Islamic Republic of Afghanistan: Fourth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, and a Request for a Waiver of Performance Criterion Informational Annex
Author: International Monetary Fund
Publication Date:
15 Jul 2008
eISBN:
9781451800401
Language:
English
Keywords:
ISCR; CR; MOF's Revenue Department; year-on-year inflation; government; PRGF loan; Kabul money exchange market; DAB balance sheet reconstruction; DAB official; SDR equivalent; peripatetic advisor; Balance of payments statistics; Monetary statistics; Bank supervision; Financial statistics; managed float
Download PDF (239.9 KB)

This paper discusses key findings of the Fourth Review Under the Poverty Reduction and Growth Facility (PRGF) for Afghanistan and a Request for Waiver of Performance Criterion. Program performance during the second half of 2007/08 fell short of expectations. The performance criterion on fiscal revenue was missed, and the authorities fell behind on several program commitments. For 2008/09, real GDP growth is projected to moderate to 7.5 percent and inflation to decelerate to 15½ percent by year’s end.

Abstract

This paper discusses key findings of the Fourth Review Under the Poverty Reduction and Growth Facility (PRGF) for Afghanistan and a Request for Waiver of Performance Criterion. Program performance during the second half of 2007/08 fell short of expectations. The performance criterion on fiscal revenue was missed, and the authorities fell behind on several program commitments. For 2008/09, real GDP growth is projected to moderate to 7.5 percent and inflation to decelerate to 15½ percent by year’s end.

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

(As of April 30, 2008)

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

II. General Resources Account

article image

III. SDR Department

article image

IV. Outstanding Purchases and Loans

article image

V. Latest Financial Arrangements:

article image

VI. Projected Payments to Fund (SDR million; based on existing use of resources and present holdings of SDRs)

article image

VII. Implementation of HIPC Initiative:

article image
article image

VIII. Implementation of MDRI Assistance: Not Applicable

Non-financial 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 April 30, 2008, the average of the buying and selling exchange rates in cash transactions on the Kabul money exchange market was Af 50.04 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 February 13, 2008. 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 was completed on June 12, 2006. It 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 had been strengthened, financial reporting and controls were insufficient to ensure the accuracy of monetary data and the accounting system remained unreliable. Depending on the outcome of KPMG’s ongoing external audit of financial year 1386 (ended March 19, 2008), staff will asses the need to continue special audits to verify reserve assets at test dates (a special audit was completed in January 2008 as a prior action for completion of the third review of the PRGF arrangement). DAB is continuing its implementation of outstanding safeguards recommendations. These efforts are being monitored by staff in the context of the program.

XII. Technical Assistance, 2005–08

article image
article image
article image

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, and will be replaced by Mr. Khanjar Wabel Abdallah as of June 2008.

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

(As of May 20, 2008)

1. Since April 2002, the World Bank has committed over US$1.65 billion for 41 development and emergency reconstruction projects and three budget support operations in Afghanistan. This support comprises over US$1.2 billion in grants and US$436.4 million in no-interest loans—known as ‘credits.’ Currently, the Bank has 23 active projects in Afghanistan with net commitments of over $950 million. Three budget support operations and emergency public works, infrastructure reconstruction, education rehabilitation projects, and the first phase of a rural development and public administration projects have so far been completed.

2. This FY (July 07-June 08), the Board has approved eight new projects for a commitment amount of $255 million. Areas of intervention included irrigation, health, microfinance, and capacity building in public administration. In terms of sectoral composition of the overall investment 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. A new Country Assistance Strategy is planned for early CY2009. It will support the recently released Afghanistan National Development Strategy.

3. The Afghanistan Reconstruction Trust Fund (ARTF) is administered by the World Bank on behalf of 27 donors and managed in conjunction with the Asian Development Bank, Islamic Development Bank, United Nations Assistance Mission for Afghanistan, and the United Nations Development Program. It is the main mechanism for providing coordinated funding support to Afghanistan’s recurrent budget and investments, in line with the agreed budget priorities of the government. As of April, 2008, 28 donors had pledged US$2.45 billion to ARTF, of which US$2.4 billion has been received. More than US$1.35 billion has been disbursed to the Government of Afghanistan to help cover recurrent costs, and US$600 million had been made available for investment projects.

4. The Japan Social Development Fund (JSDF), administered by the World Bank, has provided a special window for Afghanistan which operates in a harmonized manner to support the national programs of the government. As of April 2008, Japanese contributions to JSDF for Afghanistan reached US$23 million.

5. The World Bank has provided advice to help the government manage donor funds effectively and in a transparent way. The World Bank also supports the government by providing analytical work on the economy, public administration, gender, poverty, the opium economy, and an ongoing public finance management (PFM) review. The Bank has actively supported key reforms, particularly in the fiscal and public administration spheres, and through its budget support operation. It has advocated building capacity and legitimacy of the State and channeling donor resources through the government to ensure investments are aligned with national priorities. To this end, the World Bank works closely with other multilateral and bilateral agencies across a number of sectors where aid coordination and government ownership are most critical.

1

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

2

Under the enhanced framework, an additional disbursement is made at the completion point corresponding to interest income earned on the amount committed at the decision point, but not disbursed during the interim period.

Same Series

Other IMF Content

Other Publishers

Cover IMF Staff Country Reports
Islamic Republic of Afghanistan: Fourth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Request for Waiver of Performance Criterion: Staff Report; Staff Supplement and Statement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for the Islamic Republic of Afghanistan
Author: International Monetary Fund
Volume/Issue:
Volume 2008: Issue 229
Publisher:
International Monetary Fund
ISBN:
9781451800401
ISSN:
1934-7685
Pages:
80
DOI:
https://doi.org/10.5089/9781451800401.002