Interview with Central Bank Governor

Dr Anwar-ul-Haq Ahady, the new governor of Afghanistan’s central bank, Da Afghanistan Bank, is facing a daunting challenge. With hardly any infrastructure and an economy in ruins, he has to build a modern banking system in the war-ravaged, landlocked Central Asian country. Ahady only took up his post a couple of months ago, before returning to Afghanistan he was a professor of political science in the US. In a recent interview with IRIN he spoke about what is involved in rebuilding Afghanistan's banking infrastructure. "We have decided to completely change our banknotes," he said. "Once the security is established on a firm basis, the economy and economic situation will improve dramatically," Ahady predicted. QUESTION: What are the major tasks ahead for the Bank? ANSWER: Currency is one major issue. When I took office I was immediately concerned by what to do with our currency. There were three proposals. One was to opt for replacing the Afghan currency with the US dollar. Second was that all the government revenues and expenditure will be estimated on a dollar basis, and the third option was to continue using the afghani as the currency. We have decided to use the afghani as the currency. [However,] the problem with the afghani is that during the past six years or so - during the Taliban [era] - the central government was not involved at all in the printing of money. The Russian company that printed afghanis did not deliver it to the Afghanistan Bank. While in the past six months they [the Russian company] have been saying that we were printing money only for the Afghanistan Bank, we occasionally hear rumours that it wasn't true. So we have decided to completely change our banknotes and to withdraw the existing banknotes and introduce new banknotes with much higher security features, and change the printer, and we hope that in this way the central bank will be able to establish its control over the printing of money. But introducing new money is a very expensive proposition and it is going to cost us a lot and will take some time. Q: Do you have any plans to modernise the banking system? A: This bank is not automated at all. When I started, we were not connected to the international banking system, so I have to go and re-establish our corresponding banking with a lot of international banks. We have corresponding banking relations with a number of banks. We can engage in international transactions anywhere we want to in terms of receiving funds or sending funds. We have gained the membership of the SWIFT, which is the organisation that provides services for the electronic transfer of money. Afghanistan [has] never had that membership, and that should improve the situation considerably. We are in serious need of personnel training in the sense that most of our workers don’t speak English, they are not computer literate and they don’t know much about modern banking. We have to train all the personnel, and that’s going to be the most difficult task for us. We also have the situation that we have a number of commercial banks and specialised banks, and they are not really functional. So we have to address that issue. We intend to allow Afghan and international private banks [to operate, and] that will create a very competitive environment for the commercial banks that we used to have. I hope some of them will survive in that competitive environment. Furthermore, the bank will try to create a financial market system in the sense that in the past the financial market system was extremely controlled by the state here. The general economic philosophy of the government is to move in the direction of the free market and in that respect we need to introduce a number of new laws. We need to introduce a banking law. We need to introduce a central bank law and perhaps financial sector laws. We have prepared some of these documents in draft form, and we hope that in the next two months we will submit these laws to the government, and hopefully they will act upon these. The bank really needs rebuilding in every respect - in terms of personnel, in terms of equipment, in terms of institution building and in terms of currency. We intend to engage in an active monetary policy. We [will] also emphasise the central banking features of the Afghanistan Bank and eventually move away from some of the commercial banking responsibilities that the central bank has been performing in the past. Q: There are different versions of the Afghan currency in circulation. How does it function now? A: The exchange rate for [the] afghani for the past number of years has been really determined by the market. As mentioned earlier, it’s not done by the central bank. Probably the principle of supply and demand determines it. That will be the case in the future, but with a greater influence on the part of the central bank. Q: How will you elaborate on the current budget of the country? A: For the current fiscal year, which started from 21 March, the total recurrent budget is estimated [at] about US $460 million. Of that only one-fifth is expected to be generated from internal revenues, and we are falling behind in collecting even that amount of revenue. So the recurrent budget is pretty much dependent on foreign aid. We have commitments from foreign donors, but all the payments have not been made, which is something to be answered by the Ministry of Finance. Q: How many branches do you have all over the country, and what is the current state of commercial banking in the country? A: We have 14 branches in the capital, Kabul, and 84 branches throughout the country. So altogether we have 98 branches. Of these, 11 or 12 are not functioning, but the rest of the branches are functional in the sense that we use them as the centres for the disbursement of government employees' salaries. The other banks have branches in provinces, but no other bank has an extensive network of branches as the Afghanistan Bank has. Even though the central bank will focus more on other issues, it will continue to operate these branches for a very long time to come, because we need disbursement centres for government expenses and collection of revenues. Our branches have been severely damaged, and our major problem is the inability to connect with them by phone or electronically. We intend to computerise our branches as well, but that depends on the state of our telecommunication facilities. Q: How many employees do you have? Are there any projects under way for capacity building? A: The total number of employees is over 3,500. In my opinion, it is overstaffed in this respect. However, we have very few professionals. We need to have more professionals, and reduce the overall number of our employees. As far as the capacity building is concerned, we have talked to the German Municipal Bank, the Bank of England and the Federal Reserve Bank of New York. We are in touch with the International Monetary Fund and the World Bank. I am thinking of reorganising the bank - some offices that are not necessarily needed now, and new offices that we need to create, and I need to determine an organisational structure of the bank. Once that is determined we will take steps to train people for each function accordingly. Unfortunately, we have not [yet] decided on the structure. Q: What role do you see for the bank in attracting investment to Afghanistan? A: There are two aspects to that. We will facilitate [investment] as far as the banking facilities affect the attraction of foreign investors. We will do our utmost to provide them with the services that they need too, and that’s mostly the transfer of funds, exchange of liquidity, exchange of currency, etc. We intend [to act] on reducing restrictions on business activities as far as the money exchange is concerned as much as possible. But attracting investment is not just a banking matter, it’s also a fiscal matter, the tax incentives, perhaps providing some other physical facilities, which is the domain of the Ministry of Finance and other relevant agencies. Q: What roles do see for the bank in a transition from a war economy to a peace economy? A: We hope to provide price stability, which is the main function of the banks worldwide. That has been the major problem in Afghanistan for the past 20 years. That’s one reason why we are introducing new banknotes, and we are very keen on watching the inflation rates. Given the fact that there will be reconstruction in Afghanistan and there will be injections of foreign aid, it is almost unavoidable that we will have a significant amount of inflation. We will ask the government not to overdraft. That will help [towards achieving] macroeconomic stability. Q: With huge amounts of foreign aid being pledged for the country, do you fear that Afghanistan will once again turn into a client state? A: Actually, the foreign aid should reduce the amount of dependence that we had in the past. The amount of assistance we receive will promote the government to engage in a much more meaningful and rational economic policy than was possible in the past. I am a lot more hopeful that the government will have much greater independence, given the fact that foreign aid is coming from diverse sources. Q: How optimistic are you? A: I am quite optimistic. From an economic point of view, we will be OK. I hope that the political situation becomes stable, and I hope that security improves. I hope that the authority of the central government extends to all parts of the country. I think once the security is established on a firm basis, the economy and economic situation will improve dramatically, given the amount of foreign assistance that we have been promised.