The Taliban Have an Economic Crisis on Their Hands
Afghanistan‘s new leadership has some tough choices to make if they want to avoid hyperinflation
One of the first places the Taliban went when they entered Kabul in August was the country’s central bank. There, they asked to “inspect” the bank’s billions of dollars in foreign exchange reserves. Apparently, they expected to find those reserves stacked in old oil drums in the basement, the way Taliban field commanders kept the dollars they needed to buy weapons and pay bribes during the war. It was reportedly a big shock to find that central bank reserves existed only as electronic entries on the books of the Federal Reserve Bank of New York, and that the U.S. government was not keen to release them.
As a result of the blocking of reserves and a cutoff of aid, the Taliban, and the Afghan economy as a whole, are facing an economic crisis. There are shortages of everything, money included. It is not just dollars, which formerly circulated freely, that are in short supply. The local currency, the afghani, is also scarce and getting scarcer. Like many less-developed countries, Afghanistan does not print its own currency. Instead, afghani banknotes are printed in the UK, and the printer does not appear to be making new shipments.
Yet, despite the shortage of money, there is inflation. How can that be? Haven’t we all been told that the cause of inflation is “too much money chasing too few goods?” If so, how can there be inflation in a country that is suffering from an acute shortage of money?
The key to the paradox can be found right there in the familiar phrase. If we parse it carefully, we can see that it captures three key features of the economics of inflation: The first is money itself — the quantity of dollars and afghanis in circulation. Other things being equal, the faster the rate of increase of the money supply, the faster the rate of inflation. The second is goods, or more exactly, the rate at which goods and services are being produced, as measured by GDP. Other things being equal, the more goods are being supplied, the slower the rate of inflation. The third element, perhaps less obvious, is the speed with which the availability of money is “chasing” the available goods. Economists call that the…