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What Happens to Afghanistan’s Gold Reserves?

 and What Are Foreign Exchange Reserves?

The central bank’s vaults contained around $160 million in gold and silver, and the “Bactrian Treasure,” a priceless hoard of golden artifacts from Afghanistan’s past.

What Happens to Afghanistan’s Gold Reserves?

by Trevor Filseth

The Taliban captured Kabul on August 15 and gained access to the headquarters, main vault, and cash reserves of Da Afghanistan Bank (DAB), which is the country’s central bank. The country’s central bank had an estimated value of $10 billion. This has prompted early fears that Afghanistan’s new rulers could seize the money for themselves.

Unfortunately for the Taliban, the bank’s cash reserves—consisting of hard currency, gold, and a variety of other valuables—mostly remain far beyond their reach. The majority of Afghanistan’s financial reserves are held within the Federal Reserve Bank of New York, which houses the gold reserves of many developing nations for safekeeping. 

A year-end DAB report dated from December 2020 revealed that the central bank had stored gold worth 100 billion afghanis—or $1.32 billion—inside the Federal Reserve. The statement also revealed that around $6 billion of the bank’s holdings had been invested in U.S. Treasury securities inside the United States.

The Biden administration was quick to confirm that none of Afghanistan’s reserves held in the United States would be allowed to be released to the Taliban, and on Tuesday, an administration official officially confirmed that the United States had frozen $9.5 billion in Afghanistan’s assets.

DAB’s governor, Ajmal Ahmady, fled the country on Sunday. He described the series of events leading to his exile on Twitter.

The Taliban are also likely to be denied access to Afghanistan’s “special drawing rights,” or SDRs, held by the International Monetary Fund, according to Reuters.

While the Taliban are unlikely to recover most of the previous government’s reserves, the Taliban did gain a substantial amount of money from its rapid offensive in July and August. Some of DAB’s foreign currency reserves, overwhelmingly in the form of U.S. dollars, were stored at the bank’s various branches throughout Afghanistan, which are now entirely under the group’s control. The value of these holdings is estimated at around $360 million. 

The central bank’s vaults also contained around $160 million in gold and silver, and the “Bactrian Treasure,” a priceless hoard of golden artifacts from Afghanistan’s past. It is unclear how much of this the group was able to obtain, as the administration of President Ashraf Ghani had several weeks to send it to safekeeping before the Taliban’s capture of the city. 

In Kabul, the Taliban has maintained its control of the treasury building and issued a statement on Saturday that it would be “strictly guarded.”

 

What Are Foreign Exchange Reserves?

By Marshall Hargrave 

Foreign exchange reserves are assets held on reserve by a central bank in foreign currencies. These reserves are used to back liabilities and influence monetary policy. It includes any foreign money held by a central bank, such as the U.S. Federal Reserve Bank.

KEY TAKEAWAYS

·         Foreign exchange reserves are assets denominated in a foreign currency that are held by a central bank.

·         These may include foreign currencies, bonds, treasury bills, and other government securities.

·         Most foreign exchange reserves are held in U.S. dollars, with China being the largest foreign currency reserve holder in the world.

·         Economists suggest that it’s best to hold foreign exchange reserves in a currency that is not directly connected to the country’s own currency.

How Foreign Exchange Reserves Work

Foreign exchange reserves can include banknotes, deposits, bonds, treasury bills and other government securities. These assets serve many purposes but are most significantly held to ensure that a central government agency has backup funds if their national currency rapidly devalues or becomes all together insolvent.

It is a common practice in countries around the world for their central bank to hold a significant amount of reserves in their foreign exchange. Most of these reserves are held in the U.S. dollar since it is the most traded currency in the world. It is not uncommon for the foreign exchange reserves to be made up of the British pound (GBP), the euro (EUR), the Chinese yuan (CNY) or the Japanese yen (JPY) as well.

Economists theorize that it is better to hold the foreign exchange reserves in a currency that is not directly connected to the country’s own currency in order to provide a barrier should there be a market shock. However, this practice has become more difficult as currencies have become more intertwined as global trading has become easier.

 Foreign exchange reserves are not only used to back liabilities but also influence monetary policy.

Example of Foreign Exchange Reserves

The world's largest current foreign exchange reserve holder is China, a country holding more than $3 trillion of its assets in a foreign currency. Most of their reserves are held in the U.S. dollar. One of the reasons for this is that it makes international trade easier to execute since most of the trading takes place using the U.S. dollar.

Saudi Arabia also holds considerable foreign exchange reserves, as the country relies mainly on the export of its vast oil reserves. If oil prices begin to rapidly drop, their economy could suffer. They keep large amounts of foreign funds in reserves to act as a cushion should this happen, even if it’s only a temporary fix.

U.S. foreign exchange reserves totaled $129 billion, as of January 2020, compared to China’s $3.1 trillion.

Russia’s foreign exchange reserves are held mostly in U.S. dollars, much like the rest of the world, but the country also keeps some of its reserves in gold. Since gold is a commodity with an underlying value, the risk in relying on gold in the event of a Russian economic decline is that the value of gold will not be significant enough to support the country’s needs.

Another danger of using gold as a reserve is that the asset is only worth what someone else is willing to pay for it. During an economic crash, that would put the power of determining the value of the gold reserve, and therefore Russia’s financial fallback, into the hands of the entity willing to purchase it.

Sources: 

https://nationalinterest.org/blog/buzz/what-happens-afghanistan%E2%80%99s%C2%A0gold%C2%A0reserves-192000?fbclid=IwAR3w-l05j0lHW4PqW23TgdpKs3nvnn3RFB-vA9ZZ6x5XOp3YHbuGPkJySUk

and

https://www.investopedia.com/terms/f/foreign-exchange-reserves.asp