Islamic Republic of Afghanistan: Staff Report for The 2015 Article IV Consultation and First Review Under the Staff-Monitored Program—Informational Annex
Author: International Monetary Fund. Middle East and Central Asia Dept.
Publication Date:
01 Dec 2015
eISBN:
9781513592817
Language:
English
Keywords:
ISCR; CR; envisaged budget surplus; opium production; surplus; government; government effectiveness; priority sector; General government; core budget data; revenue trajectory; External sector statistics; Customs administration core functions
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This 2015 Article IV Consultation highlights that Afghanistan remains a poor fragile state that is far from self-reliance. Significant fiscal and banking vulnerabilities emerged in 2014. Domestic revenue collection fell below its 2013 level because of lower growth, declining imports, and lower compliance, while operating expenditure increased. The treasury cash balance fell to dangerously low levels in the second half of 2014, and domestic payment arrears and unfunded allotments emerged. The future path of the economy is highly dependent on the authorities' delivering on their economic reform commitments, continued donor support, and improvements in security.

Abstract

This 2015 Article IV Consultation highlights that Afghanistan remains a poor fragile state that is far from self-reliance. Significant fiscal and banking vulnerabilities emerged in 2014. Domestic revenue collection fell below its 2013 level because of lower growth, declining imports, and lower compliance, while operating expenditure increased. The treasury cash balance fell to dangerously low levels in the second half of 2014, and domestic payment arrears and unfunded allotments emerged. The future path of the economy is highly dependent on the authorities' delivering on their economic reform commitments, continued donor support, and improvements in security.

Relations with the Fund

(As of September 30, 2015)

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

General Resources Account

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SDR Department

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Outstanding Purchases and Loans

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Latest Financial Arrangements

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Formerly PRGF.

Projected Payments to Fund1

(SDR million; based on existing use of resources and present holdings of SDRs)

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When a member has overdue financial obligations outstanding for more than three months, the amount of such arrears will be shown in this section.

Implementation of HIPC Initiative:

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Assistance committed under the original framework is expressed in net present value (NPV) terms at the completion point, and assistance committed under the enhanced framework is expressed in NPV terms at the decision point. Hence these two amounts can not be added.

Under the enhanced framework, and 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.

Implementation of MDRI Assistance: Not Applicable

Implementation of PCDR: Not Applicable

Nonfinancial Relations

Exchange Arrangement

Afghanistan is an Article XIV member country. The authorities confirmed that there are no restrictions on current account transactions and maintain an exchange system that is free of restrictions on the making of payments and transfers for current international transactions. The authorities confirmed their desire to move to Article VIII status. The de jure exchange rate regime is classified as floating, although the authorities have been implementing a de facto managed float system with no predetermined path for the exchange rate. On August 17, 2015, the average of the buying and selling exchange rates in cash transactions on the Kabul money exchange market was 63.78 Afghanis per U.S. dollar.

To conduct monetary policy, the authorities have used foreign exchange auctions since May 2002 and 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.

Article IV Consultation

The last Article IV consultation with Afghanistan was discussed by the Executive Board on May 16, 2014. Article IV consultations with Afghanistan are held in accordance with Decision No. 14747-(10/96) on consultation cycles adopted on September 28, 2010, as amended.

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 November 13, 2011. An initial safeguards assessment of the DAB was completed on June 12, 2006, updated on March 18, 2008, and then in December 2011. The latest update for the safeguards assessment 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. 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. Following IMF advice, DAB has prepared, in accordance with IFRS, interim semiannual balance sheet and income statement, which will be submitted to the Supreme Council. The third quarter Financial Accounts have been submitted to the Supreme Council. Also, as per its Law, DAB has started preparing a pro-forma balance sheet to be submitted to the Ministry of Finance. Since February 2013, the Comptroller General’s Office (CGO) has been successful in implementing all the activities related to internal audit. To structure and implement a suitable Risk Based Internal Audit (RBIA) model, DAB considers it important (and has requested TA under the World Bank’s FSRRP project) to provide training to CGO staff and hire an expert adviser to assist CGO amend existing policies and procedures and develop new ones.

Technical Assistance, 2011–15

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METAC Advisor participated to the mission.

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

Resident Representatives

Mr. de Schaetzen; August 2002–June 2005

Mr. Charap; June 2005–June 2008

Mr. Abdallah; June 2008–January 2014

Relations with the World Bank

(As of September 2015)

1. The World Bank Group’s program in Afghanistan is governed by the joint Interim Strategy Note (ISN) for FY12-FY14, which focuses on three themes: (i) building the legitimacy and capacity of institutions; (ii) equitable service delivery; and (iii) inclusive growth and jobs. The process for preparing the next country strategy—Country Partnership Framework for Afghanistan–has been launched, with work on the Systematic Country Diagnostics (SCD) in progress.

