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This website shows the inflation rates in various countries around the world. Almost all countries have a positive inflation rate; in some of them the rate is quite high. But there is one remarkable exception: in Afghanistan, the inflation rate is about -10% (i.e. the economy is deflating).

Why is the deflation rate in Afghanistan so high? Is this just a numeric coincidence, or does it imply anything about the real economic situation there?

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2 Answers 2

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Yes, there's deflation in Afghanistan, according to the World Bank:

Constraints to monetary policy also contributed to the deflationary process. Da Afghanistan Bank (DAB) has reported a significant decrease in money supply, with M2 contracting by nearly 11 percent from the fourth quarter of 2020 to the second quarter of 2023. This decline is due to sanctions, frozen assets, banking disruptions, domestic payment system issues, and a shift to Islamic banking, leading to a cash-dominant economy. The country's inability to mint new currency, compounded by sanctions that prevent replacing old banknotes, has further tightened the money supply. Lower currency in circulation has limited access to credit for consumers and deterred spending, while businesses encounter obstacles in securing investment loans. Consequently, this is dampening demand for goods and services, prompting businesses to lower prices to attract customers, exacerbating deflationary trends.

A reduced money supply has also led to an exchange rate appreciation, exacerbating the deflationary cycle. Since August 2021, the Afghani has appreciated 22.8 percent against the US dollar. This has been instrumental in mitigating the costs of imported goods, amplifying the deflationary pressures affecting the economy. It has also rendered Afghanistan's exports pricier on the international market, diminishing their demand and undercutting Afghanistan's export sector's potential to catalyze economic growth in the postconflict landscape. It is also adding to the widening trade deficit.

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    So basically the country has deflation because the newly reinstalled Taliban government can't yet print money, so can't cause inflation ("inability to mint new currency"). Additionally, it has minor deflation, because some old paper currency is falling apart from heavy use (opposite of printing money - destroying it). Long term, if they were unable to print money, eventually population growth would also affect deflation (more people (demand) sharing the same amount of cash (supply). Two additional knock-on effects were mentioned also increasing deflation (decreased spending, and price cuts).
    – Jamin Grey
    May 15 at 17:54
  • What I find puzzling is that, usually, a high inflation is considered a sign of a bad economy. And here, a high deflation is a sign of bad economy. May 17 at 6:52
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The Afghan economy is struggling to confront deflationary winds. Over the past two years, Afghanistan's economy has been characterized by a tumultuous downturn, underlined by a staggering 26 percent contraction in real GDP. The aftermath of the Taliban takeover has seen a stark decline in international aid, leaving the nation without any internal engines of growth, and the recent return of Afghan migrants and an earthquake in Herat have intensified these challenges. The October 2023 earthquake damaged critical infrastructure, reducing GDP growth by estimated 0.5-0.8 percent. With no policy levers to stimulate aggregate demand, the economy remains stagnant, with low demand driving a noticeable deflation. By February 2024, headline inflation plummeted to -9.7 percent year-over-year, propelled primarily by substantial reductions in food (-14.4 percent) and non-food (-4.4 percent) prices. Core inflation, excluding food and energy, mirrored this downward trajectory, registering at negative 3 percent. While the food sector has benefited from better supply, weakened demand due to low purchasing power is a major driver of the deflationary process that started in April 2023 and is persisting through February 2024. This protracted deflationary process stems from a confluence of factors, including the adverse ramifications of the opium ban, the shrinking of the money supply, and the appreciation of the Afghani. The ban on opium cultivation precipitated a staggering $1.3 billion loss in farmers' incomes, equivalent to approximately 8 percent of GDP. According to United Nation’s Office on Drugs and Crime (UNODC), the opiate economy’s value has contracted by 90 percent, the area under cultivation declined by 95 percent and has cost Afghan 450,000 jobs at the farm level alone and doesn’t include the high economic losses downstream. Furthermore, repurposing around 200,000 hectares of land previously dedicated to illicit crops towards food production has led to downward pressure on domestic food prices, albeit at the expense of heightened unemployment. Constraints to monetary policy also contributed to the deflationary process. Da Afghanistan Bank (DAB) has reported a significant decrease in money supply, with M2 contracting by nearly 11 percent from the fourth quarter of 2020 to the second quarter of 2023. This decline is due to sanctions, frozen assets, banking disruptions, domestic payment system issues, and a shift to Islamic banking, leading to a cash-dominant economy. The country's inability to mint new currency, compounded by sanctions that prevent replacing old banknotes, has further tightened the money supply. Lower currency in circulation has limited access to credit for consumers and deterred spending, while businesses encounter obstacles in securing investment loans. Consequently, this is dampening demand for goods and services, prompting businesses to lower prices to attract customers, exacerbating deflationary trends. A reduced money supply has also led to an exchange rate appreciation, exacerbating the deflationary cycle. Since August 2021, the Afghani has appreciated 22.8 percent against the US dollar. This has been instrumental in mitigating the costs of imported goods, amplifying the deflationary pressures affecting the economy. It has also rendered Afghanistan's exports pricier on the international market, diminishing their demand and undercutting Afghanistan's export sector's potential to catalyze economic growth in the post- conflict landscape. It is also adding to the widening trade deficit.

https://thedocs.worldbank.org/en/doc/18a1ccff0457effb0a456c0d4af7cce2-0310012024/original/Afghanistan-Development-Update-April-2024.pdf]

First, there was a decline in international aid, which reduced economic growth, since the demand is lower, price will decrease.

Secondly, there were natural disasters, which also had deflationary impact.

Thirdly, the opium ban, reduced economic activity, which also led to deflation.

Fourthly, banking disruption and frozen asset and the fact the Central Bank doesn't have any lever also contributed.

Finally, the lack of money supply circulating, made the currency appreciate against the dollar, which made its exports noncompetitive, which also created deflation.

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    Not a critique of this answer, but I find it strange that the cited article implies "international aid" is one of the "internal engines of growth". I would have thought such aid about as external an engine as it is possible to get.
    – S. G.
    May 16 at 11:40

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