Staff Report for the 2011 Article IV Consultation and Request for a Three-Year Arrangement Under the Extended Credit Facility

Afghanistan has made important achievements in recent years. The 2011 Article IV Consultation highlights that authorities have taken steps to lay the foundation for economic stability and growth, despite a very difficult security situation and the challenges associated with building political and economic institutions. Directors agreed that the Extended Credit Facility (ECF)-supported program, accompanied by a technical assistance agenda, provides an appropriate framework for addressing the considerable challenges lying ahead and a basis for continued engagement with the donor community.


Afghanistan has made important achievements in recent years. The 2011 Article IV Consultation highlights that authorities have taken steps to lay the foundation for economic stability and growth, despite a very difficult security situation and the challenges associated with building political and economic institutions. Directors agreed that the Extended Credit Facility (ECF)-supported program, accompanied by a technical assistance agenda, provides an appropriate framework for addressing the considerable challenges lying ahead and a basis for continued engagement with the donor community.

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

(As of September 30, 2011)

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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Formerly PRGF

VI. Projected Payments to Fund

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VII. Implementation of HIPC Initiative:

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

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.

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 September 30, 2011, the average of the buying and selling exchange rates in cash transactions on the Kabul money exchange market was 48.3925 Afghanis per U.S. dollar.

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.

X. Article IV Consultation

The last Article IV consultation with Afghanistan was discussed by the Executive Board on February 13, 2008. Article IV consultation with Afghanistan are held in accordance with the decision on consultation cycles approved on July 15, 2002.

XI. Safeguards Assessment

Under the Fund’s safeguards assessment policy, the Da Afghanistan Bank (DAB) was subject to a safeguards assessment with respect to the ECF arrangement approved on June 26, 2006. An initial safeguards assessment of the DAB was completed on June 12, 2006 and updated on March 18, 2008. The initial assessment revealed serious vulnerabilities in the DAB’s external and internal audit mechanisms, as well as in its financial reporting framework and system of internal controls. An update safeguards assessment is currently in progress in the context of a proposed new ECF arrangement. A safeguards mission visited the DAB in July 2010 and found that safeguards risks had been addressed in several areas, although risks remain. The DAB implemented the majority of the previous safeguards recommendations, strengthening its external audit mechanism, financial reporting and accounting controls. Progress in establishing an effective internal audit function continues to be slow, however, and governance oversight should be enhanced. New risks have also emerged over the last year as a result of the Kabul Bank crisis, not least due to capacity constraints, resignation of the governor and strains on central bank autonomy. The central bank is working with IMF staff to complete the update assessment and is committed to implementing its recommendations.

XII. Technical Assistance, 2006-11

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Afghanistan is a participant in the Middle East Technical Assistance Center.

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 September 22, 2011)

1. IDA has committed a total of over US$2.3 billion to Afghanistan since 2002. To date, 25 development and emergency reconstruction projects including 3 development policy grants have been implemented. IDA’s active portfolio comprises 24 investment projects with combined net commitment of over 1.2 billion, of which almost 50 percent (US$536.1 million) has been disbursed.

2. The Bank’s involvement in Afghanistan extends to its role as administrator of the Afghanistan Reconstruction Trust Fund (ARTF). The ARTF has developed into the primary multi-donor funding mechanism, financing the essential running costs of government as well as key investments, including national programs in health, education, rural access, irrigation rehabilitation, microfinance, and the National Solidarity Program. Since early 2002, 32 donors have contributed over US$4.3 billion to this fund, making it the largest contributor to the Afghan budget for both operating costs and development programs.

3. In January 2010, the World Bank’s International Development Association (IDA) and the International Monetary Fund (IMF) agreed to support debt relief for Afghanistan. The Boards of both institutions agreed that Afghanistan had taken the necessary steps to reach the completion point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative. This will generate total debt service savings of US$1.6 billion, which include US$1.3 billion from the HIPC Initiative, US$260 million from Paris Club creditors beyond HIPC, and US$38.4 million from the Multilateral Debt Relief Initiative (MDRI).

4. The International Finance Corporation (IFC), the World Bank Group’s private sector development arm, continues to work with its investment partners in Afghanistan. IFC now has an investment portfolio totaling more than US$90 million in six companies. This includes commitments in the financial, telecom, hospitality and healthcare sectors.

5. One of the primary focuses of the Bank’s assistance has been to help the government with legal and regulatory reform, establishing fiscal authority, and developing systems and human resources for public financial management and the civil service as a whole. The performance of the Ministry of Finance regarding alignment of budgetary allocations with the country’s priority needs, fiscal discipline, cash control, and aggregate transparency has contributed to macroeconomic stability and sustained external donor assistance.

6. In rural development, the National Solidarity Program (NSP) has reached over 18 million Afghans in approximately 28,000 communities across rural Afghanistan through locally elected community development councils. With modest grants, the communities are empowered to make decisions about their own development priorities in drinking water supply, roads, irrigation, schools, etc. To date, NSP has financed 57,400 community infrastructure projects of which 46,000 have been completed.

