Reconstructing AFGHANISTAN

Adam Bennett, Editor

Bruno de Schaetzen

Louis Dicks-Mireaux

Felix Fischer

Thierry Kalfon

Ron van Rooden

International Monetary Fund

© 2005 International Monetary Fund

Production: IMF Multimedia Services Division

Cover design: Massoud Etemadi

Figures: Theodore F. Peters, Jr.

Typesetting: Alicia Etchebarne-Bourdin

Cataloging-in-Publication Data

Reconstructing Afghanistan/Adam Bennett, editor—[Washington, D.C.]: International Monetary Fund,2004.

• p. cm.

  • Includes bibliographical references.

  • ISBN 9781589063242

1. Afghanistan—Economic policy. 2. Afghanistan—Economic conditions. 3. Fiscal policy—Afghanistan. 4. Monetary policy—Afghanistan. I. Bennett, Adam.

HC417.R43 2004

Price: US$25.00

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Contents

• Preface

• List of Acronyms

• Map

• 1. Overview

  • Ron van Rooden

  • The Political Landscape

  • Coordination of Assistance

  • Role of the IMF

  • Economic Developments and Achievements

  • Looking Ahead

• 2. Recent Macroeconomic Developments

  • Ron van Rooden and Louis Dicks-Mireaux

  • Comparison of Donor Assistance

  • Output and Prices

  • External Sector

  • Appendix 2.1. Poppy Dimension in the Afghan Economy

  • References

• 3. Fiscal Framework and the Budget

  • Thierry Kalfon

  • A Slow Descent into Chaos

  • Dismal Situation but Resilient Structures

  • Reconstruction Strategy

  • Fiscal Policy Framework: Postconflict Budgeting

  • Appendix 3.1. Programs of the National Development Framework

  • Appendix 3.2. Comparing Afghanistan’s 2002/03 Operating Budget with Low-Income Countries’ Budgets

  • References

• 4. Structural Reforms: Revitalizing Fiscal Institutions

  • Thierry Kalfon

  • Improving Public Expenditure Management

  • Reforming Revenue Policy and Administration

  • Revitalizing the Civil Service

  • Developing the Private Sector: Building a Market-Led Economy

  • Appendix 4.1. Pay Structure for Government Staff and Tax Summary

• 5. Monetary and Exchange Rate Policy in a Postconflict Environment

  • Ron van Rooden and Louis Dicks-Mireaux

  • Choice of Currency

  • Preconditions for a Successful Monetary Policy

  • Fixed or Flexible: Choosing the Exchange Rate Regime

  • Formulating a Monetary Program

  • Monetary and Exchange Rate Developments in 2002—04

  • Reference

• 6. Financial Sector Development in Afghanistan: Seeking a Renaissance

  • Felix Fischer

  • After the Taliban: Financial System at the End of 2001

  • Modernizing the Financial Sector in Afghanistan

  • References

• Text Boxes

  • 1.1 Asian Development Bank in Afghanistan

  • 1.2 World Bank in Afghanistan

  • 2.1 Social Indicators

  • 2.2 Trade, Transit, and Transport Agreements

  • 2.3 Exchange and Trade Arrangements

  • 3.1 Public Sector and The Relationship Between the Center and Provinces

  • 3.2 UN Immediate and Transitional Assistance Programs, 2001—02

  • 3.3 Afghanistan Reconstruction Trust Fund

  • 5.1 Introducing the New Currency

  • 5.2 What Is the Right Exchange Rate Level?

