About Monetary Policy
Da Afghanistan Bank has the responsibility of conducting monetary policy. This responsibility is explicitly mandated under the Da Afghanistan Bank Law, 2003.
Article 62 of Da Afghanistan Bank Law states: “Da Afghanistan Bank shall be responsible for the formulation, adoption and execution of the monetary policy of Afghanistan.”
Monetary policy refers to the policy undertaken by Da Afghanistan Bank (DAB), as the central bank of Afghanistan, with regard to the use of monetary instruments under its control to achieve the goals specified in the law.
Monetary policy in Afghanistan involves Da Afghanistan Bank’s use of instruments to influence money supply in the economy aiming at overall prices and financial system’s stability.
Low and stable inflation provides favorable conditions for sustainable growth and employment generation over time. It reduces uncertainties about future prices of goods and services and helps households and businesses to make economically important decisions such as consumption, savings and investments with more confidence. This, in turn, facilitates higher growth and creates employment opportunities over the medium term leading to overall economic well-being in the country.
How Does Monetary Policy Work?
DAB signals its monetary policy stance through adjustments in money supply in the market. Changes in money supply will impact demand in the economy. To maintain its primary objective of domestic price stability, Da Afghanistan Bank has adopted a framework which is known as the Monetary Aggregate Targeting Framework. Controlling liquidity condition is highly important in the economy; hence any changes in the rate of liquidity have a direct impact on the overall economic activities in the country. Therefore, changes in liquidity rate should be consistent with the rate of economic growth as well as the demand for the national currency in the economy.
Monetary Policy Framework
Monetary Policy Objectives:
The preamble of the Da Afghanistan Bank Law, 2003 determines the objectives of DAB as:
Article 2: Objectives
2.1 The primary objective of Da Afghanistan Bank shall be to achieve and to maintain domestic price stability.
2.2 The other objectives of Da Afghanistan Bank, which shall be subordinated to the primary objective of Da Afghanistan Bank, shall be to foster the liquidity, solvency and effective functioning of a stable market based financial system, and to promote a safe, sound and efficient national payment system.
Without prejudice to its primary objectives, Da Afghanistan Bank shall support the general economic policies of the State, and promote sustainable economic growth.
DAB focuses on achieving monetary stability by targeting monetary aggregate-Reserve Money. At the same time, DAB also aims to ensure financial stability, particularly the smooth functioning of the banking sector and financial system of Afghanistan.
Monetary Policy Formulation And Decision Making
Da Afghanistan Bank is responsible and fully empowered to make the monetary policy decisions in Afghanistan. According to Article 2.1 of DAB Law: “The primary objective of Da Afghanistan Bank shall be to achieve and to maintain domestic price stability.” Similarly, as per the article 2 of the Law, one of the basic tasks of Da Afghanistan Bank is to formulate, adopt and execute the monetary policy of Afghanistan.
Based on the articles of the Law, Da Afghanistan Bank is responsible for adoption and formulation of Monetary Policy in Afghanistan. For this purpose, Monetary Policy Committee (MPC) is established and is chaired by the Governor of DAB, First Deputy Governor acts asDeputy Chairman, members of the Supreme Council as members and Monetary Policy Director General acts as the Secretary of the Committee. The monetary policy committee closely works with the Monetary Policy Department, Market Operations Department and Financial Supervision Department.
Monetary Policy Committee is primarily responsible for setting the stance of monetary policy, which meets four times a year. MPC vigilantly monitors the developments in the economy of the country as well as in the international economic arena and set the targets for Reserve Money and Currency in Circulation and Net International Reserves.
Monetary Policy Committee’s main task is to execute the main tasks of Da Afghanistan Bank as per the law of Da Afghanistan Bank which are:
1. Formulation, adoption and execution of monetary policy;
2. Formulation of reserve policy and DAB’s reserve position in accordance with DAB’s Law;
3. Imposing regulations on execution of exchange rate policy and open market operations;
4. Decision making on keeping and management of DAB’s reserves as determined in DAB’s law;
5. Approval of regulations to facilitate e-transactions among DAB, banks and their customers;
6. Approval of regulations to regulate repo rates and interest rates;
7. Signing international clearing and payments agreements.
MPC meetings are held on quarterly basis four times a year. The supreme council assigns a meeting on monetary policy issues during its quarterly meetings and its approvals are valid under the approvals of the Supreme Council. At the end of each MPC meeting, the Chairman holds a press conference to communicate the decisions made on recent monetary policy issues and macroeconomic situation as a whole.
