Catalog

Banking on Afghanistan

By David Kruger (dkruger@adb.org)
External Relations Specialist

Background

OPTIMISTIC Anwar-ul-haq Ahady, Governor of the Central Bank of Afghanistan

Like much of Afghanistan, the country’s banking system was devastated during 2 decades of conflict. The man charged with rebuilding the sector is Anwar-ul-haq Ahady, Governor of the Central Bank of Afghanistan, and Alternate Governor for Afghanistan in the Asian Development Bank (ADB). Mr. Ahady, who spent 23 years as a banker and professor in the United States, returned to Afghanistan in March 2002 to take up his current position. He spoke with David Kruger about his progress so far and the challenges that lie ahead. Excerpts:

It has been more than 18 months since the Karzai Government took office in Afghanistan. How is the rebuilding of the country proceeding?

You can look at it from an institutional point of view or from a physical point of view. In terms of institutional rebuilding, at least the central bank has started its rebuilding. We finished a currency conversion; we rebuilt our macroeconomic research unit, which provides the information for monetary policy. We have established a supervision department, which is the prerequisite for having a two-tier banking system, whereby commercial banks would be separate from the central bank. And we have had a pretty stable exchange rate. Prices have actually declined this year. So as far as the institution of the central bank is concerned, I think we have made significant progress. We are about to build a new banking system in the sense that we have received applications at least from three banks and they are ready, they have been reviewed, we are ready to issue them licenses, but we are waiting for the passage of the central bank law and the banking law in general.

What is the main challenge facing the central bank now?

The main challenge is to establish a new banking sector that is unlike in the past. In the past, we had commercial banks being part of the central bank. Now we will have commercial banks that are separate from the central bank. But I think we have made significant progress in that area, and I’m pretty confident that by the end of the year we will have a vibrant, privately owned banking system in Afghanistan. Our very serious problem is human resources. We do not have too many qualified people in Afghanistan. We are trying to hire some Afghans who have studied abroad in neighboring countries and have a decent education.

How will the entry of commercial banks benefit Afghanistan and its people?

These banks are supposed to compete with each other, and through competition, we hope they will offer better services, a more consumer friendly environment, and lower prices. This is the benefit you would expect from any privately owned, freemarket, and competitive economic environment. The second benefit would be that the Government would not be involved in any losses that these banks might incur. We would hope that we will change the banking culture from one of being dominated by bureaucratic procedures to one that is dominated by initiative, competition, and result orientation.

Are you confident the new national currency, the afghani, has gained acceptance?

It has been very successful. It took us 3 months to exchange our old banknotes for new banknotes. The new banknotes have been accepted countrywide. Of course, there are still some transactions in US dollars and Pakistani rupees, but I think transactions in afghani are increasing. The exchange rate has been very stable for the past 6 months, and I think we have been able to gain the confidence of the people in the currency. I am expecting that within a year or a year and a half or so, the national currency will be the only currency used in the country for major transactions.

One goal of the introduction of the new currency was to gain greater control over monetary policy. Has that been achieved?

Yes, definitely. In the past we had no control over the printing of money. We actually did not even know how much money was in circulation. Conducting money policy on a sound economic basis was very difficult. Now on a daily basis I know what is the amount of money in circulation, what is the exchange rate, what is the government expenditure, how much I should sterilize. I can make those decisions with better data and with greater confidence.

The Government has adopted a no-deficit policy. Can you explain the policy and its goals?

The no-deficit policy is that the Government will not spend more than the revenue it generates. In the past, the Government spent a lot more money than its revenues and the worst part of that was that the deficit was financed by printing money. That’s why the afghani depreciated so rapidly. To give you some perspective, in the 1970s, before the communist coup, one US dollar was equal to about 40 afghanis. By the time I took over, one dollar was about 40,000 afghanis. And the main reason was because there was so much money printed. In the 1970s before the communists took over, there were 16 billion afghanis in circulation. When the Karzai administration took over, the total amount of money in circulation was about 13,000 billion afghanis. This was money being printed without any foreign exchange support so of course the value of the afghani deteriorated very rapidly. If the Government were to have a deficit and it were monetized, the same thing would happen with the new currency.

How does the security situation in he country affect your policy decisions and the implementation of new policies?

A prerequisite for economic prosperity is security. Security could be a lot better, and it should have been better. And I think it should have been the No. 1 priority. I find it difficult to accept this argument that economic prosperity will enhance security. I don’t think there is going to be any economic prosperity unless there is security. The state of security is not as good as it should be, but the Government does realize this and is attaching very high priority to improving security.

One area in which ADB is working with Afghanistan is the establishment of a national payments system. How is that progressing?

There are three elements to the national payments system. One is the international element, and I think now the central bank is capable of doing all sorts of international payments. We can receive money from abroad and send money from Afghanistan in no time; we don’t have any problem in that regard. There are payments to be made within the city of Kabul. Once again the central bank has no problem making these payments. Then there is payment to be made in the provinces. The central government does not have a problem. It has its employees, its branches throughout the country; but to be able to send money to those branches, security conditions would have to be met. We have asked President Karzai to talk to the governors to provide a high level of security for the banks and I think they have agreed to that. Recently, we completed our connection with about 32 central bank branches in the provinces. We are connected to those branches now through computers and through satellite. But we need to repair our branches in the provinces, and for that we need more equipment, and we have asked ADB to support us in that project.

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