Islamic Republic of Afghanistan
Enhanced Heavily Indebted Poor Countries (HIPC) Initiative: Preliminary Document

This paper discusses the enhanced Heavily Indebted Poor Countries (HIPC) Initiative of the Islamic Republic of Afghanistan. Afghanistan’s economy achieved a major recovery, with robust GDP growth from a low level. Afghanistan has made significant progress in some areas of human development. Health care coverage has increased with the Basic Package of Health Services (BPHS) available to about 90 percent of the population. Public institutions should be strengthened and economic governance improved to ensure that economic growth can be sustained.

Abstract

This paper discusses the enhanced Heavily Indebted Poor Countries (HIPC) Initiative of the Islamic Republic of Afghanistan. Afghanistan’s economy achieved a major recovery, with robust GDP growth from a low level. Afghanistan has made significant progress in some areas of human development. Health care coverage has increased with the Basic Package of Health Services (BPHS) available to about 90 percent of the population. Public institutions should be strengthened and economic governance improved to ensure that economic growth can be sustained.

I. Introduction

1. This paper presents a preliminary assessment of the eligibility of the Islamic Republic of Afghanistan (hereafter “Afghanistan) for assistance under the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative.1 The preliminary assessment is based principally on IDA and IMF missions to Kabul in January/February 2007. The results show that, at end-2004, Afghanistan’s net present value (NPV) of debt-to-exports ratio after the full delivery of traditional debt relief is 585.4 percent, well above the HIPC threshold.2 In addition, in 2004, Afghanistan was eligible for the Poverty Reduction and Growth Facility (PRGF) and was an IDA-only country with a GNI per capita of US$228. The staffs, therefore, propose that Afghanistan be added to the list of ring-fenced countries that meet the income and indebtedness criteria at end-2004. Once in the list, given that Afghanistan has ongoing programs with IDA and under the PRGF, it would become eligible under the HIPC Initiative.3

2. This paper also presents a preliminary analysis based on the latest end of fiscal year debt data (March 20, 2006), for which Afghanistan’s NPV of debt-to-exports ratio is estimated at 305.8 percent. Together with the ongoing PRGF arrangement and interim Poverty Reduction Strategy Paper (PRSP), Afghanistan would meet the requirements to qualify for HIPC Initiative debt relief, which is estimated at US$569.7 million in NPV terms. Multilateral Debt Relief Initiative (MDRI) assistance at the projected completion point is expected to amount to US$14.9 million in NPV terms. This would support Afghanistan’s reconstruction and poverty reduction objectives, helping the country to make progress toward achieving the Millennium Development Goals (MDGs).

3. The paper is organized as follows. Section II provides background information on Afghanistan, including recent poverty and social developments and the policy track record. Section III discusses the medium-to-long term macroeconomic framework. Section IV establishes Afghanistan’s eligibility for the HIPC Initiative and summarizes the results of the preliminary debt relief analysis, as well as possible HIPC and MDRI assistance. Section V suggests a timeline for preparing the decision point document, presents key reforms that could be possible completion point triggers, and outlines the key issues in the use and monitoring of HIPC resources. Finally, Section VI presents issues for discussion by Executive Directors.

II. Background

A. PRGF and IDA Status

4. Afghanistan is an IDA-only country with a gross national income (GNI) per capita of US$271 in 2005.4 The Interim Strategy Note (ISN), discussed by the IDA Board of Executive Directors in May 2006, is guiding IDA’s engagement in Afghanistan over the 2006–08 period. It is expected to be followed by a Country Assistance Strategy (CAS) once the government has finalized its full PRSP.5

5. In June 2006, the IMF’s Executive Board approved Afghanistan’s first 3-year PRGF arrangement, totaling SDR 81 million (50 percent of quota). The IMF Board completed the first review under the arrangement on March 7, 2007. Afghanistan will continue to need substantial concessional assistance from the international community, and is likely to remain an IDA-only country and PRGF-eligible for the foreseeable future.

