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Afghanistan’s currency was the world’s best-performing currency in the third quarter of this year, as foreign aid inflows and strict capital controls helped Afghans recover from historic lows hit after the Taliban takeover two years ago.
The Afghani appreciated nearly 10%, making it the third-best performing currency this year, behind the Colombian peso and Sri Lankan rupee. Its strengthening helps strengthen the Taliban’s financial position as the regime grapples with widespread unemployment.
It took over from a U.S.-backed government in 2021, triggering a historic economic collapse that immediately saw the country’s gross domestic product shrink by a fifth as international powers withdrew support and imposed sanctions.
This quarter’s gains have erased losses since the currency was taken over, but the country is now among “the two or three poorest countries in the world”, according to the United Nations Development Program.
Still, Afghanistan’s economy, which initially fell sharply after the Taliban took over, has shown signs of stabilizing as the Taliban consolidates control and takes steps to support Afghans.
Inflows of dollars from the United Nations and other aid from international donors have helped stabilize Afghanistan, and currency controls imposed by the Taliban have limited foreign exchange transactions by ordinary Afghans.
“They have pretty tight capital controls, so now you can’t exchange afghanis for dollars,” said Gareth Leather, senior economist at Capital Economics covering emerging markets. “This, along with the aid money, supports the currency.”
Authorities have also cracked down on currency speculators and customs corruption, supporting dollar supplies, said Graeme Smith, senior adviser at conflict prevention group Crisis Group.
Smith said this helps make imported food such as wheat more affordable for ordinary Afghans, many of whom are going hungry. “Strong currencies save lives,” he said. “When the crumpled paper money in their hands brings them a little extra bread every day, it makes a huge difference.”
Still, the country’s prospects remain bleak. The central bank’s overseas reserves have been frozen by the United States, depriving the authorities of an important source of foreign currency.
The United Nations estimates the country needs more than $3 billion in humanitarian aid this year, but only about 25 percent of that has been raised so far. Smith said aid shortfalls were expected to worsen as relations with donors soured as the Taliban continued its crackdown on women’s rights.
“Cash shipments to support UN operations are slowing and will continue to decrease,” he said. “This could lead to a severe lack of liquidity in the Afghan economy.”
Capital Economics’ Lesser warned that despite recent gains, the Afghan currency “will remain very unstable given the geopolitical situation.”
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