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.
The Executive Board of the International Monetary Fund (IMF) today completed the fourth 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$18.5 million), which would bring total disbursements under the arrangement to SDR 58.4 million (about US$95.6 million).
In completing the review, the Board also granted a waiver of non-observance of a quantitative performance criterion related to the collection of fiscal revenue. The Afghan authorities have implemented measures to address the primary causes of the revenue slippage in 2007/08 (fiscal year ending on March 19, 2008) and committed to take additional measures to ensure that the improvement will be sustained in 2008/09.
The PRGF arrangement for the Islamic Republic of Afghanistan was approved in June 2006 for an amount equivalent to SDR 81.0 million (about US$132.5 million) (see Press Release No. 06/144).
Following the Executive Board’s discussion, Mr. Murilo Portugal, Deputy Managing Director and Acting Chair, said:
“The Afghan economy experienced strong growth in FY 2007/08, while inflation surged reflecting higher food and fuel import prices, and the security situation remained precarious. These are daunting challenges for the authorities to implement their PRGF-supported program. The success of the program hinges on a sustained implementation of the revenue-enhancing measures needed to prevent long-term aid dependence, and achieve fiscal sustainability over the long term. The expeditious implementation of tax policy and administration reforms is a priority in this regard. There is also a need to accelerate structural reforms in order to improve the country’s growth and poverty alleviation prospects. Strong commitment by the Afghan authorities to the objectives of the program along with further improvements in governance will help ensure continued support from the international community.
“The fiscal reform agenda focuses on strengthening public financial management, particularly on project preparation, procurement, expenditure execution, and tracking. Steps will need to be taken to modernize the civil service, including by linking the compensation system to skills and performance in the context of pay and grade reform. Clarifying the relationship between the budget and key state-owned enterprises will be key to preventing the emergence of fiscal drains and foster good corporate governance, particularly with respect to the national airline and the state-owned electricity company. There is also a need to improve transparency in the domestic petroleum sector and to prepare for the privatization of the government-owned Fuel and Liquid Gas Enterprise.
“The resurgence of inflation, caused by the sharp increase in food prices, requires a carefully designed policy response. This will involve prudent financial policies to help contain second-order inflationary effects, and targeted policy actions to alleviate the impact of higher food prices on vulnerable groups.
“Lowering inflation will be helped by ensuring observance of the currency in circulation ceiling. It will also be important to proceed cautiously with the planned increases in the volume of capital notes in order to avoid excessive interest rate fluctuations. A further strengthening of the regulatory framework and enforcement procedures will help stem risks in the banking sector.
“The authorities need to work closely with the World Food Program and other donor agencies to help the poor cope with the impact of increased wheat prices. Putting in place appropriate mechanisms to deliver assistance through targeted cash transfers to vulnerable households seems preferable to relying exclusively on direct wheat imports,” Mr. Portugal said.
The PRGF is the IMF’s concessional facility for low-income countries. 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.