B. Poverty and Social Issues

6. Protracted conflict and political instability have undermined Afghanistan’s socio-economic development, resulting in widespread poverty and weak social development. Nevertheless, Afghanistan’s economy achieved a major recovery since late 2001, with robust Gross Domestic Product (GDP) growth, albeit from a very low level.

7. Afghanistan has made significant progress in some areas of human development. Since 2001, many refugees and other displaced persons have returned. Health care coverage has increased with the Basic Package of Health Services (BPHS) now available to about 90 percent of the population. Independent nationwide third-party evaluations (e.g., the “balanced score card”) show that the quality of health care has improved by 35 percent since 2004. Furthermore, the use of health care services has also increased significantly (e.g., the coverage of prenatal care rose from 5 percent in 2003 to 71 percent in 2006). In addition, there has been a marked increase in the demand for education in conjunction with accelerated teacher recruitment and school rehabilitation. As a result, more than half of the estimated 10 million Afghan children are now attending school. The situation for Afghan women has also improved: (i) the new Constitution provides a clear legal basis for their participation in political and economic affairs (a quarter of parliamentarians are women); (ii) school enrollment of girls has increased significantly; and (iii) maternal care and access to reproductive health have expanded.

8. Despite recent positive trends, Afghanistan still ranks poorly on all human development indicators. The Global Human Development Report of 2004 ranks it well behind its neighbors, near the bottom of the 177 countries. A range of poverty and social indicators reflect the extent to which health and educational standards have stayed at very low levels, reflecting the legacy of conflict and continuing constraints on service delivery (Table 1). There are significant risks of infant and maternal mortality, widespread malnutrition, adult literacy is extremely low, and life expectancy is among the lowest in the world. Although net primary school enrollment ratios have improved, there are serious concerns about the quality of education.

Table 1.

Selected Poverty and Social Indicators

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Notes:*2005, ** 2002, *** 2015Source: GoA (2005 MDG Report); Central Statistics Office; World Bank, Economic and Social Indicators.

9. The absence of officially recognized poverty estimates has, to date, prevented a systematic diagnosis of poverty in Afghanistan. A recent World Bank analysis was the first comprehensive attempt at estimating and studying poverty, and its determinants.6 The Data national poverty headcount rate was found to be around 33 percent (estimated using only one survey conducted during the summer). Aggregate income inequality in Afghanistan—represented by a national Gini coefficient of 0.26—is lower than in other countries in South Asia.7

10. Poverty reduction and progress in social development will depend largely on improved security, which is contingent upon visible changes in living conditions and maintaining a stable political process. Public institutions should be strengthened and economic governance improved to ensure that economic growth can be sustained and is inclusive.

C. Recent Political, Security, and Governance Developments

11. Afghanistan’s political situation has stabilized since 2001. An agreement reached in Bonn in December 2001 sets out a transitional process leading to the election of a representative government. Following this, a new Constitution was adopted in January 2004. The first Presidential election was held in December 2004, while elections for the Wolesi Jirga (lower house of the National Assembly) and for provincial councils took place in September 2005. The inauguration of the National Assembly in December 2005 marked the formal conclusion of the Bonn political transition process.

12. Despite these achievements, security challenges remain. In particular, security has deteriorated during the past year, especially in the South. The government is still unable to enforce policies and laws in many regions. This has been exacerbated by the importance of opium in the economy.8 There are complex linkages between opium activities and insecurity. Dependence on opium production distorts the economy and discourages the development of legitimate economic activities. Moreover, drug-related corruption and crime undermine the institution-building process, and appear to have seriously compromised certain parts of government (the police in particular).

