Islamic Republic of Afghanistan: First Review Under the Extended Credit Facility Arrangement, Request for Waiver of Nonobservance of a Performance Criterion, Modification of Performance Criteria, and Rephasing of Disbursements - Informational Annex
Author: International Monetary Fund
Publication Date:
20 Aug 2012
eISBN:
9781475505917
Language:
English
Keywords:
ISCR; CR; end-March revenue target; Afs; staff appraisal; ADB operation; Kabul money exchange market; money exchange market; ADF grant-financing; ADB-managed Afghanistan Infrastructure Trust Fund; Balance of payments statistics; Budget planning and preparation
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Afghanistan’s development, humanitarian, and governance challenges are formidable. Afghanistan is in its transition to become self-reliant. To achieve this goal, the government requires donor support. The IMF-supported economic program tries to address key macroeconomic challenges and seeks to safeguard the financial sector. The authorities have broadly met their program objectives, but their implementation suffered from delays. The authorities have now initiated an asset recovery process for each Kabul Bank beneficiary. The Executive Board has agreed to the authorities’ request for a waiver.

Abstract

Afghanistan’s development, humanitarian, and governance challenges are formidable. Afghanistan is in its transition to become self-reliant. To achieve this goal, the government requires donor support. The IMF-supported economic program tries to address key macroeconomic challenges and seeks to safeguard the financial sector. The authorities have broadly met their program objectives, but their implementation suffered from delays. The authorities have now initiated an asset recovery process for each Kabul Bank beneficiary. The Executive Board has agreed to the authorities’ request for a waiver.

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

(As of May 31, 2012)

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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VI. Projected Payments to Fund2

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VII. Implementation of HIPC Initiative:

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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 May 31, 2012, the average of the buying and selling exchange rates in cash transactions on the Kabul money exchange market was 50.1950 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 the regular basis.

X. Article IV Consultation

The last Article IV consultation with Afghanistan was discussed by the Executive Board on November 14, 2011. Article IV consultation with Afghanistan are held in accordance with the decision on consultation cycles approved on July 15, 2002.

XI. Safeguards Assessment

An update safeguards assessment of Da Afghanistan Bank (DAB) was finalized in December 2011. It found that while most of the previous safeguards recommendations had been implemented, an effective internal audit mechanism had still not been established and governance oversight was weak. The assessment also made recommendations to address new risks emerging as a result of the Kabul Bank crisis including with respect to central bank autonomy. Since the assessment, some recommendations have been implemented, albeit with delay. In particular, a Memorandum of Understanding on central bank capitalization has been signed and an external auditor has been appointed. The DAB is committed to implementing the remaining safeguards recommendations, with priority assigned to development of the internal audit function (with external support) and strengthening of Audit Committee oversight.

XII. Technical Assistance, 2006–12

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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 and Bank-Fund Collaboration Under the Joint Management Action Plan

(As of May 22, 2012)

1. IDA has committed a total of over US$2.3 billion to Afghanistan since 2002. To date, 30 development and emergency reconstruction projects including 3 development policy grants have been implemented. IDA's active portfolio comprises 19 investment projects with combined net commitment of almost US$1 billion, of which almost 50 percent (US$478 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, 33 donors have contributed over US$5.3 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) is active in 359 of Afghanistan’s 364 districts and all of Afghanistan’s 34 provinces. This is the Government of Afghanistan’s flagship program aimed at strengthening Afghan communities’ ability to identify, plan, manage and monitor their own development activities. As of May 2012 approximately 29,460 communities have been mobilized, of which 29,351 have elected Community Development Councils (CDCs). 29,294 CDCs have completed their Community Development Plans which have resulted in approximately 62,068 community subprojects being partially or fully financed, of which some 49,023 subprojects have been completed. About 80 percent of the community subprojects involve infrastructure such as irrigation, rural roads, electrification, and drinking water supply, all critical for the recovery of the rural economy, stability, and governance.

7. With support of the World Bank, the Ministry of Public Health nearly tripled the number of health facilities from 148 to 432 since 2003 in 11 provinces. About 85 percent of the population lives in districts, which now have service providers to deliver a basic package of health services. However, 57.4 percent of the population lives within one hour walking distance from a public health facility (AMS 2010). Health service utilization increased among project area populations from a rate of 0.3 consultations per capita annually at the outset to 1.21 per capita by mid 2011. Health care for expectant mothers expanded, with the number of deliveries assisted by trained health workers jumping from 14 percent to 34 percent (AMS2010). The number of pregnant women who received at least one prenatal care visit appears to have more than tripled from 16 percent to 60 between 2003 and 2010.