Monetary Policy Implementation
MPD Operational Target
Under this monetary policy framework, DAB has been using reserve money (RM) as the primary liquidity indicator since 2010, and projects its precise amount based on the expected growth rate, the average annual inflation rate, and changes in the aggregate demand for Afghani during the year. Considering the expansion of the banking sector in the country and its role in creation of money as well as taking into account the economic conditions, Da Afghanistan Bank determined Reserve Money (RM) as the key operational target, while Currency in Circulation (CiC) is set as an indicative target.
To achieve the operational target, DAB primarily uses Open Market Operations (OMOs) to manage liquidity in the money market. In case of excess liquidity available in the market, DAB mops up this surplus liquidity by using the monetary policy instruments. DAB conducts Foreign Currency Auctions on weekly basis to sell foreign currency to licensed Money Service Provides (MSPs) and Capital Notes (CNs) Auction to sell CNs to commercial banks usually with the agreement to purchase the same on the transaction maturity date. On the contrary, if there is shortage of liquidity in the system, DAB injects Afghani in the system through OMOs.
Monetary Policy Communication
Article 105 Reporting on monetary policy
105.1 Da Afghanistan Bank shall report in writing to the President and the Minister of Finance of Afghanistan if at any time, the net foreign reserve position across the Da Afghanistan Bank reserve accounts declines by more than 20% over a 7 day period.
105.2 Semi-annually, Da Afghanistan Bank shall deliver to the parliament of Afghanistan and publish a policy statement that shall contain:
1) a description of, and an explanation of the reasons for, the monetary policies to be followed by Da Afghanistan Bank during the next six months period;
492) a description of the principles that Da Afghanistan Bank proposes to follow in the adoption and execution of monetary policy during the next two years, or a longer period of time
3) a review and assessment of the adoption and execution by Da Afghanistan Bank of monetary policy during the period to which the last preceding six monthly policy statement relates.
Monetary Policy Decisions are issued in every quarter four times a year after the meetings of Monetary Policy Committee (MPC) members. They contain brief analysis of economic conditions and rationale behind the monetary policy decisions made to achieve the ultimate objective of Monetary Policy i.e. Prices Stability in Afghanistan.
DAB communicates its monetary policy stance primarily through its websites and DAB’s social media accounts. The Governor makes a press conference usually after each MPC meeting to present the monetary policy stance to media in addition to uploading the decisions on website and press release. In a bid to improve the communication of monetary policy and transparency, DABwill also publish minutes of the Monetary Policy Committee meetings on its website.
In addition, to raise the level of public awareness towards Da Afghanistan Bank as the central bank and the Monetary Policy stance in particular, Da Afghanistan Bank’s staff especially Monetary Policy employees deliver presentations and lectures at various forums, universities and events, and gives interviews to print and electronic media to further clarify the monetary policy stance of DAB.
Recently, the public awareness directorate has been established in the Governor’s Office Directorate General to ease the process of Monetary Policy Communication to the general public and promote the use of Afghani in the country through public awareness campaigns, conduct of lectures, TV and Radio ads, installation of billboards, distribution of DAB brochures, manuals etc. and through any other possible means to educate Afghans on main objectives, tasks and policies adopted by the central bank.
Exchange Rate Policy (Annual)
In the light of Article 69 of the Da Afghanistan Bank law, formulating, adopting and execution of exchange rate policy is one of the main responsibilities of Da Afghanistan Bank. Among the eight exchange rate regimes in the world, Da Afghanistan Bank has adopted the Managed Floating Exchange Rate regime. Under this exchange rate framework, the exchange rate is determined by the demand and supply factors in the market.
This exchange rate regime is adopted based on the economic condition, balance of payments (exports and imports), and taking into account the degree of openness of the economy (currency inflow and outflow). Under this framework, DAB does not target the exchange rate. Meanwhile, considering the negative impacts of the exchange rate fluctuations on investors, consumers, and other economic agents’ expectations as well as the level of overall domestic prices; the bank monitors the exchange rate behavior and puts its efforts to prevent serious fluctuations in the exchange rate using its monetary policy instruments.
Legal Frame Work
|Da Afghanistan Bank Law|
|Afghanistan Banking Law|
|Counter Financing of Terrorism Laws|
|Anti-money laundering and proceeds of crime Laws|
|Negotiable Instrument Law|
|Secured Transaction of Movable Property law|
|Law of Mortgage on Immovable Property|
|Financial Leasing Law (Statute Law)|
NOTE: on 16th August 2021, Taliban captured Afghanistan and toppled the Government.