13. Weak institutions and challenges in providing good governance and reducing corruption seriously hamper economic growth and living standards. Capacity and political institutions remain weak, and there is an urgent need for a better legal and regulatory framework. Patronage is common within the civil service, and low pay scales have made it difficult to establish a professional merit-based civil service. Afghanistan was ranked in the bottom third of Transparency International’s 2005 Corruption Perception Index (117th out of 158 countries) (Table 2), which—along with a lack of basic production factors (e.g., electricity, land, human capital) and a devastated infrastructure—has been a serious impediment to private sector development. Afghanistan ranked near the bottom (162nd out of 175 countries) in the latest World Bank Doing Business 2007 Report. This compares with an average ranking of 105 for South Asia as a whole (Figure 1).

Table 2.

Corruption Perception Index, 2005

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Source: Transparency International, 2005.Notes: Countries in Italics are HIPC/HIPC eligible countries (some pre-decision point), * CPI Score relates to perceptions of the degree of corruption as seen by business people and country analysts, and ranges between 10 (highly clean) and 0 (highly corrupt).
Figure 1.
Figure 1.

Islamic Republic of Afghanistan: Ease of Doing Business

Citation: IMF Staff Country Reports 2007, 232; 10.5089/9781451800319.002.A001

Source: World Bank, Doing Business 2007Note: Rankings for each dimension are based on 175 countries. The score on each item refers to the country’s rank among all countries surveyed in difficulty of doing business. For example, Afghanistan ranks poorly for getting credit (174th out of 175 countries), while it performs well in terms of starting a business, ranking 17th out of 175 countries.

D. Policy Track Record and Reform Agenda

14. Given Afghanistan’s low national income and substantial poverty, sustained economic growth is a fundamental requirement for progress. The government’s economic growth and interim PRSP is set out in the interim Afghanistan National Development Strategy (I-ANDS). The I-ANDS is articulated around three pillars: (i) security; (ii) governance, the rule of law and human rights; and (iii) economic and social development. The I-ANDS is supported by the Afghanistan Compact, a five year framework (2006–2010) based on mutual commitments between the government and its international development partners, with detailed benchmarks and timelines.

15. Over the past few years, Afghanistan has made significant progress toward laying durable foundations for macroeconomic stability and an open market economy (Table 3). A new and stable currency was introduced in October 2002; inflation declined to 9.4 percent in 2005/06; and reforms aimed at achieving medium-term fiscal sustainability have been adopted. These improvements laid the foundations for higher economic growth: real non-opium Gross Domestic Product (GDP) has grown, on average, by 11.5 percent over the past four years, with a strong performance of services and construction driven by the reconstruction effort.

Table 3.

Selected Economic and Financial Indicators

Financial Year begins on March 21

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Sources: Central Statistical Office, Da Afghanistan Bank, Ministry of Finance, and Fund staff estimates.

16. A significant factor in Afghanistan’s progress on the macroeconomic front has been the authorities’ steadfast commitment to macroeconomic stability through engagement with the IMF. IMF policy advice and technical assistance focused on issues crucial to the restoration of macroeconomic stability, including rebuilding the payments system, introducing a new currency, modernizing the central bank, and improving budget preparation, expenditure management and revenue mobilization. In March 2004, the authorities embarked on a staff monitored program (SMP). Sustained good performance under the SMP paved the way for a three-year arrangement under the PRGF, which was approved by the IMF Board in June 2006. The authorities’ continued efforts under the PRGF-supported program have facilitated robust economic growth and a moderation in inflation, as well as improved revenue collection and administration, establishing a transparent expenditure system with fiduciary standards, and modernizing central bank operations. The current program remains firmly on track. Most of the quantitative and structural targets for the first three quarters of the program were met, and the first review under the PRGF arrangement was completed without delay on March 7, 2007.

17. On the structural side, the government of Afghanistan has initiated wide-ranging reforms and has achieved tangible results over the past five years. However, many reforms are still under way, and weak public administration and poor governance continue to be a major constraint. The government needs to address challenges in key areas, where weaknesses are still manifest: (i) budget formulation, execution, and reporting; (ii) tax policy and administration; (iii) public administration; (iv) regulatory reform in the energy and mining sector; and (v) transparency and accountability in human development. The following describes the progress made in implementing structural and economic governance measures, important elements of which are the focus of World Bank budget support, IMF technical assistance and bilateral support.