7. With support of the World Bank, the Ministry of Public Health improved health service coverage through financing 432 health care facilities in 18 provinces between 2003 and 2009. This has contributed to a 28 percent decline in the under-5 years-old mortality rate. Health service utilization increased among project area populations from a rate of 0.3 consultations per capita annually at the outset to 1.44 per capita by mid-2009.

8. The demand for education has continuously exceeded expectations and supply capacity. There are now 7 million children enrolled in schools, with nearly 40 percent being girls, compared to a little more than one million seven years ago, with almost no girls.

9. Since the implementation of an Automated System for Customs Data, the collection of transit fees in major transit corridors in Afghanistan has improved and customs revenues have increased from US$50 million in 2004 to US$700 million in 2010. To date, customs processes have been automated at major Inland Customs Depots, including at the Kabul Airport which receives approximately 55 percent of all the country’s customs declarations.

10. The Bank is helping to build the capacity of the government to exercise strong oversight of the minerals and hydrocarbons sectors. Private sector investment has been facilitated through the successful tender of the Aynak copper deposit, one of the largest such deposits in the world. The total amount of the investment will be around US$10 billion over the next 5-10 years, and an initial payment of US$80 million has been received by the Government.

11. Looking forward, the Bank’s indicative lending envelope for 2011-12 is approximately US$290 million. Resources will be primarily channeled to private and financial sector development as well as proven national programs in education and rural livelihood (including agriculture), where demands remain vast, to sustain and accelerate progress made so far. These areas constitute significant platforms for improving livelihoods and building government credibility.

12. Supporting sound national programs under the leadership of the government is the most effective use of international aid. The Bank will engage in areas where there is evidence: (i) that a strong, reform-minded, leadership is in place; (ii) where it can help leverage the support of other members of the international donor community, and (iii) where opportunities exist to develop operational frameworks for future programs. In this context, the Government has requested that the Bank play an enhanced role in working with them to determine the vision, design, and framework of their national programs.

Annex III. Islamic Republic of Afghanistan—Implementation of the Joint Management Action Plan on Bank-Fund Collaboration

(as of october 19, 2011)

1. Joint Management Action Plan (JMAP). This memorandum, endorsed by Mr. Schimmelpfennig (IMF mission chief) and Mr. Krafft (World Bank country director), documents the annual consultations between Afghanistan country teams of the World Bank and the IMF, undertaken under the JMAP. Discussions were held on September 29 in Washington and October 5, 2011 in Kabul.

2. Bank’s work during the past year. The Bank has supported the Government with a wide array of projects comprising the development of broad-based education and health services, the reconstruction of infrastructure, provision of rural infrastructure, technical assistance to the mining sector as well as structural reforms in public administration, and customs administration and the financial system. Sector specific activities aside, the World Bank work interfaced with the Fund’s engagement in several areas: the Afghanistan Reconstruction Trust Fund (ARTF)-funded Incentive Program assisted the Government in strengthening the Public Financial System (e.g., through issuing a new audit law), improving oversight mechanisms, accelerating reforms in public administration, and increasing domestic revenues through custom reforms. A new financial sector project was approved following the Kabul Bank crisis which will, among other things, finance audits of 10 banks. The World Bank also provided technical assistance and analytical work on a number of fronts including a debt management performance assessment, notes on sub-national finance reforms and a poverty profile. Moreover, the World Bank is undertaking a major piece of analysis on the impact of the “transition process” on the outlook for fiscal sustainability, poverty and long term economic growth.

3. Fund’s work during the past year. The Fund focused its efforts on helping the authorities resolve the Kabul Bank crisis and safeguard financial sector stability. An action plan has been developed with a goal to minimize fiscal costs of the crisis, protect the banking system, promote transparency, reduce moral hazard, strengthen banking supervision, and improve the legal and regulatory framework. The plan is currently being implemented. The authorities made progress on a set of measures and prior action and, accordingly, a staff-level agreement on a new ECF-supported program was reached on October 6, 2011. In its advice, the Fund emphasized the need to preserve fiscal sustainability and offered recommendations to that effect. Finally, between October 2010 and September 2011, the Fund has fielded over 10 technical assistance missions, including on banking resolution, financial sector supervision, public financial management, tax policy, revenue administration, Islamic finance and statistics.

4. Bank-Fund collaboration during the past year proceeded according to the last JMAP. Both institutions worked closely on the strategy to resolve the Kabul Bank crisis as well as on issues related to macroeconomic stability and fiscal sustainability. As noted above, in support of Fund conditionality the Bank Board approved a new financial sector investment to finance audits of ten banks. The Fund shared its macroeconomic projections with the Bank, as requested.

5. Key medium- and long-term objectives. Staffs exchanged views on the main medium- and long-term economic priorities and challenges facing Afghanistan. The key areas identified during the previous JMAP period remain valid—they are: (i) sustaining macroeconomic and financial stability; (ii) preserving fiscal sustainability and improving prioritization and management of expenditures; (iii) reducing red tape and promoting private sector development and trade; (iv) harnessing mineral resources for development; and (v) ensuring rule of law, reducing corruption and improving governance.

