Afghanistan initially had a small and underdeveloped financial system, with a central bank which had few effective instruments and unclear objectives and itself undertook commercial banking activities, while unregulated money bazaars also provided important services. Financial and other arrangements deteriorated in the 1990s. After the overthrow of the Taliban government in 2001 there were attempts to develop more modern financial arrangements, but with only modest success.


Targets and attainment



official exchange rate fixed to USD but various special exchange rates subject to periodic adjustment, plus central bank’s ‘operational’ free exchange rate kept in line with rate determined by supply and demand in important money bazaars in Kabul and Kandahar (which also provide some domestic lending); central bank, which is also partly a commercial bank and lacks most monetary instruments, plus small number of other (non-competing) commercial and specialist banks, some state-owned; monetary growth driven by credit to public and private sectors and balance of payments; low monetisation and bancarisation; under 1975 law private banks nationalised, plans for central bank to lose commercial activities and monetary policy to become more active; 1976 appreciating bazaar rate leads to central bank rate revaluation and forex intervention; 1978-9 coups lead to Soviet intervention, followed by years of civil war; 1979 some simplification of exchange rates, but controls and additional rates return; 1981 bazaar forex rate depreciates strongly; 1982 central bank brought under planning arrangements instead of finance ministry; from 1981 banks’ credit to private sector and SOEs is subject to (indicative) annual plans and monetary growth is driven by lending to government, while interest rates are rarely adjusted; limited planning, but private sector is dominant in many areas and government does not intervene in bazaar market; monetisation remains low; 1988 new ‘commercial’ forex rate, 1989 non-official convertible transactions switched to commercial rate, which is linked to bazaar rate; trend rise in bank finance of fiscal deficits; 1988-9 Soviet troops withdraw but civil wars continue, with severe effects on fiscal deficits, monetary growth, infrastructure, public services (including health and education), economic activity; 1991 commercial forex rate stabilised while bazaar rate depreciates continuously; over 1990s bazaar and related hawala system come to play larger financial role, while central bank becomes inactive, and foreign and counterfeit currencies are widely used; by late 1990s most of country under Taliban government, which fails to restore public services, but is overthrown late 2001; statistics in early years weak (and in some cases on CMEA/Soviet basis), data collection ended mid-1990s

unstructured discretion UD


government opts to introduce new currency 2003 (with revived payments system) to be managed by upgraded central bank under floating exchange rate, but central bank soon begins to manage exchange rate; continuing conflict and security issues; growth of opium production poses problems for exchange rate, economic and security policy; monetary policy focused on currency in circulation; growth and restructuring of banking and financial sector, including central bank’s ‘capital’ notes issued from 2004; latter facilitate regular auctions in domestic securities but monetary policy operated primarily through (much larger) forex auctions, aided by standing facilities and reserve requirements, while high aid inflows and dollarisation complicate and reduce scope of monetary policy; 2009-10 reserve money replaces currency in circulation as operational target and central bank tries to expand secondary market for and role of capital notes; 2010 crisis at Kabul Bank, country’s largest, arising from fraud by insiders: resolution takes many years, as does unwinding of blow to public confidence; central bank recapitalised 2012; continued armed conflict of varying severity; monetary policy remains focused on price stability, but weak transmission, high dollarisation, dependence on aid inflows (which impedes forecasting of liquidity) and lack of adequate domestic instruments all limit effectiveness of monetary policy (even though fiscal dominance is largely precluded by aid inflows and exchange rate is subject to only limited intervention); statistical database gradually but substantially improved

loosely structured discretion LSD

Selected IMF references: RED 1975 pp28-9, 49-51, 69-71; RED 1976 pp23-5, 39-41; RED 1977 pp42-3, 56-7; RED 1983 pp16-17, 32-4; SR 1983 pp4, 7-8; RED 1984 pp19-21, 34-5; RED 1985 pp24, 40; RED 1986 p32; SR 1986 pp11-12; RED 1990 pp44-5; RED 1991 pp26-8, 40-2; [note: no IMF consultations or reports, and few statistics, available from 1992 to 2001] RREDP 2002 pp4-5, 10, 14-18; SR 2003 pp6, 12, 13-15, 18-19; SR 2005 pp8, 10; SR February 2006 pp9-10, 12-13, 18; SI 2008 pp22-30; SR January 2008 pp10-12, 14; SR 2010 pp13-16; SR 2011 pp6, 8, 10, 18-19; SR 2015 pp19-20; SR November 2017 pp11-12.

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