  • Budget formulation, execution and reporting. Since 2001, much progress has been made in addressing weak budget practices and a weak payments system. The quality of budget formulation has been improved by introducing a Medium-Term Fiscal Framework (MTFF) and integrating the operating and development budgets. Challenges ahead include further aligning the budget with the ANDS, improving the realism of the development budget, and coordinating external aid. With respect to budget execution, fiduciary controls have been enhanced through (i) enacting a Public Finance and Expenditure Management Law; (ii) implementing the computerized Afghanistan Financial Management Information System (AFMIS); (iii) introducing a Treasury Single Account; and (iv) using the Afghanistan Reconstruction Trust Fund’s Monitoring Agent to post-audit transactions. Finally, the government has demonstrated its commitment to transparency by improving budget reporting. The 2005/06 budget was audited and the audit report was sent to Parliament in a timely fashion. To reach its objectives of using the budget as a core policy tool and attracting more external aid into budget channels, the government needs to: (i) be more stringent on project selection and the piloting of program budgeting; (ii) continue to improve the MTFF; (iii) strengthen the tracking of aid and budget processes; (iv) allow for a less compressed budget preparation timeline; and (v) improve budget implementation.

  • Tax policy and administration. With significant technical assistance from various sources since 2002, the customs and tax authorities have both adopted five-year reform plans. However, much remains to be done and the government is committed to clarifying its tax policy framework and further modernizing customs and revenue administration.

  • Public administration. In order to strengthen capacity, the government’s public administration reforms are focused on raising basic skills and management, and putting in place an adequate pay scale to attract qualified personnel. A central element of the initial Public Administration Reform (PAR) program—adopted in 2002—was the Priority Reform and Restructuring (PRR) scheme, which placed more than 43,000 positions in 32 ministries and agencies on an elevated pay scale. Merit-based recruitment was also introduced. The government is now preparing a comprehensive PAR program, centered on comprehensive pay and grading reform. The government has placed a high priority on implementing its PAR strategy, a key component of the I-ANDS and the anti-corruption strategy.

  • Regulatory reform in the energy and mining sector. Modern Minerals and Hydrocarbons Laws were adopted in 2005, although the latter has shortcomings that need to be addressed. The 2005 amendments to the Income Tax Law have created a more attractive fiscal regime for the energy and mining sector. The government has committed to good governance in the sector, including by: (i) adopting regulations and model contracts; (ii) establishing an International Advisory Council to review transactions; (iii) using the services of an international firm to build the cadastre and grant licenses; and (iv) implementing the principles of the Extractive Industry Transparency Initiative. Looking ahead, the reform strategy will consist of: (i) amending the Hydrocarbon Laws; (ii) implementing the new laws; and (iii) reforming the Ministry of Mines from a vertically-integrated extractive industry conglomerate to a regulatory ministry.

  • Transparency and accountability for human development outcomes. The Ministry of Public Health (MoPH) continued to strengthen its stewardship role, deepen its administrative reform program, and make progress in implementing the BPHS in the provinces. The MoPH is also committed to increasing transparency and accountability, and making public third-party assessments of the BPHS. Progress in education has been significant since 2001, notwithstanding weak institutional capacity and frequent changes in political leadership. The authorities have recently drafted a five-year strategic plan for education, the teacher payroll, and initiated the decentralization of decision-making down to the school level (as part of the IDA-funded Education Quality Improvement Program). The Ministry of Education’s monitoring and evaluation system (Education Management Information System) will be strengthened to become more relevant for planning and management purposes.

