Monetary policy has remained broadly consistent with the program, despite difficulties with liquidity management experienced during and after Ramadan. Growth of currency in circulation surged from 8.5 percent during the first half of 2007/08 to 18 percent in October. Continued exchange rate stability throughout this episode suggests that the temporary excess supply of Afghanis-related to an acceleration of government expenditure-was met with increased demand, reflecting a combination of Ramadan-related seasonality and steep increases in the prices of imported fuel and essential foodstuffs.
Monetary policy will remain focused on containing inflationary pressures. To that end, there is a need for DAB-in cooperation with the MoF-to improve its liquidity forecasting to ensure smooth monetary policy execution. It is also important that DAB's management strengthen the internal consultation mechanism over liquidity forecasts and intervention policy by endowing the Monetary Policy Department with greater ownership and accountability for its policy advice. The mission welcomed the intention of DAB to expand the volume of capital notes auctions with a focus on managing bank liquidity and developing the yield curve.
For Discussion: How does one deal with economic policy when the informal or illegal economy is larger than the formal economy?