  • 5.3 Foreign Exchange Auctions

  • 5.4 Considerations on the Level of Foreign Exchange Reserves

  • 6.1 The Law on Money and Banking of the Islamic State of Afghanistan

  • 6.2 Physical Infrastructure and Security of Da Afghanistan Bank

  • 6.3 Six Licensed Banks in Afghanistan

  • 6.4 Money Dealers in Afghanistan

• Text Tables

  • 2.1 Gross Domestic Product

  • 2.2 Selected Indicators of Economic Activity

  • 2.3 Balance of Payments

  • 2.4 Direction of Trade 1

  • 2.5 Direction of Trade 2

  • 2.6 Commodity Composition of Trade

  • 3.1 General Government Current Budget, 2002/03

  • 3.2 Budget Execution, Center and Provinces, 2002/03

  • 3.3 Operating Budget, 2003/04

  • 3.4 Development Budget, 2003/04

  • 5.1 Monetary Developments (Da Afghanistan Bank)

• Figures

  • 2.1 Foreign Assistance to Postconflict Countries

  • 2.2 Price and Exchange Rate Developments

  • 3.1 National Development Framework: Relationship Between Pillars, National Development Programs, and National Priority Subprograms

  • 3.2 Budget Execution: Economic Classification, 2002/03

  • 3.3 Budget Execution: Functional Classification, 2002/03

  • 5.1 Exchange Rates

• Appendix Box

  • A4.1 Civil Servant Salaries

• Appendix Tables

  • A2.1 Indicators of Opium Cultivation

  • A2.2 Estimate of Farmers’ Net Income from Opium

  • A2.3 Revenues from Opiates

  • A3.1 Afghanistan’s 2002/03 Budget Compared with Budgets of Selected Low-Income Countries

  • A3.2 Sample of Low-Income Countries Used for Comparison

  • A4.1 Tax Summary

Preface

This study was prepared by an IMF staff team headed by Adam Bennett. Team members included Louis Dicks-Mireaux, Felix Fischer, Thierry Kalfon, Ron van Rooden, and Bruno de Schaetzen. Reconstructing Afghanistan reflects the staff’s work in Afghanistan beginning in early 2002, with the establishment of the interim administration headed by President Hamid Karzai, through the first quarter of 2004. During this period, the staff focused on helping (often under difficult circumstances) the Afghan authorities quickly establish a basic framework for economic management and policies, including rebuilding key institutions, notably the Ministry of Finance and the central bank, Da Afghanistan Bank. A preliminary version of this study was first published during the Annual Meetings of the IMF and the World Bank in Dubai in the fall of 2003, in the context of the IMF’s 2003 Article IV Consultation with Afghanistan.

The authors are grateful for the excellent cooperation received from the Afghan authorities. In particular, our thanks go to Ashraf Ghani, Minister of Finance of Afghanistan (2002—04); Anwar Ul-Haq Ahady, Governor of Da Afghanistan Bank (2002—04); and Michael Carnahan, Larry Seale, and Martin Dinning, three key advisors in the Ministry of Finance and the central bank. The authors are also grateful to the United Nations Office on Drugs and Crime, which provided valuable information on and useful insights into the illicit drug sector in Afghanistan. The study covers the key areas in which the IMF staff has made important contributions toward the reconstruction of Afghanistan. In this regard, the authors would like to acknowledge the work of Paul Chabrier, Jean Le Dem, and Milan Zavadjil, who respectively led the staff team before Adam Bennett took over in the spring of 2003. The authors also acknowledge the work of the staff members of the IMF’s functional departments who have provided technical assistance to the Afghan authorities in their various areas of expertise, especially Steven Symansky and Emil Sunley of the IMF’s Fiscal Affairs Department, Ake LÖnnberg of the Monetary and Financial Systems Department, Tobias Asser of the Legal Department, and Adriaan Bloem and Vilay Soulatha of the Statistics Department. The authors are also grateful for helpful comments and suggestions received from our colleagues in the IMF’s Middle East and Central Asia Department, especially George Abed and Mohammad Shadman-Valavi. The authors are indebted to Sheila Tomilloso for providing invaluable secretarial assistance, both at the IMF headquarters in Washington and in Kabul, and to Archana Kumar of the IMF’s External Relations Department for editing this book and coordinating its publication.

The views expressed here are those of the authors and do not necessarily reflect those of the IMF, its Executive Directors, or the Afghan authorities.

List of Acronyms