III. Medium-to-Long-Term Macroeconomic Outlook9

18. Real GDP growth is projected to converge toward a long-term level of 4.5 percent a year by 2021/22 (Table A10). However, robust GDP growth in the near term, owing to a likely recovery in agriculture (after the 2006/07 drought) and continued high levels of donor-financed public investment, will contribute to average real GDP growth over the projection period (2007/08–2026/27) of 5.9 percent. Continued robust growth over the medium-to-longer term is expected to be underpinned by: (i) a gradual improvement in security and continued macroeconomic stability; (ii) institutional and financial sector reforms, including improved bank supervision, further developing monetary policy instruments and establishing a capital market; (iii) increased investment in infrastructure; and (iv) an increasing role for the private sector over the medium-to-longer term, including in mining, energy, and agribusiness. On this basis, output growth is assumed to remain strong, but to decline gradually to a long-term level of 4.5 percent per annum by 2021/22.

19. Inflation is projected to ease from 7 percent in 2006/07 to 5 percent in 2007/08 and to remain at this level throughout the projection period. The nominal exchange rate is assumed to remain stable and the differential between CPI inflation in Afghanistan and its trading partners—estimated at 2 percent during the projection period—should be offset by productivity gains. Monetary policy should help secure low and stable inflation.

20. Investment is projected to moderate from its current exceptional levels (41.3 percent of GDP in 2006/07) to a more sustainable long-term level (about 22.5 percent of GDP). In the short-term, investment will continue to be underpinned by high levels of donor support for reconstruction and greenfield public investment (mainly in infrastructure). Given uncertainties associated with security and governance, a conservative assumption has been made regarding the efficiency of investment. As a result, the longer-run investment-to-GDP ratio of 22.5 percent is not expected to generate real GDP growth higher than 4.5 percent a year. Currently, a large part of ‛public’ investment is conducted directly by donors outside the central government budget—a situation that is expected to be reversed over the projection period. Private investment is projected to increase gradually from 10 to 12.5 percent of GDP over the projection period and will offset in part the decline in public investment. Foreign direct investment is expected to play a dominant role in the short-to-medium-term, while the domestic private sector would generate increased savings in the longer-run to maintain the projected levels of private investment.

21. Fiscal policy will be aimed at ensuring macroeconomic stability and sustainability together with the delivery of priority development expenditures. Continued improvements in revenue performance are expected to offset the decline in budget support grants, allowing the central government to contain its overall deficit (before HIPC assistance) to just under 2 percent of GDP over the projection period. Specifically:

  • Central government revenues are expected to increase progressively from 6.4 percent of GDP in 2006/07 to 12 percent of GDP in 2026/27, while grants to the budget are expected to decline by half from the current level of around 10 percent of GDP. Over the short- to medium-term taxes on international trade would continue to play a dominant role while a broad-based consumption tax is expected to gain importance as administrative capacity improves.

  • Central government expenditures would peak at 21 percent of GDP in 2011/12, driven by reconstruction and security needs, before declining gradually to about 18 percent of GDP by 2026/27. Operating expenditures are assumed to grow by 10 percent a year in order to accommodate donor-financed current expenditures gradually coming onto the budget. As the government takes on investments currently funded by donors, development expenditures are expected to increase to just above 11 percent of GDP by 2010/11 and would average 10 percent for the remainder of the projection period. Nonetheless, donors are expected to play an important role in the short- to medium-term, with donor-financed off-budget expenditures exceeding direct budget support until about 2012/13.10

  • Over the medium term, fiscal sustainability will be measured by whether and when domestic revenues cover operating expenses—a principle set out in the Compact. The baseline scenario envisages the government meeting this objective by 2012/13.11 Longer-term sustainability will entail the government steadily decreasing reliance on overall external financing.

22. External grants are expected to remain the predominant form of financing for most of the projection period. This will be essential to the government financing its poverty reduction strategy in a fiscally sustainable way. However, as the economy continues to grow and the revenue base expands, the need for total external financing is expected to ease. Transfers would decline significantly as a percentage of GDP (from nearly 40 percent in 2006/07 to around 7 percent in 2026/27) and the share of debt financing would increase gradually over the projection period. The terms of new borrowing are expected to remain highly concessional (and largely from multilateral creditors) in the short- to medium-term—consistent with the PRGF arrangement—but, after the completion point, it is likely that some borrowing will be on somewhat less concessional terms.

