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.
The Executive Board of the International Monetary Fund (IMF) has completed the third review of The Islamic Republic of Afghanistan's performance under the economic program supported by the three-year Poverty Reduction and Growth Facility (PRGF) arrangement. The completion of the review allows for an immediate disbursement of SDR 11.3 million (about US$17.9 million), which would bring total disbursements under the arrangement to SDR 47.1 million (about US$74.5 million).
In completing the review, the Board also granted a waiver of non-observance of a structural performance criterion on submitting to parliament the core budget's audited financial statement for 2006/07. The audited financial statement was submitted with a minor delay and no corrective action is required.
The PRGF arrangement for the Islamic Republic of Afghanistan was approved in June 2006 for a total of SDR 81.0 million (about US$128 million) (see Press Release No. 06/144).
The PRGF is the IMF's concessional facility for low-income countries. PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5½-year grace period on principal payments.
Following the Executive Board's discussion, Mr. Murilo Portugal, Deputy Managing Director and Acting Chair, said:
“Despite a difficult security environment, Afghanistan continues to have a satisfactory performance under the Poverty Reduction and Growth Facility-supported program. Nevertheless, structural reforms need to be accelerated to support high growth and reduce poverty.
“Real GDP growth is estimated to have moderated to 6 percent in 2006/07, but is projected to increase sharply in 2007/08, owing primarily to a rebound in agriculture. Year-on-year inflation was 17 percent in December 2007 on account of higher prices of imported fuel and foodstuffs. The revenue performance during the first half of 2007/08 was satisfactory, but revenue collection in the third quarter fell somewhat short of the indicative target for December 2007. However, prudent execution of the core operating budget permitted meeting the December 2007 indicative target on the operating budget deficit. The Afghani has appreciated by 1 percent against the U.S. dollar since end-December 2007, on account of increased sales of foreign exchange by Da Afghanistan Bank (DAB).
“Looking forward, the continued success of the program hinges on mustering political support for the revenue enhancing measures that are necessary to move Afghanistan toward fiscal sustainability. There is also a need to allocate adequate resources for infrastructure maintenance, and to clarify the government's relations with state-owned enterprises with a view to stem potential fiscal drains.
“As regards monetary policy, increased reliance on capital notes should enhance effectiveness. Managing the volume of capital notes prudently would be important in order to prevent unnecessary fluctuations in liquidity. It is also important to follow-up on Fund staff's recommendations to improve the accounting system of DAB. With regard to the banking sector, measures taken recently by DAB to strengthen bank supervision and the regulatory framework should help stem risks in this sector.
“The managed float regime in place has served Afghanistan well and the level of the exchange rate appears appropriate. In the future, improving competitiveness will require acceleration of structural reforms and further efforts at promoting a transparent and liberal trade regime. The authorities should also avoid further ad hoc changes to the tariff schedule. The authorities have made satisfactory progress toward completing their PRSP—the Afghanistan National Development Strategy. In the period ahead, they should align sector strategies with the growth objectives, while taking into account the economy's absorptive capacity.
“The intention to link explicitly the disbursement of subsidies to the state-owned electricity company to progress in its restructuring should provide momentum for much-needed reforms in this area. Redressing the shortage and high cost of electricity in Afghanistan would have a major, positive impact on the business environment and the well-being of the population. The authorities have launched a joint appeal with the World Food Program to distribute wheat to areas affected by shortages. Cash-transfers should be targeted to vulnerable households—sourced from the existing budget envelope—to mitigate the effect on the poor of rising wheat prices,” Mr. Portugal said.