative impact on trade flow and transit, spike in prices of basic commodities, lockdown of cities, industrial parks, schools, and other social places; and increased government expenditure on health and other sectors. With 66,903 confirmed by end of May 2021, the World Health Organization’s (WHO) data shows that the cases have significantly dropped now compared to the same timeframe last year. Government efforts to immunize people is ongoing and more than 500,000 doses of vaccine have been administered to the Afghan population.
Besides the pandemic, political uncertainty further added to the challenges Afghan economy faces. With the US Troops withdrawal, of-course the US dollars cash inflow decreases. With a trade deficit of more than five billion US dollar, the withdrawal of the troops isn’t a pleasing news for the economy.
Luckily, despite the ongoing political and social unrest and even with a hard Covid-19 hit, key government institutions have been able to maintain financial sector stability and a positive economic trajectory. Economic growth was approximately -2% last year – a relatively positive achievement during the Covid-19 crisis. Inflation is currently at 4.1%, the financial sector also emerged relatively healthy from the Covid-19 crisis.
This wasn’t a coincidence. During this time, domestic commodity prices remained relatively stable after an initial spike. The resume of trade, operation of banks during lockdown was the result of a rather prioritized objectives and strategic initiative by some governmental institutions– particularly the Ministry of Industry and Commerce and the Da Afghanistan Bank (Afghanistan central bank).
The pandemic hit last year in April when I was Minister of Industry and Commerce (MoIC). During this challenging time for Afghanistan, it was the ministry’s job to make sure the economy stayed afloat and trade continued without disruption. As the Minister, the greatest responsibility at the time was to make sure that the border closures could be managed so that citizens continued to have access to essential needs – including basic food items and healthcare products.
To make sure citizens have access to essential food was possible only through strong and continued coordination among relevant entities and great leadership. Therefore, I developed, besides other mechanism, “Borders Mechanism” to ensure smooth trade flow between neighboring countries, “Industries Mechanism” to ensure continued supply of goods to the markets and production of Covid-19 related medical supplies. I accelerated the ministry’s efforts towards Covid-19 relief. I worked with our regional trade and economic partners to keep the borders open to continue the flow of goods during the lockdowns. We also had to restructure the foreign donor projects in order to align them towards urgent Covid-19 relief.
Longer-term, a key goal as Minister of Industry and Commerce was to bring reforms in both trade and industry sector of Afghanistan. As a first principle, I set one principle as “Change Afghanistan from an importing country to exporting” with specific annual targets of $1.0B exports in 2019, $1.5B in 2020 and $2.0B in 2021. As a result, Afghanistan exported more than $1 billion worth of goods for the first time in 2019.
Prior to becoming Minister of Industry and Commerce, I made reforms to improve the trade environment. As a result of such reforms, in 2018 Afghanistan was announced as the best reformer in the “Doing Business Indicator” annual report of World Bank. In addition, I initiated the Air Corridor Program in 2017 to facilitate export of Afghan goods to regional and global markets. As of now, more than $437 million of Afghan products were exported to more than 50 countries – representing more than 20% of total exports from Afghanistan.
2018 World Bank Report: “Improving the business environment is essential for Afghanistan to stimulate domestic investment and create jobs. Given the exceptional challenges of conflict and violence in the country, the government’s resolve to improve the business climate for private enterprise is doubly commendable,” said Shubham Chaudhuri, World Bank Country Director for Afghanistan. ”We look forward to continuing to record Afghanistan’s successes in years to come.”
Monetary and Financial Stability
Now as governor of the central bank, I have likewise attempted to bring reforms to improve and strengthen the financial sector. The central bank made significant progress on a number of areas in the first quarter of 2021. Although with much improvements in the sector, the country still faces a long way to go. In the face of such a fragile socio-economic condition, it is vital to maintain a stable financial and banking sector.
Afghanistan, being one of the countries most affected by the Covid pandemic, was expected was expected to face a large growth shock to our economy. However, to everyone’s surprise our financial sector performed relatively well. The good turnout was a result a monetary policy measure to prevent any further downturns.
Upon becoming the Governor of the Central Bank, I began my new role by bringing extensive reforms. Starting from institutional reforms by removing corrupt officials to changing procedures, regulations and eventually focusing on monetary policy and banking reforms. In the span of a year, I have developed 70 working procedures and regulations that lay a strong foundation of the central banking. As a result, private banks injected more than AFN 1 billion in additional capital to support and mitigate their capital position.
Another financial reform was the corporatization of Money Services provider (MSPs) and Foreign Exchange Dealers (FXDs), an effort to tackle money laundering and illegal monetary activities, which previously were disorganized and lacked proper reporting and transparency. The corporatization of the MSPs and FXDs was a major challenge as it was vehemently opposed by a few persons within the sector, but has turned into a large success.
Next, let us examine DAB’s monetary policy. A large part of DAB’s success can be attributed to the monetary policy regime. DAB was able to meet all monetary aggregate quantitative targets during 2020, and expects to be able to meet any targets for 2021.
In terms of growth, DAB has been able to mitigate the negative growth shock during 2020, as a result of the Covid-19 crisis. We now expect growth to resume in 2021, with DAB’s forecast to be between 4-5%. There may be some downside risk due to potential lower agricultural sector growth. DAB is reviewing various monetary and macro-prudential measures to support growth.
Reserves continued to grow during the first quarter of 2021, and we expect to be able to continue to grow reserves during 2021 by any international metric, Afghanistan has ample reserves to deal with most external shocks. To ensure that reserves contribute to the betterment of citizen’s welfare, DAB has made improvements to the reserve management policies and management to align with best practices among central banks.
In sum, DAB has been able to meet the inflation target and increase Afghanistan’s international reserve, while at the same time being able to reduce currency volatility. We allow the market to set the exchange rate, but do so while reducing volatility. In this regard, recent changes to deepen financial market and improve auction procedures have contributed to this positive development.
Beside the basic banking services, DAB has also taken initiatives to support local businesses access to finance. DAB finalized SME support package that includes actions to provide fiscal, monetary, and structural support for the sector. We have structured the package to provide both immediate supports to combat the Covid-19 crisis, but also to provide a foundation for continuous support for the SME sector. In April 2021, DAB also initiated the lending program for industrialists, entrepreneurs, agricultures and craftsmen by commercial banks.
DAB’s performance as the country’s main financial pillar has been regarded positively by international partners. As much as Afghanistan tries to be independent, the country still remains reliant on foreign aid for monetary and policy support. Da Afghanistan Bank has been working in collaboration with international partners. International Monetary Fund (IMF) has been one of DAB’s strategic partners. DAB works with IMF on three benchmarks, Safeguard Assessment and Extended Credit Facility programs. IMF recently after completing their assessments, praised Da Afghanistan Bank on extending credit facility program. The full IMF statement can be read here: IMF Reaches Staff-Level Agreement on the First Review under Afghanistan’s Extended Credit Facility Arrangement.
“The team discussed with the Afghan authorities the implementation of economic reforms, commending them for prudent macroeconomic management under challenging circumstances as well as progress towards bolstering financial sector resilience.” IMF Praising DAB’s Performance
Author: Ajmal Ahmady – Da Afghanistan Bank Governor
Ajmal Ahmady is the Governor of Da Afghanistan Bank, who previously served as the Minister of Industry and Commerce and Economic Advisor to the President of Afghanistan. He also worked at various asset management firms and the World Bank for almost a decade. He has two masters from Harvard (MBA and MPA/ID). Mr. Ahmady is previously published in Harvard Business School, The Hill and The Financial Times.