23. Consistent with the financing picture and the path of fiscal policy, the external current account deficit (excluding transfers) is projected to decline steadily from over 40 percent of GDP in 2006/07 to about 10 percent in 2026/27. As total investment declines in parallel with public investment, imports are expected to trend toward a more sustainable level, from over 66 percent of GDP in 2006/07 to an average of nearly 30 percent of GDP in 2017/18–2026/27. At the same time, officially-recorded exports are expected to get a boost from an increasingly export-oriented private sector. However, given the low base of official exports, it will be some years before they can provide a solid source of foreign exchange. The evolution of total exports will be dominated by the expected decline of transit trade (both as a percent of GDP and as a share of overall exports), as border protection improves.

24. Given exceptionally difficult challenges facing Afghanistan, the macroeconomic projections are subject to significant uncertainties and risks. The evolution of the still fragile security situation, weak governance and the counternarcotics effort will have a significant bearing on future macroeconomic conditions. Afghanistan’s heavy dependence on external grants—currently the main driver domestic absorption—also leaves macroeconomic growth and stability prone to a faster than anticipated, or a sudden and unforeseen, withdrawal of grants. Therefore, the sensitivity analysis (section IV. F) considers, among others, the impact of a lower growth and less grant financing. Nevertheless, the broader growth and development agenda remains subject to a number of other exogenous risk factors.

IV. Debt Relief Analysis and Possible Assistance Under the HIPC Initiative

A. Debt Reconciliation Status

25. Debt reconciliations were conducted for Afghanistan’s public and publicly-guaranteed debt outstanding and disbursed for two reference dates.

  • First, in order to assess eligibility for the HIPC Initiative, public and publicly-guaranteed debt outstanding at end-December 2004 was reconciled. Afghanistan had not been included in the list of ring-fenced countries that meet the income and indebtedness criteria at end-2004 because a large part of its potential external obligations was, at the time, either unverified or in dispute.12, 13 However, the document indicated that, in the event that Afghanistan’s end-December 2004 debt ratio was found to be above the relevant thresholds, the staffs would propose that Afghanistan be added to the list of ring-fenced countries.

  • Second, a reconciliation of debt data as of March 20, 2006 was undertaken to analyze the level of HIPC debt relief that would be required at the expected decision point.14

26. The debt reconciliations were undertaken jointly by the authorities and the staffs of IDA and the IMF. They are based on loan-by-loan data, provided by the authorities and creditors, for public and publicly-guaranteed debt outstanding and disbursed as of end-December 2004 and March 20, 2006 (the expected reference date for the decision point). The reconciliations were completed in January/February 2007, with 100 percent of multilateral and over 99 percent of bilateral debt reconciled.15, 16 However, given the protracted conflict in Afghanistan and the consequent lack of documentation, there is a greater than usual likelihood in this case of debts that have not yet been identified.

B. Preliminary Assessment of Eligibility for Assistance Under the HIPC Initiative

27. Afghanistan meets the HIPC Initiative end-2004 income and indebtedness criteria, and other eligibility criteria. The staffs, therefore, propose that it be added to the list of ring-fenced countries. Once in the list, given that Afghanistan has ongoing programs with IDA and under the PRGF, it would become eligible for the HIPC Initiative. In 2004, Afghanistan was a PRGF-eligible and IDA-only country, with a GNI per capita of US$228. The absence of reliable source data on Afghanistan’s exports of services precluded the staffs from calculating the NPV of external debt to exports (goods and services) ratio based exclusively on official data. Using staff estimates of services receipts (Box 1), the end-December 2004 NPV of debt-to-exports (goods and services) ratio, after the full application of traditional debt relief mechanisms, is estimated at 585.4 percent, above the 150 percent threshold established under the HIPC Initiative (Table 4).17

Staff Estimation of Services Receipts

The absence of reliable source data on Afghanistan’s exports of services precluded the staffs from calculating the NPV of external debt-to-exports (goods and services) ratio based exclusively on official data. To assess Afghanistan’s eligibility for the HIPC Initiative, the staffs have imputed the value of exports of services based on the relationship between services and merchandise exports in comparator countries. These estimates are also expected to be used at the time of the decision point.

