Afghanistan's foreign exchange market has seen unusual activity in the past week since it became clear that former Afghan King Mohammad Zahir Shah was returning to the country. The mysterious appearance of unused bank notes worth billions of afghanis has caused the national currency to weaken rather than strengthen, as had been expected with the former king's return.
Prague, 25 April 2002 (RFE/RL) -- Many currency traders in Afghanistan thought the value of the country's national currency, the afghani, would strengthen with the return from exile of the former king, Mohammed Zahir Shah, last week.
But the mysterious appearance of new bank notes worth billions of afghanis has, instead, caused the currency to weaken -- leaving those who had speculated on the foreign exchange market with sizable losses.
In early April, one U.S. dollar had been able to buy around 32,000 afghanis at the Shahzada Exchange Market in Kabul.
When interim government leader Hamid Karzai announced that he would travel to Rome last week in order to accompany Zahir Shah back to Kabul after his 29 years abroad, many Afghans began to sell off hard currency they had been saving in order to buy afghanis. Many had hoped to buy back their dollars and deutsche marks at a lower price and keep the differences as profit.
Once Zahir Shah arrived in Kabul, however, fresh stacks of 10,000 afghani bank notes -- many still wrapped in plastic from the printing house -- began to appear on the market.
The Afghan National Bank and the interim Finance Ministry both say they have not authorized the printing of new afghani bank notes recently. The National Bank says somebody flushed some 20 billion afghanis onto the market just as Zahir Shah arrived in Kabul.
At the same time, those who wanted to profit from the news of the ex-king's return began to try to sell back their afghanis for foreign currency.
And instead of strengthening to the expected level of 30,000 afghanis or less per dollar, the local currency in Kabul weakened -- dropping to as low as 40,000 afghanis per dollar at some markets.
Since 22 April, Kabul's foreign exchange market appears to have stabilized. Today at the Shahzada Exchange, one U.S. dollar is worth about 37,000 afghanis.
There have been conspiratorial whispers in Kabul that Russian and Pakistani businessmen may be behind the new bank notes.
Many traders think the appearance of the unused bank notes is an attempt by the enemies of Zahir Shah to minimize the significance of the ex-king's return. Others allege that Pakistan's government is involved. So far, there has been little hard evidence to support any of those claims.
Interim Finance Minister Hedayat Amin Arsala told RFE/RL this week that Afghanistan's money markets are so limited that market speculation around events like the return of the former king can cause wide currency fluctuations.
"I also have heard that large amounts of Afghan currency have been flushed onto the market [since the return of Zahir Shah] and that people have exchanged it against the dollar."
Arsala said he expects the volatility of the Afghan currency to continue until authorities establish "healthy control over finances." He also said one of the most important steps toward stabilizing the financial situation in the country is to fully establish political stability.
"We have taken the preliminary steps with a budgetary plan to stop inflation and reduce excess expenses. In other words, to reach some balance between income and expenses in order to reduce our debts and not to print new bank notes in excess of our needs."
When asked about the suspected source of the new afghani bank notes, Arsala suggested they may be notes printed during the reign of the Taliban -- or possibly even earlier -- but hoarded and kept out of circulation. Just before the Taliban fled Kabul last November, the cost of one dollar on the Afghan black market was about 100,000 afghanis.
"In the past years, a lot of currency was printed and therefore there is a flow of money into Kabul and other parts of Afghanistan that cause fluctuations in the value of the afghani. Obviously, there should be a reformed policy so that we can stabilize this situation."
In fact, the Central Bank has had little room to shield the value of the afghani from the volatility that comes with widespread currency speculation since the interim administration took power in December. That's because all of the Central Bank reserves in Kabul -- gold, as well as hard currency -- was looted by the Taliban on the night it fled the capital.
Among the few sources to replenish those reserves has been $6 million of United Nations aid earmarked to pay the salaries of civil service workers and a $1.6 million cash gift from the United Arab Emirates.
Arsala says the Central Bank also regained access to gold and currency that it has had for years in accounts at U.S. banks -- accounts that the Taliban had been unable to access because of a freeze imposed by the U.S. government.
"There is no doubt that we have some to support the afghani. There is a lot of gold, so I don't see any problems with our treasury having the necessary support for new afghani bank notes [that might be printed in the future]."
Arsala said he is unable to say the exact value of those reserves because all of the accounts abroad must be re-evaluated. But he estimated that between the Federal Reserve Bank of New York and the funds that have been sent to Kabul, the total is about $200 million in hard currency and another $200 million in gold.