Fifth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Request for Waiver of Performance Criteria, and Rephasing and Extension of the Arrangement
Author: International Monetary Fund
Publication Date:
01 May 2009
eISBN:
9781451800418
ISBN:
9781451800418
Language:
English
Keywords:
ISCR; CR; food inflation; staff appraisal; PRGF loan; IMF staff representative; headline inflation; Kabul money exchange market; AsDB's investment; ARTF fund; money exchange market; anticipated ADF assistance; Bank supervision; Budget planning and preparation; Financial statistics
Download PDF (206.2 KB)

This paper discusses key findings of the Fifth Review for Afghanistan under the Poverty Reduction and Growth Facility (PRGF). Performance under the PRGF-supported program has been mixed. Monetary and financial policies were broadly consistent with the program. However, difficulties were evident in reforming public enterprises and in the fiscal area. The economic program for 2009/10 envisages a prudent monetary policy to ensure fast disinflation, fiscal adjustment anchored on remedial measures to increase revenues and contain spending, and closer monitoring of public enterprises that pose fiscal risks.

Abstract

This paper discusses key findings of the Fifth Review for Afghanistan under the Poverty Reduction and Growth Facility (PRGF). Performance under the PRGF-supported program has been mixed. Monetary and financial policies were broadly consistent with the program. However, difficulties were evident in reforming public enterprises and in the fiscal area. The economic program for 2009/10 envisages a prudent monetary policy to ensure fast disinflation, fiscal adjustment anchored on remedial measures to increase revenues and contain spending, and closer monitoring of public enterprises that pose fiscal risks.

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

(As of February 28, 2009)

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

article image
article image
article image
article image
article image
article image
article image

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 in place. The authorities have provided documents to Fund 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 March 24, 2009, the average of the buying and selling exchange rates in cash transactions on the Kabul money exchange market was Af 51.49 per US$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 24-month cycle for the Fund’s program countries.

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 and updated on March 18, 2008. The assessment 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 follow-up staff visits found that while external audit arrangements had been strengthened, financial reporting and accounting controls remain weak. 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, 2005–09

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

Mr. de Schaetzen; August 2002–June 2005

Mr. Charap; June 2005–June 2008

Mr. Abdallah; June 2008–present

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

(As of March 04, 2009)

1. Since 2002, the International Development Association (IDA) has committed a total of US$1.7 billion in grants (74 percent) and credits (26 percent) in Afghanistan. Three budget support operations as well as 31 development and emergency reconstruction projects have been implemented to date. During FY2007–08, IDA delivered 10 new investment operations, three additional financing operations, and one US$80 million budget support operation for a net commitment amount of US$562 million. IDA’s current active portfolio comprises 23 investment projects with combined net commitment of US$991 million, of which US$550 million (or 55 percent) had been disbursed as of January 31, 2009.

2. For this FY2009 (July 2008–June 2009), the Board is expected to approve eight new operations for a commitment amount of US$240 million. Areas of intervention during this fiscal year include health service delivery, customs, rural livelihoods (the National Solidarity Program and Irrigation Rehabilitation) and natural resource management. A US$30–35 million budget support operation is also envisaged to be delivered by the end of the fiscal year. 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 two-year Interim Strategy Note is planned to be delivered in June 2009. It will support the recently released Afghanistan National Development Strategy.

3. The Afghanistan Reconstruction Trust Fund (ARTF) Management Committee (MC) consists of the World Bank (the administrator), the Islamic Development Bank (IDB), the Asian Development Bank (AsDB) and the UN (UNAMA and UNDP). The Government, represented by the Ministry of Finance, plays an active role in both the MC meetings (as an observer) and the donor meetings. During 2007-08, the ARTF handled US$634 million of donor contributions. For 2008–09, donor pledges reached US$695 million. The largest single contributors to the ARTF are the United Kingdom, the United States, and Canada. Other donors include 15 European countries, the European Commission, Australia, India, Iran, Turkey, Australia, and the Gulf States. The priority use of ARTF funds is the Government’s operating budget (the Recurrent Cost Window) and secondarily for investment projects (the Investment Window). Since the ARTF’s inception more than US$1.6 billion has been disbursed to finance recurrent costs, and US$741 million for investment projects.

4. 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.

Annex III. Islamic Republic of Afghanistan—Relations with the Asian Development Bank

(As of March 12, 2009)

1. A new Country Partnership Strategy (CPS) covering the 2009–13 period was endorsed by the Asian Development Bank (AsDB)’s Board of Directors on March 5, 2009. The new CPS is fully aligned with the Afghanistan National Development Strategy (ANDS), with AsDB’s investments contributing to Afghanistan’s further economic development. The new CPS continues AsDB’s narrow focus on Afghanistan’s energy, transport, and agriculture and irrigation sectors, including sector governance and further institutional and human capacity development.

2. As of end-December 2008, the AsDB had committed an aggregate of some US$1.77 billion to Afghanistan’s reconstruction through approved Asian Development Fund (ADF) loan- and grant-financed projects, technical assistance activities, donor grant-financed projects administered by AsDB, and AsDB private sector investments. AsDB’s ADF-financed investments totaled US$1.37 billion (US$735 million in loans and $630 million in grants). Since 2007, all of AsDB’s public sector (ADF) assistance has been provided on a 100 percent grant basis. At the June 2008 International Conference in Support of Afghanistan AsDB pledged an additional $1.3 billion over the 2008–13 period, making AsDB Afghanistan’s fourth largest donor overall (after the United States, the United Kingdom, and the World Bank).

3. In November 2008 AsDB approved a US$570 million energy sector multitranche financing facility (MFF) and a US$400 million transport sector MFF; a US$300 million water resources management MFF is planned for 2009. With the approval of these three MFFs, the bulk of AsDB’s anticipated ADF assistance over the 2008–2013 will be fully “earmarked,” although with some flexibility depending on changes in Government priorities.

4. Since AsDB operations in Afghanistan resumed in 2002, there have been 11 public sector loans and 13 grants covering 22 investment projects (13 loan or combined loan and grant projects, and 9 completely ADF grant-financed projects), all from ADF resources. In addition, there have been 8 separate and 2 combined donor-financed grant investment projects totaling US$137.8 million. AsDB’s private sector operations in Afghanistan began in 2004. As of end-2008, cumulative approvals for six private sector projects have amounted to US$208.1 million.

5. The AsDB has been actively engaged in providing analytical and advisory technical assistance (TA) services to the Government, with total TA amounting to some US$63 million as of end-2008 (including US$5.6 million in donor cofinancing). Increasingly, TA is included as integral parts of AsDB’s grant-based investment projects, with focus on public financial management, procurement, and anti-corruption as well as institutional and human capacity development. AsDB also has provided ongoing TA support to the Ministry of Finance.

6. AsDB is a member of the Afghanistan Compact/ANDS Joint Coordination Management Board (JCMB) and also is a member of the Afghanistan Reconstruction Trust Fund Management Committee. AsDB plays an active part in other donor coordination activities, including the JCMB Social and Economic Development Standing Committee, the Ministry of Finance’s High Level Committee on Aid Effectiveness, the Inter-Ministerial Committee on Energy, and others.

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: Fifth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Request for Waiver of Performance Criteria, and Rephasing and Extension of the Arrangement: Staff Report; Staff Statement; 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 2009: Issue 135
Publisher:
International Monetary Fund
ISBN:
9781451800418
ISSN:
1934-7685
Pages:
68
DOI:
https://doi.org/10.5089/9781451800418.002