Tuesday, January 31, 2023

Afghanistan: Siphoning out US dollars to Iran and Pakistan

By SS Ahmad 

The stock of US dollar (USD) which is considered the global currency is crucial for maintaining forex reserves of any country. The currency holds strategic significance as its captures an estimated 62 percent share of the global reserves. Maintenance of sufficient amount of USD by any country is important for safeguarding the local currency’s value which helps to keep inflation numbers under check and in providing liquidity at the time of economic crisis. However, it is a challenge for developing countries which are struggling due to low export base and not much industrial development. Owing to the twin constraints, the inflows in form of export revenue or inward investments are hard to come by. Moreover, the dependence of high imports at these countries requires them to pay in US dollars leaving them vulnerable to shortfall in their forex reserves. 

Afghanistan is one such consumer economy that depends on imports of goods from foreign countries while its economy is heavily supported by foreign aid. The majority of such aid flows into Afghanistan in the form of USD which helps the country to preserve the value of its domestic currency, Afghani and avoid severe economic crisis. Afghanistan’s economy is already under clouds with peaking poverty and diminishing employment opportunities. It is the availability of USD due to which the country maintaining the value of Afghani to some extent. However, vulnerability of the country also acts as a chance for the competing or adversary countries to inflict damage on Afghan economy. 

It is being noticed that smugglers from neighboring countries i.e., Pakistan and Afghanistan are involved in wide scale smuggling of USD out of Afghanistan. Da Afghanistan Bank reports indicate that USD 4-5 billion is being smuggled annually from Afghanistan to neighboring countries. Recently, Abdul Rahman Zirak, Deputy Chief of Afghanistan Money Exchange Union said that there is an escalation of USD smuggling to Iran and Pakistan. He warned that the increasing smuggling may damage both Afghanistan’s economy and domestic currency. 

Smuggling USD out of Afghanistan leads to a rise in the price of goods imported from outside, and a reduction in the value of the Afghani currency, which decreases the purchasing power in Afghanistan. Abdul Latif Nazari, Deputy Minister of Economy of Afghanistan said that the smuggling will negatively impact the country’s economy; urging relevant authorities to take bold measures against it. 

Of late, money exchangers in Kandahar have been expressing concern against rampant smuggling of USD to Pakistan. They claim that millions of Pakistani rupees are brought to Kandahar on daily basis by the smugglers to buy dollars and transfer the same to Pakistan using different ways and means. Owing to its weak forex position, Pakistan is in dire need of US dollars at present. Pakistan’s forex reserves have reached an eight-year low of $ 6.7 billion which can only provide import cover for one month. Islamabad is struggling to arrange forex for meeting USD 8.5 billion external debt repayment requirement due in January-March 2023. There is a raising concern that the country may be at risk of default and unable to repay its foreign debts. 

At the same time, the Pakistani currency is losing against the USD amid depleting foreign exchange reserves, and increasing demand for import payments. It was due to the unavailability of foreign reserves that Pakistan put lots of effort to pay the Afghanistan coal import in rupees instead of USD. The high demand for USD in Pakistan motivates smugglers to transfer the same from Afghanistan to Pakistan. On December 16, 2021, 21 smugglers were arrested for taking USD 18 million from Sarai-e-Shahazada, Afghanistan’s largest Money Exchange Market in Kabul. However due to weak enforcements and support from the Pakistani side, in most of the cases, the smuggling goes undetected.

Afghanistan’s other neighbour, Iran is also facing severe shortage of USD. Iran’s foreign reserves in 2018 were USD 122.5 billion which dropped to USD 12.4 billion in 2021. The forex crisis here was triggered by withdrawal of the United States from the 2015 nuclear agreement which led to restrictions on Iran’s oil exports and international banking relations. The shortage of USD in the country inspires the Iranian smugglers to buy dollar currency from Afghanistan and sell it at a higher price in domestic market. 

Meanwhile, there are no restrictions from the Iran government on the transfer of dollars into that country. Money Exchange dealers in Afghanistan’s Herat province bordering Iran expressed their concerns over the surge of dollars smuggling to Iran. On December 27, 2022, a group of smugglers was arrested in Herat while carrying USD 80,000 to Iran. The local traders in Afghanistan are now demanding bold measures and serious restrictions to stop smuggling of USD through borders. They warn that aid provided by the international community to Afghanistan is wasted, as only smugglers and neighboring countries benefit from it. According to them, the Central Bank and concerned departments must have serious control and oversight over the market as well as at the borders to ensure that Afghan foreign reserve is not transferred to neighboring countries before it’s too late.

NoteThe contents of the article are of sole responsibility of the author. Afghan Diaspora Network will not be responsible for any inaccurate or incorrect statement in the article. 

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