8. The demand for basic and higher education has continuously exceeded expectations and supply capacity. There are now 7.2 million children enrolled in schools, with nearly 40 percent being girls, compared to a little more than one million in 2001, with no girls. The Second Education Quality Improvement Project EQUIP, Strengthening Higher Education Project SHEP and the Afghanistan Skills Development Projects ASDP of the World Bank are geared towards providing equitable access to quality education and improving relevance of learning and skills of youth. Demand for education will continue to rise during the post transition decade.

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 significantly over the past years. 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 and Hajigak ore deposit. If these and other likely deposits are developed, foreign direct investment in the sector could amount to some US$10–20 billion over the next decade.

11. Looking forward, the Bank’s indicative lending envelope for 2012–13 is approximately US$260 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.

13. Bank-Fund collaboration on macroeconomic issues proceeded according to the October 2011 memorandum under the Joint Management Action Plan. Both institutions worked closely on strengthening the banking sector and its supervision, as well as on issues related to Afghanistan’s transition to more self-reliance, debt sustainability, fiscal sustainability and the macroeconomic framework in general. Inter alia, in support of Fund conditionality the Bank financed audits of ten weak banks and began implementation of the project to improvement the payments system. Table 1 below lists the Bank’s and Fund’s planned activities in the area of joint interest for June 2012–May 2013.

Table 1.

Afghanistan: Bank’s and Fund’s Planned Activities in the Area of Joint Interest, June 2012–May 2013

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Timing is tentative.

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

(As of May 22, 2012)

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-December 2011 the Asian Development Bank had provided US$2.7 billion to Afghanistan's reconstruction through approved Asian Development Fund (ADF) loan- and grant-financed projects, technical assistance, ADB administered Japan’s Fund for Poverty Reduction (JFPR), and ADB private sector investments. Since 2007, all of ADB's public sector 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, Japan, and the European Union).

3. Since November 2008, ADB has approved four 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$805 million transport sector MFF (October 2011), 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 assistance over the 2008–2013 period will be fully “earmarked,” although with some flexibility depending on changes in the Government’s priorities.

4. Since ADB operations in Afghanistan resumed in 2002, there have been 11 public sector loans in total US$722.2 million and 19 grants in total US$1580.1 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 JFPR 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 JFPR, Kuwait Fund, CIDA (2), and United Kingdom amounting to US$76.7 million. ADB's private sector operations in Afghanistan began in 2004. By end of 2011, cumulative approvals for seven private sector projects have amounted to US$206.1 million, including support for Afghanistan International Bank, Roshan Telecommunications, and the Afghanistan Investment Guarantee Facility.

5. ADB has been actively engaged in providing analytical and advisory technical assistance (TA) services to the Government, with total TA amounting to some US$66.9 million as of the end 2011. 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. In November 2010, ADB approved the ADB-managed Afghanistan Infrastructure Trust Fund (AITF) to pool donor resources to cofinance and complement ADB-assisted infrastructure projects. AITF promotes infrastructure development by allowing donors to leverage ADB’s technical expertise, fiduciary arrangements, and local capacity. To date, ADB has received cash flows amounting to US$58 million from Japan and United Kingdom, with US$33 million committed during 2011. Japan approved a further US$50 million contribution to AITF in March 2012. ADB is also discussing the prospect of AITF contributions with the Australia, E.U., Germany, India, United States, and other interested partners. It is hoped that US$1 billion could be raised for AITF to support the transition process.

7. 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.

1

Formerly PRGF.

2

Forthcoming; based on existing use of resources and present holdings of SDRs.

3

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

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Cover IMF Staff Country Reports
Islamic Republic of Afghanistan: First Review Under the Extended Credit Facility Arrangement, Request for Waiver of Nonobservance of a Performance Criterion,Modification of Performance Criteria, and Rephasing of Disbursements Staff Report;Staff Supplement; Staff 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 2012: Issue 245
Publisher:
International Monetary Fund
ISBN:
9781475505917
ISSN:
1934-7685
Pages:
104
DOI:
https://doi.org/10.5089/9781475505917.002