Pakistanto Gain If Afghan Adopts IMF Dollar Idea

January 31, 2002 - 0:0
KARACHI An IMF proposal for Afghanistan to use the U.S. dollar as its national currency, if implemented, should have knock-on benefits for the economy of neighboring Pakistan, bankers and economists said on Wednesday.

With war-ruined Afghanistan highly dependent on foreign imports, they said the switch should result in an influx of dollars into cash-strapped Pakistan's economy, boosting foreign reserves.

It would also cut the amount of Pakistan rupees, widely used in Afghanistan, in circulation and improve liquidity in Pakistan's banking system, AFP reported.

"If the IMF managed to implement its proposal the amount of rupees in circulation will fall... in one way or another the money will come back into our banking system," a senior banker at a foreign bank in Pakistan said.

International Monetary Fund and World Bank experts visiting Afghanistan said on Tuesday it would make sense for the country to switch to the U.S. dollar from the Afghani in the short term.

Afghan officials estimate there are at least seven versions of the Afghani in circulation, leaving the Central Bank with no idea just how much money is in circulation.

"They will need the dollar as a currency at least for the short term as there are trillions and trillions of forged Afghani floating all over Afghanistan," a senior official at Pakistan's Central Bank said.

According to the latest figures, legal trade between the two countries was worth 6.24 billion rupees ($103.5 million) in July 2000 to march 2001, of which 5.3 billion rupees was Pakistani exports to Afghanistan.

But smuggling and informal trade is an even bigger industry, helped by a long and rugged border.

Trade Advantage

A chief economist at a foreign bank said Pakistan's trade advantage meant it would gain from the proposal.

"We will definitely end up as a beneficiary," he said.

Two decades of war have devastated Afghanistan's industrial base, leaving the country highly dependent on its neighbours.

Their own economy is almost non-existent," the senior banker said. "P0kistan and other neighboring countries are supplementing their trade and consumer needs. If the IMF moves ahead with its proposal, I foresee greater dollar inflows into Pakistan."

Bankers said the IMF's idea would help stem a recent rapid increase in the amount of rupees in circulation and that Pakistan's financial sector would benefit as the currency flowed back through banking channels.

"Improved liquidity means lower lending rates," the senior banker said.