6. The challenge of “transition.” That notwithstanding, the most important short- and medium-term challenge is proper management of the “transition” process. Transition entails an accelerated reduction of the international military presence by 2014, and a timeline for rationalization (scaling down) of donors’ assistance. Accordingly, the government of Afghanistan is expected to provide for an increasing share of security expenditures from its domestic revenues and gradually take full responsibility for its development agenda.

7. Bank-Fund Collaboration. The teams agreed to the following cross-support and exchange of information:

  • The teams agreed to continue to share and consult at the early stage, on their envisaged program conditionality and benchmarks, and to ensure that these conditions are complementary and mutually reinforcing;

The teams agreed to continue to support each other in those aspects of the respective work programs that lay in the scope of leadership and expertise of the other institution. Particularly, the Bank will support the Fund in the area of banking sector audits, payment systems, anti-money laundering, mining, social spending and other structural reforms, while the Fund will share with the Bank macroeconomic data and projections as well as its assessment of macroeconomic policies. Both institutions will work collaboratively on better understanding the economic consequences of transition and the appropriate policies to mitigate any negative impact;

  • The teams further agreed to participate in each other’s formal and informal review processes as requested and to exchange information as necessary.

8. Table 1 below lists the teams’ separate and joint work program for October 2011-September 2012

Table 1.

Afghanistan: Bank’s and Fund’s Planned Activities in the Area of Joint Interest, October 2011—September 2012

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Timing is tentative.

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

(As of September 25, 2011)

1. A new Country Partnership Strategy (CPS) covering the 2009-2013 period was endorsed by ADB’s Board of Directors on March 5, 2009. The new CPS is fully aligned with the Afghanistan National Development Strategy (ANDS), with ADB’s investments contributing to Afghanistan’s further economic development. The new CPS continues ADB’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-August2011 the Asian Development Bank had committed an aggregate of some US$2.21 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 ADB, and ADB private sector investments. Since 2007, all of ADB’s public sector (ADF) assistance has been provided on a 100 percent grant basis. At the June 2008 International Conference in Support of Afghanistan, ADB pledged an additional US$1.3 billion over the 2008-2013 period, making ADB Afghanistan’s fourth largest donor to Afghanistan (after the United States, the United Kingdom, and the World Bank).

3. Since November 2008, ADB has approved three multi-tranche financing facility (MFF) projects as follows, a US$570 million energy sector MFF and a US$400 million transport sector MFF (November 2008); a US$300 million water resources management sector MFF (October 2009); and a railway project of US$165 million (October 2009). With the approval of these MFFs and the railway project, the bulk of ADB’s anticipated ADF assistance over the 2008-2013 will be fully “earmarked”, although with some flexibility depending on changes in Government priorities.

4. Since ADB operations in Afghanistan resumed in 2002, there have been 11 public sector loans in total US$722.2 million and 14 grants in total US$963.1 million covering 23 investment projects. This involved ADF funding resources using loan or combined loan and grant funding, and since 2007 all projects have used only ADF grant-financing. In addition, there have been 10 Japan Fund for Poverty Reduction funded projects, 8 standalone projects, and 2 combined with loan projects totaling US$110.0 million. Also, there have been 5 donor cofinancing grants from Japan’s Fund for Poverty Reduction, Kuwait Fund, CIDA (2) and DFID amounting to US$106.45 million. ADB’s private sector operations in Afghanistan began in 2004. As of end June 2010, cumulative approvals for seven private sector projects have amounted to US$208.1 million, including support for Afghanistan International Bank, Roshan Telecommunications, and the Afghanistan Investment Guarantee Facility.

5. The Asian Development Bank has been actively engaged in providing analytical and advisory technical assistance (TA) services to the Government, with total TA amounting to some US$64.6 million as of 25 September 2011 (including US$8.2 million in donor cofinancing). Increasingly, TA is included as integral parts of ADB’s grant-based investment projects, with focus on public financial management, procurement, and anti-corruption as well as institutional and human capacity development. ADB has also been providing ongoing TA support to the Ministry of Finance.

6. ADB 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. ADB 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, and the Inter-Ministerial Committee on Energy.

Annex V. Islamic Republic of Afghanistan—Statistical Issues

(As of September 21, 2011)

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Afghanistan: Table of Common Indicators Required for Surveillance

(As of September 21, 2011)

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Any reserve assets that are pledged of otherwise encumbered should be specified separately. Also, data should comprise short-term liabilities linked to a foreign currency but settled by other means as well as the notional values of financial derivatives to pay and to receive foreign currency, including those linked to a foreign currency but settled by other means

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

Foreign, domestic bank, and domestic nonbank financing.

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

Including currency and maturity composition.

Includes external gross financial asset and liability position vis-à-vis nonresidents.

Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A); Not Available (--).

Islamic Republic of Afghanistan: 2011 Article IV Consultation and Request for a Three-Year Arrangement Under the Extended Credit Facility-Staff Report; Staff Supplement-A Joint World Bank/IMF Debt Sustainability Analysis; 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