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 tomaintain 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 theliquidity, 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.

MPC responsibility:

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.

MPC Tasks:

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:

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, since 1389, DAB has been using reserve money (RM) as the primary liquidity indicator, 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 as the key operational target, while currency in circulation 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 twice a week to sell foreign currency to licensed Money Service Provides (MSPs) and Capital Notes (CNs) Auction once a week 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, DAB will 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.

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 central bank monitors the exchange rate behavior and puts its efforts to prevent serious fluctuations in the exchange rate.

Macroeconomic Sectors:

Real Sector

This sector is responsible to compile and analyze statistical data on the macroeconomic indicators. The sector works with a close cooperation with the Central Statistics Organization (CSO) and collects raw data such as the gross domestic product (GDP), consumer price index (CPI), and other indicators from the National Statistics and Information Authority (NSIA) of Afghanistan. After the data collection, all the primary data are reviewed to assure its accuracy. Following the review and necessary calculations, the data is provided to the analysts to produce analytical reports. Such analytical reports are produced on monthly, quarterly, and annual basis, and make them accessible to all national and international users through economic publications of Da Afghanistan Bank.

To adopt, formulate and execute prudent and effective monetary policy, making short term and long term projections of some macroeconomic indicator are critical. Therefore, one of the most important tasks of this sector is to forecast some of the macro-economic variables.

External Sector

This sector is responsible to collect statistical data on the foreign trade (exports and imports of goods and services), primary and secondary incomes as well as the financial and capital transactions of the country with the rest of the world. External sector statistics are the key economic indicators for the central banks and other monetary institutions. Such statistics provide information on the foreign reserves position as well as the liabilities of the country including liquidity and foreign debts. In addition, the external sector statistics provide information on the transfers of remittances, inward remittances from the Afghan workers abroad and vice versa. Specifically, the required statistical data for the balance of payments are the transactions between residents and non-residents in the country.

The external sector statistics are compiled on a quarterly basis. Moreover, this sector prepares analytical reports for the DAB quarterly and annual statistical and economic bulletins. In order to improve the quality of the external sector statistics, the data from various sources such as the International Transactions Reporting System (ITRS) which is mainly collected  from commercial banks and used by the government and non-government organizations, are being used. A timely data collection is highly critical while formulating the monetary and exchange rate policies. Moreover, the external sector statistics are also of great importance for other macro-economic policy makers as well as the private sector.

Fiscal Sector

The monetary and exchange rate policies are formulated and implemented in a close coordination with the fiscal policy of the country. Therefore, the central bank has a close cooperation with the Ministry of Finance. The Fiscal Sector of the Monetary Policy Department collects the fiscal data such as the government revenues and expenditure, finance sources of the national budget and so on from the different departments of the Ministry of Finance. After the data is compiled, the data is reviewed and placed in the specific tables by the statisticians and the final data is provided to the sector analysts. Based on the data, the analysts prepare analytical reports for different time periods. After the final revision is done, the reports are published in the economic publications of the central bank.

In addition, attending the Cash Management Committee meetings, held on a monthly basis with participation of Ministry of Finance and DAB, and other relevant meetings are the other responsibilities of this sector. The main purpose of CMC is to exchange views regarding the government expenditure, revenue collection and success or failure of the government in spending the budget over the past month and make required decisions for the elimination of existing shortcomings and complications.