Editor in Chief: Moh. Reza Huwaida Tuesday, October 23rd, 2018

The Threat of High Inflation and Rising Prices

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The Threat of High Inflation and Rising Prices

The economy of Afghanistan remains extremely vulnerable to a surge in inflation rates. Inflation, manifested in the increase in prices of goods, commodities and essentials services, is one of the most important causes of destruction of people's purchasing power and decrease in the standard of living of people. In the context of Afghanistan, a high rate of inflation means people in general would lose much of their ability to buy and consume the commodities and services that they desperately need to maintain their already meager livelihoods.

As a result of inflation, it is generally the lower income groups in the society who would come to bear most of the pressure. For most of them this would mean more starvation and malnutrition, and more child labors and crumbling families. Higher inflation would also mean slower growth in some key sectors of the economy and less capacity for job creation and helping people move out of poverty. High rates of Inflation, whether in consumer or industrial goods sector, always accompanies serious troubles both for the common people and the public administrators who are responsible for maintaining stability in the economy and in general price levels.

Afghanistan's Da Afghanistan Bank, as the Central Bank of the country, has, among other things, the authority and responsibility to maintain price stability through tracking and keeping the inflation rate in the country under control. Currently, as per available statistics compiled by Da Afghanistan Bank and the International Monetary Fund, inflation rate in Afghanistan stands at around 13%. This high but still manageable level of inflation in the country should not mislead the policymakers and the authorities as well as those outside government such as the business community, who observe the country's macroeconomic developments.

There can be no guarantee whatsoever that the inflation rate in the country will remain within the manageable range over the medium and long term given the fundamental weaknesses of the economy of Afghanistan. This means that millions of our fellow Afghans, most of them poor and leading subsistence-level lives, are at the immediate risk of steep price rises in food and non-food commodities such as fuel and other consumer goods. The prospect of high rates of inflation in Afghanistan due to a wide range of fundamental weaknesses in Afghan economy is real and need to be taken into serious consideration by authorities.

A steep rise in inflation rate would consequently mean that many of the gains made over the past one decade in poverty reduction would be lost as a result of the unbearably high prices. Hundreds of thousands of families across Afghanistan, who have been able to enjoy a relatively better standard of living in recent years, are therefore at the immediate risk of losing a significant part of their real income in the event of the inflation rates spiraling out of control. One example is the year 2008, when a combination of skyrocketing pieces in international food markets coupled with supply chain bottlenecks led to very high inflation rate of 28% and above at conservative estimates. Some sources put the inflation rate at near 40% and above.

The people of Afghanistan, majority of them poor, and its economy still remain extremely vulnerable to such economic shocks. Barely one month ago and after the troops reduction announcement by the U.S. government, the Afghani exchange rate against U.S. dollar and other currencies plummeted to historic lows immediately leading to price rise in commodity and food markets across Afghanistan. If such price rises continue for a longer period of time, millions of poor Afghans would lose the ability to buy whatever meager food they have so far been consuming. Therefore, the exchange rate factor is one important source of risk to the stability of Afghanistan's economy and more importantly the welfare of millions of its poor citizens.
Afghanistan's trade deficit, a ticking bomb?

Another factor that perhaps constitutes the gravest threat to the economy of Afghanistan in the medium to long term is its widening trade deficit i.e. the difference between the imports and exports. Generally and as a rule, high imports and less export puts under pressure the country's exchange rate. In other words, importing excessively without a corresponding volume of exports can lead to decrease in the country's exchange rate value. According to Da Afghanistan Bank, at the end of 2010, the country's imports of merchandise and other goods and services stood at $1031.9 million while the country's exports was a mere $127.29 million.

In normal circumstances, such a foreign trade and balance of payments situation should have made the Afghani's exchange rate go down to historic lows. Surprisingly we see that Afghani's exchange rate is still robust trading at 1/47 against the US dollar. This miracle has been possible thanks to billions of dollars in foreign aid and military-related spending constantly flowing into Afghanistan. The flow of humanitarian and military dollars, when reaching Kabul and other Afghan cities' currency markets, keeps the demand for Afghani high, and with that props up an economy that otherwise should have been much poorer.

Therefore, the concerns are genuine that the shrinking in the flow of humanitarian dollars might pull the rug from under the feet of the Afghan economy and catapult it once again to the depth of ruin. Therefore, in the medium to long run, the trade deficit of Afghanistan, characterized by high imports and meager exports, is not sustainable. It is up to the initiative of the government of Afghanistan and generosity of the international community to help bring about a balance in Afghanistan's foreign trade before it becomes too late.

Da Afghanistan Bank's strategies and monetary policies to keep the general price levels and inflation rates stable might not work when it comes to factors that are not in the hands of the Bank and the government of Afghanistan to control. Reduction in the volumes of incoming foreign aid and military-related spending – especially after 2014 when the majority of foreign troops leave – is one critical factor over which Da Afghanistan Bank and the government of Afghanistan have little control.

In addition, the ongoing increase in international prices of food and non-food commodities is one factor outside the realm of the government in Afghanistan. Imported inflation, much more than domestic inflation, threatens the stability of prices and well-being of people in Afghanistan. Open market operations of Da Afghanistan Bank such as foreign currency and capital note auctioning will not be enough in dealing with such broad factors that have their origins outside Afghanistan. It is high time that the government of Afghanistan and the international community address the fundamental weaknesses of Afghanistan's economy.

The author is the permanent writer of the Daily Outlook Afghanistan. He can be reached at outlook afghanistan@gmail.com

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