Global Policy Forum

By Kate Linebaugh

The International Monetary Fund may advise Afghanistan to temporarily use the U.S. dollar instead of its afghani, the volatile, often-faked currency of a country that until this month had less than $150,000 of reserves. Dollarization "is one of the options we are discussing with the authorities," Warren Coats, the IMF's assistant director for monetary and exchange affairs, told reporters in Kabul.

His remarks in Afghanistan came as the nation's interim leader, Hamid Karzai, met in Washington with IMF Managing Director Horst Koehler. Koehler said the IMF will be working with Karzai's regime and the World Bank to restore a governing structure that has been destroyed by two decades of war. An IMF loan program is a prerequisite for establishing strong ties to the international community, and tapping the $4.5 billion in aid that was promised to Afghanistan in Tokyo last week.

Koehler, who was joined in his meeting with Karzai by U.S. Treasury Secretary Paul O'Neill, said IMF staff members and the countries that control its agenda both want the global lender to expand its work with the country. As for dollarization, Coats told reporters he sees "more benefits than negative consequences."

Two indistinguishable versions of the afghani now circulate. One was printed by the government before 1996, the other by the Northern Alliance while it fought the Taliban. The alliance had retained access to a Moscow printing press that made the notes. The afghani traded at more than 80,000 to the dollar a year ago, the United Nations says. After the Taliban fled, and the world pledged millions of dollars in aid, it now trades at between 25,000 and 33,000 to the dollar. Paul Chabrier, the IMF's director for the Middle East department, said he changed $4 into afghanis at a rate of about 28,000.

Abdul Qadeer Fitrat, acting governor of Da Afghanistan Bank, is on record as opposing continued use of the afghani, mostly because its peculiar provenance makes it difficult for the government to prevent it being faked. He said in an interview last week that next month's government salaries may be paid in dollars. If the government were to decide to print new notes, it may even consider dropping a zero from the exchange rate, Fitrat said.

"We may reduce a zero, one at least," he said. A decision on whether to replace it "depends on the Cabinet" he said.

The IMF's recommendation would be put to a four-member Cabinet committee, which will then put its recommendation to the whole Cabinet. This decision must be made within 10 days, Coats said. Using dollars now would make it difficult for Afghanistan to later revert to another currency.

"When an economy dollarizes, it takes a little while to undollarize," Coats said.

Another argument in favor of using the dollar is that it could take as long as two years to decide on a design for the new afghani and to ensure the currency can become a "unifying vehicle" for the country, Coats said.

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