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Article#0010        Date: 3 July 2006             Country: Afghanistan

Afghans Ditch Ragged Banknotes

The currency is only four years old but the smaller notes are so worn out that the central bank is replacing them with coins.

By Khalilullah Ghawsi in Kabul (ARR No. 219, 15-Jun-06)
Gul Agha, a smartly-dressed young man, is engaged in a heated argument with the bus conductor who is refusing to accept his money for the fare. The notes are legal Afghan currency issued within the last four years but the conductor says they are no good - they are too old.

Gul Agha, 19, retorts, "Old or new, I didn’t print this money. It’s the state currency and you should accept it."

This kind of dispute is common on the streets of the capital Kabul these days, where a strange discrepancy has grown up between low and high denomination afghani banknotes. Moneychangers are even trading the Afghan currency at different rates, with a single 1,000 afghani note worth much more than a thousand bank notes with a face value of one afghani.

The conductor, Farid, 30, explained why he is so reluctant to take Gul Afgha’s cash, "I make 1,000 afghanis [20 US dollars] a day. All my income comes in small denominations. When I buy fuel or car spares, no one will take it from me.”

Farid then has two choices - take his cash to a commercial money-trader or to a bank. But he said, “If I want to change small-denomination notes, the moneychangers reject the old ones and then buy the [clean] notes cheaper [than larger-value notes]. What do I do?”

The banks are not a solution, either. "I don't have time to go to the bank every day,” he said. “Even if I do go, I’ll have to pay some money as a bribe to get my money changed quickly, otherwise I’ll have to spend the entire day to get my money changed."

The afghanis currently in use, ranging from one to 1,000 in face value, were introduced in September 2002 by the administration of President Hamed Karzai. They replaced banknotes issued under communist rule, which ended in 1992. By the time the Taleban government collapsed in 2001, the afghani had been thoroughly devalued as a result of war, economic collapse, and the lack of monetary control by successive governments.

The main reason for issuing the new notes was to allow the new finance and banking authorities to regain control of monetary policy and inflation, and rebuild public confidence in the currency. During the Nineties, warring sides printed huge batches of forged afghanis to bankroll their activities, creating yet more devaluation.

Noorullah Delawari, governor of the Afghanistan’s central bank, recalled how the 18 trillion afghanis in circulation were exchanged for the 2002-issue currency at a rate of 1,000 old for one new afghani, and then destroyed.

Whereas in the latter years of Taleban rule it took 100,000 afghanis to buy one dollar, the current exchange rate of 50 to one means the new money should be much more manageable in daily transactions. Since the notes were printed in Western Europe, they should also be durable.

However, in practice the smaller denominations of one, two and five afghanis have become worn through constant handling.

Delawari suggested that part of the reason was that the smaller notes were produced to a lower quality, "Countries generally don’t pay so much attention to the printing of small-denomination banknotes because forgers won’t copy them, whereas they will produce fake 500 and 1,000 afghani notes."

The central banker said about 19,000 afghanis in small-denomination notes, worth some 38,000 dollars, were withdrawn and scrapped last year.

When IWPR interviewed shoppers on the streets of Kabul it was clear why the notes wear so quickly – people hold them tightly scrunched up in their fists rather than putting them in a wallet, purse or pocket. Many women and children are unused to purses, and they also fear pickpockets.

Shaima, a 40-year-old woman wearing a blue burka, had the cash crumpled up in her hand to buy clothes for her six-year-old daughter.

"I hold my money in my hand for fear of pickpockets. They have stolen my money several times in the past," she said.

The smaller denominations now count for so little that they sell at less than their face value on the commercial currency market. If you approach a currency trader, the first question he will ask is what size of notes you have. Anything up to 100 afghanis counts as small change of less worth.

"We make a good living from changing small denominations, because the differential between small and large notes is between 10 and 40 per cent,” said Hassamuddin, a moneychanger at the Shahzada Currency Exchange Market. “That’s a good income."

Central bank chief Delawari said trading at different rates was against the law, and anyone on the receiving end of such sharp practice should inform the police.

The central bank plans to address the problem by introducing one, two and five afghani coins to replace the worn banknotes. The coins are being distributed to branches of the bank so that people at least become familiar with their appearance.

Delawari said the banks cannot force people to take the coins unless they want it, but will be using it to pay public sector workers, "We plan to pay government employees a small percentage of their salaries in coins."

The question is whether Afghans will be any happier carrying about handfuls of small change.

"Metal coins make your pocket heavy and they’re a bother," said Sayed Abdullah, who is likely to start receiving the currency in his wages as he works at a ministry in Kabul.

Massoud, an economic analyst and a lecturer at the economy faculty of Kabul University, says the cost of withdrawing banknotes wholesale to make way for the coins will make a further dent in the government’s budget.

"Destroying old money is definitely a major economic blow which will be felt in the longer term," he said.

Delawari responded to this claim by accepting that there would be a cost, “but not significant”.

Original Article: http://www.iwpr.net/?p=arr&s=f&o=321630&apc_state=henh

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