Islamic Republic Of Afghanistan: 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
Author: International Monetary Fund
Publication Date:
20 Feb 2008
eISBN:
9781451800371
Language:
English
Keywords:
ISCR; CR; authority; operating budget; government; financing; DAB balance sheet reconstruction; ARTF investment window financing; Kabul money exchange market; DAB official; managed float; Government finance statistics; money exchange market
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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.

Abstract

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.

Annex I. Islamic Republic of Afghanistan—Relations with the Fund

(As of December 31, 2007)

I. Membership Status: Joined July 14, 1955; Article XIV.

II. General Resources Account

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III. SDR Department

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IV.Outstanding Purchases and Loans

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V. Latest Financial Arrangements:

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VI. Projected Payments to Fund

(SDR million; based on existing use of resources and present holdings of SDRs)

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VII. Implementation of HIPC Initiative:

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VIII. Implementation of MDRI Assistance: Not Applicable

Nonfinancial Relations

IX. Exchange Arrangement

Afghanistan is an Article XIV member country. The authorities are implementing a liberal exchange system. Based on information currently available to the staff, no exchange restrictions and multiple currency practices are currently in place. The authorities have provided documents to IMF staff related to laws and regulations on the exchange regime and have requested technical assistance from the Fund to formalize the current liberal regime. They have been implementing a managed float system with no predetermined path for the exchange rate. On January 16, 2008, the average of the buying and selling exchange rates in cash transactions on the Kabul money exchange market was Af 49.47 per $1.

To conduct monetary policy, the authorities rely on foreign exchange auctions since May 2002, and on short-term capital note auctions since September 2004. The foreign exchange auctions were initially open only to licensed money changers, but since June 2005 they are also open to commercial banks. The capital note auctions are open to commercial banks. Auctions are linked to the overall monetary program and are held on a regular basis (biweekly for foreign exchange auctions, daily for capital note auctions).

X. Article IV Consultation

The last Article IV consultation with Afghanistan was discussed by the Executive Board on March 6, 2006. Consultations with Afghanistan are on the standard 12-month cycle.

XI. Safeguards Assessment

Under the Fund’s safeguards assessment policy, Da Afghanistan Bank (DAB) is subject to a safeguards assessment with respect to PRGF arrangement approved on June 26, 2006. A safeguards assessment of DAB completed on June 12, 2006 revealed serious vulnerabilities in DAB’s external and internal audit mechanisms, as well as in its financial reporting framework and system of internal controls. Capacity constraints, however, hampered the effective implementation of measures recommended by the assessment, and a follow-up staff visit conducted in November 2007 found that while external audit arrangements have been strengthened, financial reporting and internal controls were insufficient to ensure the accuracy of monetary data, and the accounting system remained unreliable. To provide some assurances ahead of the next review of the PRGF arrangement, the mission recommended that a special audit of reserve assets be conducted as a prior action for the completion of the review.

XII. Technical Assistance, 2005–07

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Afghanistan is a participant in the Middle East Technical Assistance Center

With financial support from the Sweden Technical Assistance Subaccount, the Fund sponsored a number of training activities aimed at DAB officials. A long-term resident training advisor, Mr. Khan, was posted at DAB from September 2004-April 2006 and is now conducting peripatetic technical assistance missions. Finally, Sweden has financed a monetary policy peripatetic advisor (a position currently shared by Mr. Coats and Mr. Gray) to assist DAB in developing the strategy and instruments for improving the implementation of monetary policy.

XIII. Resident Representatives

During the first half of 2002, the Fund’s resident representative in Pakistan, Mr. Ghesquière, assisted in maintaining relations with the Afghan authorities. A resident representative, Mr. de Schaetzen, took up his post in Kabul on August 24, 2002. Mr. Charap succeeded him on June 13, 2005.

