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International Monetary Fund. Middle East and Central Asia Dept.

Fifth Review Under the Extended Credit Facility Arrangement and Request for Modification of Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for the Islamic Republic of Afghanistan

International Monetary Fund. Middle East and Central Asia Dept.
This paper presents estimates of the fiscal revenue cost of conflict in Afghanistan, defined as the loss of government domestic revenue due to conflict. The loss of government revenue is an important component of the humanitarian costs of conflict. In Afghanistan, almost all security spending is funded by foreign grants, which will most likely be scaled back gradually in the event of peace. Hence, any fiscal peace dividend is likely to come principally from increased revenues, as reduced security spending will be mostly offset by reduced grants. Nevertheless, size and the statistical significance of the results suggest that the order of magnitude of the estimate, around $1 billion, is robust. By way of counterfactual, these results imply a sizeable potential fiscal dividend for Afghanistan should peace, or at least a significant reduction in violence, materialize. Several country-specific factors, including conflict and a landlocked geography, have held back an expansion in Afghanistan’s trade which could increase the country’s economic resilience. Improving its external connectivity is a key factor to unlocking its trade potential including leveraging its natural resources.
Mr. Willem Bier
This paper describes a computer program with which one can build macroeconomic models. It is possible to specify up to eighteen behavioral equations, each with between five and eleven independent variables. For certain variables, the user can decide whether they will be endogenous or exogenous. Many policy simulations dealing with adjustment and growth issues can be performed with this program by varying any of the exogenous variables, and these experiments can be repeated for different model specifications. This paper describes a number of experiments with a model of an open economy where output and prices are endogenous.
International Monetary Fund

Afghanistan has made substantial progress toward macroeconomic stability, but structural reforms need to be accelerated. The uncertainty affecting the fiscal outlook warrants a prudent expenditure policy. Monetary policy has been instrumental in reducing inflation and safeguarding external stability, but it needs to be strengthened. The government should resist pressures for expanding its role in the economy and focus on fostering competition and improving economic governance. The current exchange rate level appears in line with fundamentals. The government should increase its efforts to improve Afghanistan’s statistical database.

International Monetary Fund. Middle East and Central Asia Dept.

Context. Afghanistan remains one of the poorest countries in the world, despite enormous progress over the past decade. Security and political uncertainties and the drawdown of international troops, together with weak governance and institutions, have held back growth and employment, and recently contributed to increased emigration. In May 2015, IMF management approved a nine-month Staff-Monitored Program (SMP), aimed at addressing fiscal and banking vulnerabilities, preserving macroeconomic stability, improving prospects for inclusive growth, and building a track record for a possible future IMF financial arrangement. Outlook and risks. On account of the sustained headwinds the economy faces, projections for real GDP growth in 2016 and beyond have been scaled back compared to those in the November 2015 Article IV staff report. The outlook remains highly challenging given political and security uncertainties and the related risks to reform implementation. Shortfalls in donor aid and continued emigration also pose important downside risks, and the banking system remains a key source of vulnerability.

International Monetary Fund
This report provides an update on the status of implementation, impact, and costs of the Heavily Indebted Poor Country (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI). Debt relief provided under the Initiatives has substantially alleviated debt burdens in recipient countries. Through the continued use by IDA and the Fund of the flexibility available in the framework governing the HIPC Initiative and the MDRI, significant progress has been achieved under the Initiatives since the last report.