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© 2008 International Monetary Fund
February 2008
IMF Country Report No.08/76
Islamic Republic of Afghanistan: 2007 Article IV Consultation and Third Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, and Request for Waiver of Performance Criterion—Staff Report; Staff Statement; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for Islamic Republic of Afghanistan
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of a combined discussion of the 2007 Article IV consultation with Islamic Republic of Afghanistan and third review under the three-year arrangement under the Poverty Reduction and Growth Facility, and request for a waiver of a performance criterion, the following documents have been released and are included in this package:
The staff report for the 2007 Article IV consultation, Third Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, and Request for Waiver of Performance Criterion, prepared by a staff team of the IMF, following discussions that ended on November 15, 2007, with the officials of Islamic Republic of Afghanistan on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on January 28, 2008. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.
A staff statement of February 7, 2008 updating information on recent developments.
A Public Information Notice (PIN) and Press release summarizing the views of the Executive Board as expressed during its February 13, 2008 discussion of the staff report on issues related to the Article IV consultation and the IMF arrangement, respectively.
A statement by the Executive Director for Islamic Republic of Afghanistan.
The document listed below have been or will be separately released.
Letter of Intent sent to the IMF by the authorities of Islamic Republic of Afghanistan *
Memorandum of Economic and Financial Policies * by the authorities of Islamic Republic of Afghanistan *
Poverty Reduction Strategy Paper—Progress Report
Selected Issues Paper
Statistical Appendix
Technical Memorandum of Understanding *
* Also included in Staff Report
The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.
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Front Matter Page
INTERNATIONAL MONETARY FUND
ISLAMIC REPUBLIC OF AFGHANISTAN
Staff Report for the 2007 Article IV Consultation, Third Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, and Request for a Waiver of Performance Criterion
Prepared by the Middle East and Central Asia Department in consultation with other departments
Approved by Juan Carlos Di Tata and Anthony R. Boote
January 28, 2008
Discussions were held in Kabul from October 30–November 15, 2007. The mission met with Senior Minister Arsala; Minister of Finance Ahady; former Governor of Da Afghanistan Bank (DAB) Delawari; 1 Minister of Commerce and Industry Farhang; other government officials; and representatives of Parliament, the diplomatic and donor communities, and the private sector.
The staff team comprised Mr. Elhage (head), Ms. Farahbaksh, Mr. Wieczorek (all MCD), Mr. Tyson (FAD), Mr. Saxegaard (PDR), Mr. Hayward (MCM expert), and Mr. Charap, Fund resident representative in Kabul.
At the conclusion of the last Article IV consultation on March 6, 2006, Executive Directors noted that Afghanistan continued to face formidable medium-term challenges, compounded by lingering insecurity. Directors stressed the need to consolidate macroeconomic stability while pursuing vigorously the reform agenda in support of sustained growth and poverty alleviation. Since then, the authorities have succeeded in maintaining macroeconomic discipline, but progress on the structural agenda has been uneven and slow. Moreover, rapid growth in commercial banking has given rise to new challenges and risks.
Afghanistan’s three-year PRGF arrangement amounting to SDR 81.0 million (50 percent of quota) was approved by the Executive Board in June 2006. The arrangement supports the authorities’ economic program through March 2009. On July 9, 2007, the Board completed the second review of the program and agreed that Afghanistan had reached the decision point under the enhanced HIPC Initiative. Completion of the third review would allow the fourth disbursement (SDR 11.3 million).
Afghanistan maintains a managed float regime, with no preannounced path for the exchange rate. Afghanistan continues to avail itself of the transitional arrangements under Article XIV, but based on available information, no exchange restrictions and/or multiple currency practices are currently in place.
Contents
I. Economic Developments: From Postwar Recovery to Macro-Stability
A. Overview
B. Macroeconomic Policies and Debt Issues
C. Financial Sector Developments and Risks
D. Structural Reforms, ANDS (PRSP), and AML/CFT
II. Medium-Term Outlook: Creating Conditions for Sustainable Growth
A. Overview
B. Fiscal Policy
C. Monetary Policy
D. The Financial Sector
E. External Sector Issues
III. The PRGF-Supported Program
IV. Staff Appraisal
Text Boxes
1. Afghanistan’s Opium Economy
2. Rebuilding Domestic Revenue
3. Banking System
4. Summary Import Tariff Schedule
5. Macroeconomic Effects of Donor Assistance
6. External Competitiveness
Figures
1. Growth and Inflation
2. Fiscal Balance, 2003/04–2007/08
3. A Challenging Expenditure Structure Dependent on Donor Funding, 2007/08
4. Monetary Policy Indicators, 2002/03–2007/08
5. Exchange Rates, January 2005–November 2007
6. Share of Exports of Goods and Services, 2002/03–2006/07
7. Exchange Rates and Ratio of Nontradable to Tradable Prices, January 2003–October 2007
8a. Currency in Circulation, 2005/06–2007/08
8b. Capital Note Actions, September 2004–October 2007
9a. DAB’s Foreign Exchange Reserves, March 2005–October 2007
9b. Price and Exchange Rate Indices, March 2004–November 2007
Tables
1. Selected Economic Indicators, 2005/06–2012/13
2a. Core Budget, 2005/06–2012/13 (In millions of Afghanis)
