Why the Taliban banning foreign currency is not as big a deal as it seems

Afghanistan’s economy has been in dire straits since the Taliban took over in August, with banks running out of cash, most aid cut off, and all of it exacerbated by rising food prices and unemployment. 

The new Taliban administration has announced a ban on foreign currencies, saying they will prosecute anyone who uses it for domestic business.

Meanwhile, Afghanistan's central bank eased restrictions on withdrawals from dollar accounts, raising the maximum to $400 (36,000 afghanis) a week from the previous limit of $200 (18,000 afghanis).

The move comes as the Taliban grapples with some $9 billion in central bank reserves frozen by the US. Add to that key Afghan trade crossings that have been blocked for weeks, which has crushed exports and deprived the administration of millions of dollars in customs revenues. 

According to Bloomberg, the IMF has refused to release around $370 million to Afghanistan while two-thirds of bank deposits and half the national loans are in US dollars. Unable to maintain an influx of dollars, banks have run low on foreign currency, and long lines have formed outside branch locations amid fears there is not enough cash to go around. 

A familiar affair

Afghanistan has long been accustomed to using multiple currencies. Many transactions are conducted in US dollars while Pakistani rupees are common in areas close to its southern border trade routes.

Banning foreign currency is not an uncommon occurrence. The measure was adopted in Argentina from 2011-2015 and Zimbabwe in 2019 as a form of exchange control to boost confidence and demand for a battered currency. 

“It’s not a new activity or practice,” former Afghan deputy minister for industry and commerce Sulaiman bin Shah tells TRT World. 

“The previous government has always tried to strengthen AFN against any other currency. Previous governments used a ban on foreign currency and trade in foreign currency to help achieve that objective.”

Bin shah says trade activity along the border with Pakistan is what shifted focus in that region to the rupee, as traders often use the currency to buy items across the border. 

“The government would try to ban that and abolish the use of other currencies and promote AFN and this was the objective before as well.”

Desperately seeking dollars

Back in August former Afghan central bank governor Ajmal Ahmady expected the afghani to fall, as the central bank could not supply enough dollars to local banks, and for the Taliban to use capital controls to prevent outflows.

Indeed, the afghani did fall, plummeting to record lows of 91 against the US dollar. Concerns rose as customers desperate for cash crowded outside banks, which were running low on the much sought after dollar. 

The cash strapped administration is attempting to shore up support for the beleaguered currency by shifting local demand for foreign exchange towards the afghani.

“So to make sure AFN has a demand and a strength, governments simply ban other foreign currencies and ask its people, traders, businessmen, whoever to have transactions only in the local currency. Now this obviously leads to more demand for this local currency and when there is more demand, there is some relative degree of strength or credibility intact,” bin Shah says. 

The Taliban could channel more afghani into the economy to meet high demand, Juma Khan, an economics professor at Bakhtar University, told Bloomberg. He added that the move could “potentially appreciate afghani currency in the short term, as well as allow the Taliban to purchase and save more dollars at a time the country’s running out of dollars.”

It is unclear how the Taliban will enforce the move after decades of reliance on the dollar, but Sulaiman says proper enforcement hinges on strong state authority. 

“We have seen in the past that when these bans were enforced, they would be enforced very critically, strictly for a few days or weeks and then eventually the ban would mean nothing because people would resort back to using foreign currencies,” bin Shah says. 

“We will have to wait and see how long this time the practice or enforcement will take place, because in terms of authority, in terms of power or leverage, this new rule is way stronger and different than any other governments in Afghanistan previously.”