Annex II. Islamic Republic of Afghanistan—Relations with the World Bank

(As of January 9, 2008)

1. The Interim Strategy Note (ISN) discussed by the IDA Board of Executive Directors on May 25, 2006 follows the two Transitional Support Strategies (TSS) that covered the 2002-06 periods. It is guiding IDA’s engagement in Afghanistan over the period of 2006–08 and is expected to be followed by a full Country Assistance Strategy (CAS) once the Government has finalized its full PRSP–Afghanistan National Development Strategy which is expected to be completed in March 2008. The government promulgated its Interim Afghanistan National Development Strategy (I-ANDS) in January 2006. As the government had submitted the I-ANDS to the IMF and the World Bank as its Interim Poverty Reduction Strategy (I-PRSP), Bank and Fund staff prepared a Joint Staff Advisory Note (JSAN) which was also discussed by the Bank Board on May 25, 2006. The ISN focus shifts slightly from the previous TSS, notably to provide greater emphasis on the development of the rural economy. Its pillars are: (i) build the capacity of the state and its accountability to its citizens to ensure the provision of services that are accountable, accessible, and of adequate quality; (ii) promote growth of the rural economy and improve rural livelihoods; and (iii) support growth of a formal, modern, and competitive private sector.

2. As of January 9, 2008 the World Bank had committed an aggregate of US$1.6 billion in IDA assistance to Afghanistan, financing more than 30 projects covering public administration, infrastructure, education, health, customs, transport, and rural development. Three IDA projects closed in FY 2007 (i.e. July 2006–June 2007) and two have closed thus far in FY08. Most recently, the Board approved, in January 2008, a US$30 million IDA investment in microfinance. Together with the HIV/AIDS project and the National Rural Access Program this takes FY08’s commitments to date to US$152 million with three more planned for board approval, including projects for skills development, educational improvement and Kabul urban waste.

3. As of December 31, 2007, the IDA’s active portfolio comprised 21 investment projects with combined net commitments of US$1,016 million of which 48 percent had been disbursed. In terms of sectoral composition of the overall portfolio, rural and transport sectors continue to represent the two largest shares, with respect to both commitments and disbursements. This is largely due to the successful implementation of the two nation-wide programs: National Solidarity Program (NSP) that supports development of community demand-driven rural infrastructure and community level governance, and the National Emergency Employment Program (NEEP) that provides short-term employment opportunities to the vulnerable segments of rural population through rural roads rehabilitation and reconstruction.

4. The World Bank also administers the Afghanistan Reconstruction Trust Fund (ARTF), on behalf of 27 donors, which became effective in May 2002. The ARTF is the main mechanism for providing coordinated funding support to Afghanistan’s recurrent budget, as well as investments through the Core Development Budget in line with agreed budget priorities of the Government. In the previous Solar Year 1386 (2005/06), the ARTF mobilized over US$450 million, while cumulative disbursements reached US$468 million. This Solar Year through November 2007, contributions have reached US$455 million and disbursements US$297 million.

5. As of 21 November, 2007, paid-in donor contributions to the ARTF reached US$ 2.4 billion. As of 21 November, 2007 the ARTF investment window financing comprised 11 active projects with combined commitments of US$394 million, of which US$263 million had been disbursed. The National Solidarity Program II and the Microfinance are the two fast-disbursing programs in the ARTF current investment portfolio. The new Management Capacity Program was added to the ARTF active portfolio in FY 2007. The Bank also administers a special window for Afghanistan for the Japanese Social Development Fund of US$50 million. ARTF is increasing its financing of investments and has the potential to support better donor coordination, simplified processes, and fast results.

6. The World Bank is also actively engaged in providing analytical and advisory services to the government. Current and recent analytical work has focused on civil service reform, urban development and land management, education policy reform, labor market and pensions, oil/gas infrastructure development, and the drug economy, as well as broader regional trade work encompassing issues with Afghanistan’s neighbors. A Gender Assessment was released in January 2006. The World Bank completed a major Public Finance Management (PFM) review in 2006, which incorporates an assessment of civilian public expenditures and fiduciary aspects, including procurement and financial management, as well as revenue and security sector expenditures. Fund staff contributed to the PFM review, including by providing an analysis of domestic revenue prospects. Technical assistance on pensions and three major analytical tasks, on Public Administration Reform, on Fighting Corruption, and on Sub-National Administration are underway in response to government requests. Looking ahead, the pipeline for FY09 includes work on financial sector reform and rural enterprise development.