Based on extensive statistical technical assistance in the area of balance of payments statistics, the staffs consider that further efforts to compile historical source data have no guarantee of success and would unnecessarily delay the HIPC process. Moreover, the staffs did not consider it appropriate to assess Afghanistan’s HIPC eligibility on the basis of merchandise exports only as this would be akin to imputing zero value for services receipts (implying higher potential debt relief).

Accordingly, the staffs have estimated Afghanistan’s exports of services, for HIPC purposes, based on the following three principles:

  • identifying a group of comparator countries that: (i) are PRGF-eligible and meet the World Bank’s low-income country (LIC) classification; and (ii) share Afghanistan’s key characteristics of being landlocked and either post-conflict or located within the central Asia region;

  • calculating a benchmark ratio of total service credits to merchandise exports in those comparator countries, averaged over the period 1980–2005; and

  • applying that benchmark ratio to Afghanistan’s official merchandise export data as reported by Central Statistics Office.

The Fund is providing technical assistance to support the authorities’ efforts to compile a comprehensive balance of payments (including services data). If actual data are available at the completion point and are deemed by the IMF’s Statistics Department (STA) to be of sufficient quality, they could be used at that time.

The methodology is set out in detail in Appendix II. For uniformity of treatment considerations, estimates of export services based on data compiled for similar countries would be available in the future for other countries in a similar situation (e.g., countries lacking reliable source data on export services).

Table 4.

NPV of External Debt after the full application of traditional debt relief

(end-December 2004 data, in units indicated)

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Sources: Afghan authorities and staff estimates.

After up-front 80 percent discount on Russian debt.

Calculated using a backward-looking three-year average of goods and services; excluding transit goods.

C. Structure of External Debt as of March 20, 2006

28. Afghanistan’s public and publicly guaranteed external debt prior to the application of traditional debt relief mechanisms is estimated at US$11,939.4 million in nominal terms as of March 20, 2006 (Tables A1 and 5, and Figure 2). The Russian Federation accounts for the vast majority of total external debt (93.2 percent before the application of an up-front 80 percent discount on its debt). The United States (0.9 percent) and Germany (0.4 percent) are the other Paris Club creditors. Multilateral creditors include IDA and the Asian Development Bank (ADB), representing 2.5 percent and 2.1 percent of Afghanistan’s nominal debt, respectively. Non-Paris Club creditors account for 0.8 percent of total claims. At the time, there was no outstanding debt to the IMF or commercial creditors. Although debts to Paris Club creditors were regularized in the context of the July 2006 rescheduling agreement (Box 2), Afghanistan’s outstanding debt still includes arrears to non-Paris Club bilateral creditors and the OPEC Fund for International Development (OFID).

Table A1.

Islamic Republic of Afghanistan: Nominal Stock and Net Present Value of Debt as of March 20th 2006 by Creditor Groups

(In million of US$ unless otherwise specified)

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Sources: Afghan authorities and staff estimates.

Before up-front 80 percent discount on Russian debt.

After up-front 80 percent discount on Russian debt.

Includes a stock-of-debt operation on Naples terms at March 20, 2006; and at least comparable treatment by other official bilateral and commercial creditors on eligible debt (pre-cutoff and non-ODA).

Table A2.

Islamic Republic of Afghanistan: HIPC Initiative: Assistance Under a Proportional Burden-Sharing Approach 1/2/

(In millions of U.S. dollars, unless otherwise indicated)

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Sources: Afghan authorities and staff estimates and projections

The proportional burden sharing approach is described in “HIPC Initiative--Estimated Costs and Burden Sharing Approaches” (7/7/97 and IDA/SEC M 97-306, 7/7/97).

