The Afghan currency hits a record low on Wednesday, trading at 86 against the dollar, according to data from Refinitiv. This is a significant decrease from around 80 a week prior.
This currency crash mirrors concerns about Afghanistan's future, following the fall of Kabul to the Taliban. The Taliban, a repressive militant group, is heavily sanctioned by the United States and other world powers.
Afghanistan's volatile economy is heavily reliant on international aid, led by the US, which is now under serious threat as US troops withdraw. The World Bank estimates that about 75% of public expenditure is financed through international aid.
The devaluation of the Afghan currency will intensify inflationary pressures. Higher prices, particularly for essentials like food and medical supplies, will hit the poorest Afghans the hardest.
Robert Kahn, Eurasia Group's Global Strategy Director, attributes the currency drop to concern over a physical shortage of US dollars. Afghanistan's financial system depends heavily on the US dollar, as the country imports more than it exports.
"The biggest challenge for the Taliban regime will be securing access to hard currency to pay for imports and prevent a mature balance of payments crisis," said Piotr Matys, Chief FX Strategist at In Touch Capital Markets.
Meanwhile, the Governor of the Afghan Central Bank, Ajmal Ahmadi, described his desperate efforts to stabilize the currency before leaving the country on Sunday.
"On Friday, we received a call saying we would no longer receive US dollar deliveries due to the deteriorating environment," Ahmadi said, adding that the central bank had to reduce the currency supply for the market on Saturday, exacerbating the situation.
"The market was panicked," Ahmadi said. He announced a meeting on Sunday to calm the markets and exchange currencies to stabilize the market.
Ahmadi revealed that Afghan leaders, including President Ashraf Ghani, had requested the resumption of dollar deliveries from the US, which they believes US should have granted.
"The next delivery never arrived. It seemed our partners had a good understanding of what was going to happen," Ahmadi said.
As Afghan officials fled the country, Ahmadi tweeted his anger at the lack of planning from the Afghan leadership. He also pointed out that the Afghan Central Bank had "almost no" hard currency reserves. The Taliban's US dollar shortage may force them to implement capital controls.
The US is blocking the Taliban's access to funds. What will the IMF do?
According to CNN, Washington has effectively denied the Taliban access to the Afghan Central Bank's assets in the US in recent days.
The International Monetary Fund (IMF) is set to provide Afghanistan with about $450 million next week. However, with the Taliban in control of the country, this funding may be suspended.
Republican representatives have sent a letter to US Treasury Secretary Janet Yellen urging her to intervene and prevent the IMF from sending funds.
The US Treasury is taking steps to block the Taliban's access to IMF funds, a finance official told CNN on Wednesday.
Such disputes are usually resolved through votes among IMF member countries, some of which have made it clear they will not recognize the Taliban as a legitimate Afghan government.
Marc Chandler, Chief Market Strategist at Bannockburn Global Forex, fears that the US's financial action against the Taliban may have unintended consequences.
"I'm concerned that the US's efforts to punish the Taliban for actions from two decades ago could have unintended consequences," Chandler said. "A weak economy will only make the challenges faced by the Taliban's regime harder and could weaken the Taliban's control over the country, creating space for non-state actors – terrorists."
What's next for Afghanistan?
According to Eurasia Group's Director Robert Kahn, the Taliban's economic model has proven resilient in the past.
"Given the agrarian and decentralized nature of Afghan economic activity, the Taliban's economic model has shown it can withstand sanctions and limited access to formal financial markets and resources," Kahn said in an email to CNN.
Against the Taliban, US sanctions are partially imposed due to alleged human rights violations against women and girls, including denying education, forced marriage, and restricting employment opportunities for most of them.
Mattis, a FX strategist at In Touch Capital Markets, said optimistic investors could anticipate stabilization in Afghanistan relative to the past two decades.
"Political stability, even if it's provided by authoritarian regimes, is an important factor for foreign investors, who typically do not prioritize democracy," Mattis said. "If it's the case, it would be a list of countries worth investing in. Frankly, the list would be very short."
