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Chabrier interview: Security issues critical as Afghanistan moves to rebuild its economy

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 2002
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IMF Survey: What do you see as the immediate priorities to get the economy functioning again?

Chabrier: There are four main priorities. First, the security situation has to improve dramatically. The present government is in full control of Kabul, with foreign troops ensuring security, but there are difficulties in the provinces. Unless the security climate improves, it will be very difficult to move into reconstruction and for the government to perform its traditional functions.

Second, help is needed to improve the work and efficiency of key institutions, such as the major ministries and the central bank.

Third, the proliferation of currencies must stop. At present, there are three Afghan currencies—the official one issued by the central bank in Kabul, one issued by the Northern Alliance, and one by a warlord. Plus, there are indications that more are being issued. Unless the issuance of new Afghan banknotes not backed by the central bank is stopped, it could lead to massive inflation and destabilize the economy. Already, it has caused a progressive weakening of the official currency in the foreign exchange market following a rapid appreciation from October to December.

Fourth, Afghanistan must move quickly to establish a budget for the next fiscal year. It doesn’t need to be elaborate, but it has to be a budget where recurrent expenditures can be appropriately assessed. The bulk of expenditures will consist of the salaries of the civil service and the army, which haven’t been paid in five months. There has been an attempt to partially pay some public servants in Kabul, but payments outside Kabul have been prevented, in part, by difficulties in transporting the cash and assessing the number of public servants. A budget for 2002/03 (which starts on March 21) is required to establish the needs for external assistance and elicit the disbursement of that assistance.

IMF Survey: Is there a dollar figure on Afghanistan’s needs for rebuilding?

Chabrier: The World Bank and other development institutions estimate the reconstruction needs at about $15 billion over 10 years, but it’s extremely difficult to pinpoint the correct figure. The real issue is, rebuild to what level? To a modest level of functioning? The need for the next 12–18 months is put at $1.7 billion—a sum that was pledged in Tokyo in late January. What we need to do now is ascertain the form and timing of such assistance, including some of the conditions under which it can be disbursed.

IMF Survey: How long will it take to see the economy functioning reasonably well?

Chabrier: Afghanistan being basically an agricultural economy, I would say two or three years, with the proviso that security is reestablished over the whole of the territory and the basic infrastructure for agriculture is reconstructed. If security is not established, it raises doubts about the government’s ability to run the country. Communication links also need to be established with the provinces; otherwise everyone begins operating independently. And, finally, the reconstruction assistance will have to flow soon.

IMF Survey: How about fiscal revenues?

Chabrier: There is a very modest revenue base that consists of a few fees and some tariffs on imports. It would cover at best 10 percent of recurrent spending in the coming years. Thus, the bulk of financing of the recurrent deficit would have to be through foreign assistance. We also assume that the investment budget will be fully foreign financed.

IMF Survey: Was a lot of money cleared out of the central bank as reported?

Chabrier: Yes. Before Kabul fell to the Northern Alliance, someone went to the vaults of the central bank and stole $6 million in U.S. dollar bills and about $1 million worth of Pakistan rupees. We saw the safe that had been cut open. It was in a room with a number of safes, some of which held relics from the royal family. But the thieves knew exactly which safe to open. So they had some inside information.

IMF Survey: Any chance of recovering the money?

Chabrier: No, I don’t think so. Nobody knows exactly who stole it. But the thieves have probably disappeared into the countryside.

IMF Survey: What is the IMF’s advice on exchange rate policies?

Chabrier: The central bank governor is absolutely convinced that the best system for Afghanistan is a free float, the system of the past 50 years. The currency should be fully flexible, and the central bank shouldn’t intervene in the market. The problem is that three currencies are circulating and more are being printed. The authorities are very clear that a new, single Afghan currency will have to be established at some point in the future, replacing the current Afghanis. But what should be done between now and then? The IMF staff has made some proposals, which are being examined by a committee composed of the finance minister, the central bank governor, another minister, and a special UN representative.

It isn’t easy, however, to devise a new currency; this will take some time. A key issue is what picture will go on the currency notes. This is especially controversial because, unlike in Kosovo and East Timor—territories that wanted to become independent and thus had no particular attachment to a currency—the Afghans want to reestablish a unified nation. Should the currency picture a human face, which was unacceptable under the Taliban, or a monument? If the latter, which monument would satisfy the various ethnic groups?

IMF Survey: How will the IMF be helping?

Chabrier: The task of rehabilitation and reconstruction covers many areas, but the IMF has to limit itself to its areas of expertise. I see us helping in three main areas. First, there is an urgent need to boost the administrative capacity of the existing institutions. The administrations exist but the personnel are not there. In the banking area, for example, we have to help the central bank rebuild its capacity to be a central bank and, in particular, to supervise commercial banks. Second, on the budgetary front, it’s a question of not only helping to design the budget for the next fiscal year, beginning March 21, but also helping to ensure that the budget is properly monitored and that budget proposals are realistically linked to external assistance. Third, there is an urgent need to rebuild the statistical base. No statistics have been collected since 1996. There isn’t even a central bank balance sheet. How long will it take to rebuild this base? It will probably take a year, and we will have to take shortcuts. There would be historical value in extending the statistics back to 1996, but this might take too long. The alternative would be to just start with the present and go forward.

IMF Survey: Do you have counterparts to work with?

Chabrier: I think at the top level, the people at the central bank and ministries are impressive. Below them, it’s more difficult to find the right type of team. You have some individuals who are pretty good, but they are all overworked. If you are knowledgeable, everybody wants to see you. This is an area where a lot of technical assistance will be needed. The IMF will have to post some experts there for a while to help the Afghans run things and establish procedures.

IMF SURVEY: Can the IMF look to any other countries as comparisons for postconflict rebuilding?

CHABRIER: Because I was associated with the task, the closest case that comes to mind is Bangladesh, when it became an independent nation in 1972. In both countries, reconstruction did not have to start from scratch. In Afghanistan, there still is a government and an administrative structure, even if it’s very weak. Another parallel is that Bangladesh also had a lot of external assistance, but it needed to be organized. A lot of assistance has been pledged for Afghanistan, but we will need to identify the type and timing of it. This must be done very quickly for budgetary and efficiency reasons. Salaries must be paid, and this can’t be done through project loans.

No statistics have been collected in Afghanistan since 1996. There isn’t even a central bank balance sheet.

–Paul Chabrier

IMF Survey: You were last in Kabul 10 years ago. What is your impression this time?

Chabrier: It’s an impression of great sadness. I knew a lot of people in the central bank and the finance ministry 10 years ago, but I couldn’t find them, which means that they have died or disappeared. Also, 40–50 percent of the city has been destroyed. In the center, the destruction hasn’t been as great, although there was some bombing. But when you go outside the center, you find total devastation, which has been going on since 1993. The other feeling is that the team that accompanied me to Kabul this time had an impressive will to help despite the difficult accommodation conditions. This attitude was matched by the authorities’ desire to put things straight. That is the best memory I keep from this recent mission.

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