After up-front 80 percent discount on Russian debt, a hypothetical stock-of-debt operation on Naples terms (March 20, 2006) and comparable treatment by other official bilateral creditors.

Includes all official bilateral creditors.

Each creditor’s NPV reduction in percent of its exposure at the decision point.

Fiscal year ending March 20, 2006.

Based on the three-year average of exports of goods and services (backward-looking average, i.e., 2003/04-2005/06); excluding transit goods.

Table A3.

Islamic Republic of Afghanistan: Discount and Exchange Rate Assumptions at end-December 2004 and at end-March 2006

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Sources: OECD; and IMF, International Financial Statistics.

The discount rates used are the average commercial interest reference rates over the six-month period prior to the reference date, i.e., the end of the period for which actual debt and export data are available.

The exchange rates are expressed as national currency per U.S. dollar at the end of the reference date.

Table A4.

Islamic Republic of Afghanistan: External Debt Service, 2006/07–2025/26 1/

(in millions of U.S. dollars, unless otherwise indicated)

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Sources: Afghan authorities and staff estimates and projections

All debt indicators refer to public and publicly guaranteed (PPG) debt and are defined after rescheduling, unless otherwise indicated. Fiscal year ends March 20th.

Includes only scheduled debt service on current maturities and does not include projected penalty interest on arrears. For OFID, a rescheduling of arrears is assumed in order to obtain a debt service projection.

Does not include repayment of, or debt services on, amounts in arrears.

Assumes an up-front 80 percent discount on Russian debt and a hypothetical stock of debt operation on Naples terms and comparable treatment from other bilateral creditors.

This does not take into account the Paris Club rescheduling of July 2006.

Paris Club creditors are assumed to provide full delivery of HIPC assistance through a Cologne flow rescheduling on eligible debt during interim period and a stock of debt operation on Cologne terms on the remaining balance at the completion point (mid-2009). Non-Paris Club creditors are assumed to provide assistance on comparable terms. Multilateral creditors are also assumed to provide HIPC debt relief as of the completion point, except for the World Bank and the ADB, for which the delivery would start after the decision point.

The reduction is measured as the difference between the projected debt service after full use of traditional debt relief and debt service after the application of HIPC relief.

MDRI assistance applies only to the World Bank and starts at the beginning of the quarter following the completion point (October 2009). Assumes that MDRI has no impact on Afghanistan’s new borrowing over the projection period.

Based on official merchandise exports reported by Afghanistan’s Central Statistics Office and staff estimates for exports of services; excluding transit goods.

Revenues are defined as central government revenues, excluding grants.

Table A5.

Islamic Republic of Afghanistan: Net Present Value of External Debt, 2005/06–2025/26 1/

(in millions of U.S. dollars, unless otherwise indicated)

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Sources: Afghan authorities and staff estimates and projections

Fiscal year ends March 20th.

Shows the external debt situation after the up-front 80 percent discount of Russian debt and the full use of traditional debt-relief mechanisms, and assuming at least comparable treatment from official bilateral creditors. This does not take into account the Paris Club rescheduling of July 2006.

In terms of simple historical three-year average of exports of goods and services; excluding transit goods.

Assumes interim relief under the enhanced HIPC Initiative from June 2007 to June 2009 and full delivery of assistance in June 2009.

For 2005/06, after up-front 80 percent discount on Russian debt and prior to the conditional delivery of enhanced HIPC assistance from June 2007 to June 2009.

Assumes full delivery of estimated enhanced HIPC Initiative debt relief as of March 20, 2006.

MDRI assistance applies only to the World Bank and starts at the beginning of the quarter following the completion point (October 2009). Assumes that MDRI has no impact on Afghanistan’s new borrowing over the projection period. Does not include commitments by Paris Club creditors to cancel 100 percent of Afghanistan’s debt.