The United States helped Afghanistan introduce a single national currency following the toppling of the Taliban regime as part of the U.S. effort to rebuild the Central Asian country, said U.S. Treasury Under Secretary for International Affairs John Taylor September 7.

Taylor said the task of replacing all the banknotes within a short period of time posed "tremendous logistical challenges."

"Many parts of the country are isolated due to the mountainous terrain and a terrible road system. Extraordinary preparations and allowances for the currency exchange were needed, such as air-lifting cash by helicopter to remote exchange points, and allowing sufficient time for all Afghans -- many of them traveling on foot -- to bring in old currency to exchange for new. Careful preparations were also needed to ensure that the old currency, once exchanged, was secured and destroyed so that it did not find its way back into the exchange process," Taylor said in a speech entitled Unusual Episodes in Monetary Policy Making and delivered at the Central Reserve Bank of Peru.

Taylor said three versions of the national currency were circulating in the country during the days of the Taliban -- the official afghani, which had been issued prior to the Taliban rule and which the Taliban and the government in exile had continued to issue, and the currencies of two warlords who had issued their own versions of the official currency.

The exchange rate of the new afghani has remained broadly stable, "reflecting the confidence in the new currency," Taylor said.

Phasing Out Multiple Currencies in Post-Taliban Afghanistan in 2002

The U.S. Treasury has been significantly involved in economic reconstruction in Afghanistan, including developing an early needs assessment to guide fundraising, encouraging private sector development, providing assistance to the finance ministry in creating the first post-Taliban budget, and establishing measurable results systems for assistance. Here I will focus on monetary policy.

In Afghanistan, like Argentina, we were faced with a multiple domestic currency problem, in some respects, even more daunting than in Argentina. Three versions of the national currency were circulating in the country during the days of the Taliban. There was the official Afghani, which had been issued prior to the Taliban rule and which the Taliban and the government in exile had continued to issue. And there were the currencies of two warlords who had issued their own versions of the official currency.

When the new Afghan government came to office in 2002, they had as a top priority the issue of a single national currency. Fortunately some work had already been completed by the Taliban, including preliminary designs of various denominations, which significantly shortened the time needed to launch the new currency. The Afghan government announced the new currency plan on September 4, 2002, with the conversion process to begin on October 7, 2002.

Replacing all banknotes in a post-conflict country like Afghanistan within a fairly short period posed tremendous logistical challenges. Many parts of the country are isolated due to the mountainous terrain and a terrible road system. Extraordinary preparations and allowances for the currency exchange were needed, such as air-lifting cash by helicopter to remote exchange points, and allowing sufficient time for all Afghans -- many of them traveling on foot -- to bring in old currency to exchange for new. Careful preparations were also needed to ensure that the old currency, once exchanged, was secured and destroyed so that it did not find its way back into the exchange process. Treasury technical advisors collaborated with the Afghan authorities, the U.S. Agency for International Development, the Department of Defense, and with the international financial institutions on this very challenging operation.

I visited Afghanistan in September 2002 and reviewed the plans for the currency exchange that was to begin after the first week in October. I recall that some high-level government officials were worried that there had not been sufficient preparation. Some noted that the currency destruction equipment had not been delivered yet. A significant potential problem was that the Afghan began to depreciate in value. Some wanted to postpone the exchange date. I met with a number of currency traders and business people and concluded that there were no serious confidence or speculation issues. At the request of the government I issued a statement saying that the plans for the currency exchange were on track, and that there was every reason to expect that it would go well.

In the end the exchange was successfully completed in January 2003. The exchange was conducted without any major security incidents. The exchange rate of the Afghani has remained broadly stable since then, reflecting the confidence in the new currency, with the exception of one period shortly after the introduction of the new currency when the afghani appreciated sharply.

Once the currency conversion was complete, the next step was to develop a framework for monetary policy. After considering the alternatives, the Afghan government decided on a floating exchange rate, though in practice, the central bank has aimed to limit exchange rate volatility.

Regarding the policy instrument, the central bank aims to control the money supply. The ability to target inflation through the domestic money supply is complicated, however, by the widespread use of foreign currencies.

Moreover, without a functioning banking system or money market, the only way to change the domestic money supply has been by selling foreign exchange through foreign exchange auctions. We are now working with the Afghan government to help them strengthen the banking sector and develop additional instruments for the conduct of monetary policy.