2b. Core Budget, 2005/06–2012/13 (In percent of GDP)
3. Balance of Payments, 2005/06–2012/13
4. Monetary Program (Da Afghanistan Bank), 2005/06–2008/09
5. External Financing Requirement and Sources, 2005/06–2012/13
6. Projected Payments to the Fund as November 30, 2007
7. Proposed Schedule of Reviews and Disbursements
8. Millennium Development Goals 1990–2005
Attachments
I. Letter of Intent
II. Memorandum of Economic and Financial Policies
III. Technical Memorandum of Understanding
List of Acronyms
| AML | Anti-Money Laundering |
| ANDS | Afghanistan National Development Strategy |
| CFT | Combating Financing of Terrorism |
| CiC | Currency in Circulation |
| CN | Capital Note |
| CPI | Consumer Price Index |
| BRT | Business Receipts Tax |
| DAB | Da Afghanistan Bank |
| DABM | Da Afghanistan Breshna Moassesa |
| DSA | Debt Sustainability Analysis |
| FDI | Foreign Direct Investment |
| FLGE | Fuel and Liquid Gas Enterprise |
| GDP | Gross Domestic Product |
| GST | General Sales Tax |
| HIPC | Heavily Indebted Poor Countries |
| I-ANDS | Interim Afghanistan National Development Strategy |
| MCD | Middle East and Central Asia Department |
| MDRI | Multilateral Debt Restructuring Initiatives |
| MEFP | Memorandum of Economic and Financial Policies |
| MOF | Ministry of Finance |
| MTFF | Medium-Term Fiscal Framework |
| NCBF | Net Central Bank Financing |
| NIR | Net International Reserves |
| OFID | OPEC Fund for International Development |
| PFM | Public Finance Management |
| PRGF | Poverty Reduction and Growth Facility |
| PRSP | Poverty Reduction Strategy Paper |
| SOEs | State-Owned Enterprises |
| TMU | Technical Memorandum of Understanding |
Executive Summary
Economic Developments
Economic performance since the fall of the Taliban regime has been strong, and substantial progress has been made toward achieving macroeconomic stability. During 2002/03–2006/07, real GDP growth averaged 15 percent a year and inflation declined markedly. For 2007/08, growth is expected to exceed 13 percent and inflation to return to double digits, mainly as a result of sharp increases in prices of imported fuel and foodstuffs. The nominal exchange rate has remained stable.
Economic growth over the medium term will depend critically on confronting governance issues, overcoming infrastructure bottlenecks (particularly in the electricity sector), and implementing structural reforms in support of private sector activities. The security situation continues to impact economic activity and the widespread drug economy is undermining the authorities’ efforts to broaden economic development.
Policy Issues
During the consultation discussions, the authorities were in broad agreement with the staff on the following key issues:
Greater government ownership of the policy framework and an acceleration of structural reform is needed. Better coordination between government ministries and donors would be instrumental in developing a coherent strategy for reform. At the same time, the government should reaffirm its support for the development of a market economy. An acceleration of the reforms under the PRGF-supported program would provide a strong positive signal.
Revenue mobilization requires further efforts aimed at capacity building and introduction of a broad-based consumption tax, while maintaining a transparent and equitable trade regime.
The role of capital notes should be expanded to better manage liquidity and improve the effectiveness of monetary policy.
Bank supervision and the regulatory framework for the financial sector need to be strengthened.
There are no immediate risks to external stability and the exchange rate level appears broadly in line with fundamentals.
Program for the remainder of 2007/08 and for 2008/09
The PRGF-supported arrangement remains on track. Nevertheless, the implementation of structural conditionality was mixed. The authorities have implemented the following prior actions: (i) completion of a special audit of DAB’s reserve assets; (ii) appointment of a reputable audit firm to perform an audit of DAB’s financial statements for the financial year 2007/08—both reflecting safeguards assessment concerns; and (iii) elimination of the discretionary application of a 1 percent import duty on selected industrial inputs.
The program has been strengthened to address the risks emerging from: (i) government involvement in the domestic petroleum market; (ii) potential fiscal drains stemming from the government’s relations with public enterprises; and (iii) a weak supervisory and regulatory framework for the banking system, particularly in light of its recent rapid growth.
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Staff Report for the 2007 Article IV Consultation and Third Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, and Request for a Waiver of Performance Criterion
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INTERNATIONAL MONETARY FUND
ISLAMIC REPUBLIC OF AFGHANISTAN
Informational Annex
Prepared by Middle East and Central Asia Department
(In consultation with other Departments)
January 28, 2008
Contents
I. Relations with the Fund
II. Relations with the World Bank
III. Statistical Issues
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February 13, 2008
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Public Information Notice (PIN) No. 08/24
FOR IMMEDIATE RELEASE
February 20, 2008
International Monetary Fund
700 19th Street, NW
Washington, D. C. 20431 USA
Telephone 202-623-7100
Fax 202-623-6772
On February 13, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Islamic Republic of Afghanistan.1
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Public Information Notice (PIN) No. 08/25
FOR IMMEDIATE RELEASE
February 14, 2008
International Monetary Fund
Washington, D. C. 20431 USA
Telephone 202-623-7100
Fax 202-623-6772
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February 13, 2008
