Iran's currency plunge ruins Afghan markets

Deutsche Welle, 5 october 2012

The decline in Iran's national currency has brought unrest and protests in Iran. But the rial's inflation has also wreaked havoc in neighboring Afghanistan. Cross-border trade threatens to collapse.

At the bazaar in Herat in western Afghanistan, the mood is heated. The decline in Iran's currency, the rial, has unleashed great unrest on this side of the border. Herat is the wealthiest city in Afghanistan, thanks largely to its fluid, cross-border transactions with Iran. Oil, Water, and foodstuffs in particular are imported from their next-door neighbor.

Yet Iran's currency crisis now threatens Herat with ruin. For business people in the city, Iranian inflation is nothing short of a financial death sentence, said Haji Khush, a merchant in Herat. "The drop in the rial has done damage to all of us," he said. "We had to give everything up and are just sitting at home now. All of our money is gone." Whether wares, fuel, or currency exchange, everything had collapsed, he added.

Cash in suitcases 

The Afghan government has imposed
limits on currency exports

Many Iranians have tried to escape their currency's runaway inflation by bringing pillow cases stuffed with rials to Herat, where they hoped to exchange them for US dollars.

"In one case it was around 140,000 euros [US $180,000] that someone tried to bring over the border in a suitcase. We seized it," said General Sher Ahmad Maladani of the Afghan border patrol.

In west Afghanistan, both rials and US dollars are popular shadow currencies, more popular even than the country's own cash, the "Afghani." Given that the Herat market has been positively flooded with rials, the Afghan dealers are now finding themselves sitting upon large piles of Iranian cash - cash that is losing value every hour.

To avoid losing all of their dollar reserves, the Afghan government has levied a $1,000 ceiling as the maximum allowable to be shipped over the border into Iran. But experts like Mir Barez Hossaini, professor of economics at the University of Heart, doubt the government's measures will protect the Afghan market from collapse.

"We have a long border with Iran that can't really be controlled," he said. "The state's measures will not have much of an effect, but they are legal and the state has the legitimacy to enact them."

Under current conditions he thought smuggling would boom.

Falling rial, rising prices

It is in western Afghanistan, in the provinces of Herat, Nimroz and Farah which border Iran, where the rial circulates in the largest quantities. In some areas the rial is even used exclusively. But if the dollar continues to rise, people will stop utilizing the rial as a second currency, said Hossaini. He believed western Afghanistan markets would collapse, sending prices sky high. Jan Agha Farahi, a merchant from Herat, reported of already-dramatic exchange rates.

"Earlier, when Iranian dealers received loans from us, the money was at least worth something," he said. "For a million rials I got 40,000 Afghani. Now that'd be 15,000. People are getting angry."

Since Islamic law prohibits profiting from interest on debt and loans, Afghan dealers have to look toward other sources of income. Many of them have relocated their activities directly to Iran. For dirt-cheap prices they can by goods there and sell them in Afghanistan.

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