Annex III. Islamic Republic of Afghanistan: Statistical Issues

General

1. Data are broadly adequate for surveillance and program monitoring, although statistical weaknesses remain. The statistical system has improved since 2002; nonetheless, organizational weaknesses, poor staffing, and lack of equipment continue to hamper the compilation process. Due to security reasons and limited central government influence outside Kabul, setting up a nationwide statistical system has been a difficult undertaking. While the Central Statistics Office (CSO) has regional offices, staffing and communication are poor. Staffing in most agencies is inadequate both in number and expertise, and salaries remain low. Strengthening statistical capacity is an ongoing process and greater efforts and significant institutional support will be required if further substantial improvements are to be made. STA continues to provide technical assistance through peripatetic statistical advisors as well as short-term topical missions.

2. The authorities have restructured the CSO, but many key donors involved in preparing the statistical master plan (SMP) have expressed concern over the independence of the CSO, which now reports to the Ministry of National Economy, and the integrity of the statistical system. Progress on the implementation of the SMP has been delayed, as the authorities have been slow in undertaking the required institutional changes and strengthening the management structure of the CSO.

3. The authorities have been participating in the General Data Dissemination System (GDDS) since June 2006.

Real Sector

4. The national accounts compilation process is hampered by the general lack of source data. The Asian Development Bank (AsDB) provided funding for two major surveys that could supply critical source data for the national accounts; however, the survey fieldwork has been delayed. The AsDB has suspended funding of TA projects in Afghanistan and the future of these surveys is uncertain.

5. The CSO now compiles a nationwide CPI covering Kabul and the five major cities. Nonetheless, the inexperience of price collectors has posed some early challenges to the compilation process. There is also the need to update the expenditure weights as the current CPI basket was derived from a 1987 household income and expenditure survey. In 2003, the CSO conducted a limited exercise to update the weights based on household expenditure in Kabul; however, a comprehensive exercise to obtain representative weights is required, and is predicated on the completion of an integrated living standard survey.

6. Customs coverage of overland foreign trade—which is most of foreign trade—is limited at best. The CSO currently records trade at only seven of the 14 customs posts. Monthly trade data are updated manually, thereby causing delays in dissemination. Accordingly, there is an urgent need for improved computer hardware.

Government Finance Statistics

7. An STA expert has been assisting the Ministry of Finance (MOF) in compiling government finance statistics, achieving considerable progress. The tables reported for publication in the Government Finance Statistics Yearbook 2006 incorporate for the first time data on extra-budgetary agencies, donor expenditure made on behalf of the government, and the operations of municipalities. Nevertheless a number of weaknesses remain, including a very limited technical capacity of the MOF’s staff, inadequate classification systems in use by municipalities, deficiencies in the functional classification of government expenditure, and a lack of consistency and comprehensiveness in the data compiled.

Money and Banking Statistics

8. The banking sector has developed steadily over the last several years. In addition to three state-owned banks in the process of restructuring, twelve commercial banks are now in operation. While there was some improvement in the scope and quality of data reporting by the central bank, there are still weaknesses in many areas. Da Afghanistan Bank (DAB) has installed a new accounting software, which allows DAB to produce its balance sheet at least on a monthly basis. The very limited accounting capacity of DAB, especially outside Kabul has hindered efforts to produce a complete and reliable balance sheet. Regarding the commercial banks, DAB has developed new reporting formats to provide data for bank supervision and monetary statistics compilation, and the banks are now reporting data to DAB regularly according to these formats. STA has assisted DAB (four expert visits took place between March 2006 and November 2007) in bringing the data reporting of DAB and the commercial banks in compliance with the methodology in the IMF’s Monetary and Financial Statistics Manual

9. The authorities have expressed interest in reintroducing a country page for Afghanistan in International Financial Statistics (IFS). A STA expert has assisted DAB in drafting a country note and initiating data reporting for publication in IFS. Provided that DAB is able to compile and report data (Standardized Report Forms 1SR, 2SR, and 5SR) to STA on a regular monthly basis, an IFS page for Afghanistan could be introduced in early 2008.

Balance of Payments

10. Like the national accounts, compilation of balance of payments statistics suffers from a paucity of source data. There are no estimates of unrecorded border trade, which constitutes a significant proportion of foreign trade. No reliable source data exist to estimate services, income, transfers, and foreign direct investment. A balance of payments statistics mission (May 19–25, 2007) found that source data are extremely weak and that survey initiatives have not materialized in any significant data output due to poor responses, sampling problems, and a lack of human, financial, and technological resources. The mission found that limited progress had been made on the work program initiated in August 2006. Outstanding issues include:

  • Adopt legal measures that give DAB the authority to collect data from other sectors, other than banks, and ensure the confidentiality of reported data.

  • Estimate exports and imports based on CSO data with adjustment for illegal trade and duty free imports. The CSO should start including duty free imports according to international classifications.

  • Adjust freight and insurance at 12 and 3 percent, respectively, of c.i.f. imports from overseas to calculate imports f.o.b.

  • Introduce questionnaire to hotels and guesthouses to collect data on expenses of nonresidents to estimate travel receipts.

  • Conduct sample surveys of residents returning from travel abroad and use immigration data to estimate travel expenses.

  • Introduce a questionnaire for collecting data from foreign embassies and other foreign organizations to estimate government receipts and compensation of employees.

  • Improve the questionnaire on foreign direct investment (FDI) to collect relevant data from major FDI enterprises.

  • Introduce reporting forms for foreign exchange transactions between residents and nonresidents to commercial banks, following discussions with the Banking Supervision Department of the DAB.

  • Introduce a questionnaire for money changers and money transfer service providers.

  • Enhance the collection of quarterly data from the Ministry of Economy on NGOs’ receipts of donations and grants.

  • Compile preliminary balance of payments statistics on the basis of various estimation procedures discussed with and documented by the Balance of Payments Section.

A follow-up STA mission in October/November 2007 noted some improvements in the area of source data and in the cooperation between agencies. The mission’s main recommendations were to: (1) review the reporting forms in the area of services as provided by the mission and implement these as needed; (2) compile the financial account related transactions for the commercial banks based on the forms as agreed with the Banking Supervision Department; (3) compile DAB related transactions using the reporting form provided by the mission; (4) continue compiling international reserves data consistent with the fifth edition of the Balance of Payments Manual (BPM5) as compiled during the mission and provide these to the IMF for publication in the International Financial Statistics (IFS); and (5) agree with Afghan Investment Support Agency to conduct an FDI survey. An action plan was agreed upon with the authorities, with targeted dates for implementation. Furthermore, DAB will report on a monthly basis to STA the progress regarding processing and compiling balance of payments statistics. The mission will continue to provide remote TA. Future TA missions will depend on DAB completing specified benchmarks three months after the end of the mission

External Debt

Many records were destroyed during the war and the authorities are slowly rebuilding their database. Nevertheless, significant progress in terms of reconciliation has been made in the context of the July 2006 Paris Club rescheduling. Progress is also being made in reconciling debts to non-Paris Club creditors.

Islamic Republic of Afghanistan: Table of Common Indicators Required for Surveillance

(As of January 16, 2008)

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Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially-determined, including discount rates, money market rates, and rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consist of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA).

1

Net Present Value (NPV) at the decision point under the enhanced framework.

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Cover IMF Staff Country Reports
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
Author: International Monetary Fund
Volume/Issue:
Volume 2008: Issue 076
Publisher:
International Monetary Fund
ISBN:
9781451800371
ISSN:
1934-7685
Pages:
99
DOI:
https://doi.org/10.5089/9781451800371.002