2. Since 2002, IDA has committed a total of $3.12 billion in grants (86 percent) and credits (14 percent) in Afghanistan. Thirty-seven development and emergency-reconstruction projects and four budget-support operations have been committed as of end-August 2015. In addition, the ARTF has generated $7.99 billion from 33 donors, and committed $3.61 billion for the government’s recurrent costs and $3.79 billion for government investment programs. At end of August 2015, the active IDA portfolio was worth $725.98 million and the active ARTF investment portfolio was worth $2.5 billion.

3. The Bank also administers the Afghanistan Reconstruction Trust Fund (ARTF) – the World Bank Group’s largest single-country multi-donor trust fund. The ARTF provides grant support to Afghanistan based on a 3-year rolling financing strategy. Together, International Development Association (IDA) and the Afghanistan Reconstruction Trust Fund (ARTF) provide close to $1 billion per year in grant resources (about $150 million from IDA and about $800–$900 million from the ARTF). The ARTF is a key vehicle for providing Government with predictable and transparent on-budget financing and provides a platform for policy dialogue between Government and donors.

4. In fiscal year 2015, the World Bank Board approved additional financing for an existing project—the Second Customs Reform and Trade Facilitation Project—in the amount of $21.5 million. No new projects were approved under the ARTF during the political transition period. Funds were, however, allocated to ongoing projects for a total of $450 million, which includes $50 million for the National Horticulture and Livestock Project, $100 million for National Solidarity Program III, $100 million for the Rural Access Program, and $200 million for the System Enhancement for Health in Transition Project. In fiscal year 2015, $419.56 million was disbursed under the Recurrent Cost Window, including the baseline financing ($125 million), Incentive Program ($132.5 million, of which $65 million was through the O&M Facility), and additional donor grants through the ad-hoc mechanisms of $146.9 million.

5. The World Bank continues to engage in rigorous analytical work and places large emphasis on policy dialogue. These non-lending activities have been supportive of the Bank’s lending program and have played a crucial role in informing government of its strategic choices and advancing dialogue between the Government of Afghanistan and its international development partners. In recent years, four pieces of analytical work stand-out: Transition Economics, Resources Corridors, Poverty Analysis, and Agriculture Sector Review. The Bank also prepared Policy Notes on key sectors of the economy to help guide its policy dialogue with the new administration and launched the preparation of a comprehensive revenue analysis.

6. IFC’s portfolio in Afghanistan has increased to about $135 million. IFC is following an integrated advisory and investment strategy focused on improving the investment climate, building capacity, and supporting selective investments in sectors with high development impact and job creation. Currently, IFC’s portfolio includes two investments in the telecommunication sector and two operations in the financial markets. Going forward, IFC is looking to expand its investment program in Afghanistan, in the areas of infrastructure, finance, manufacturing, agribusiness and services.

7. MIGA has $154 million of gross exposure in Afghanistan, supporting telecoms and agribusiness projects. In 2013 MIGA launched its “Conflict Affected and Fragile Economies Facility,” which is supporting the agency’s exposure in Afghanistan. MIGA is currently supporting three projects in Afghanistan, of which one is a joint effort with IFC in the telecoms sector (MTN). The other two are MIGA-only dairy and cashmere production projects.

Implementation of the Joint Management Action Plan on Bank-Fund Collaboration

(August 17, 2015)

1. Joint Management Action Plan (JMAP). The Afghanistan country teams of the World Bank (led by Mr. Saum, country director) and the IMF (led by Mr. Ross, mission chief) held several consultations in 2014 and 2015. The teams regularly exchanged views on the recent economic developments and their outlook, identified the macroeconomic priorities and challenges facing Afghanistan and discussed ways to coordinate their respective work programs. As part of the cooperation effort, the World Bank team participated in SMP missions as observer.

2. 2015 showed a small improvement in economic activity and a number of economic reforms. The security transition and the protracted elections affected confidence and considerably slowed down reform progress in 2014. The SMP program provided a macroeconomic framework for a swift recovery in economic activity and structural reforms. The following areas are critical from the macroeconomic perspective in the short and medium terms:

  • Sustaining macroeconomic stability. Policies should focus on revenue mobilization, improving the effectiveness of public expenditures, containing non-priority spending and controlling the money growth to manage inflation. A flexible exchange rate and international reserves should help accommodate shocks. The success of this strategy is predicated to a large extent on the continued donor flows, as pledged at the 2012 conferences in Chicago and Tokyo. The government’s delivery on its commitments under the IMF-supported program as well as the ARTF Incentive Program and the IDA-financed Development Policy Grant will be critical towards sustaining donors’ confidence.

  • Advancing fiscal sustainability and strengthening efforts to mobilize domestic revenues. The revenue effort faltered further in 2014 and it will be critical to restoring Afghanistan’s revenue trajectory. Teams therefore agree on the need to emphasize revenue-enhancing measures in their dialogue with authorities. In order to improve our understanding for the scope of reforms, especially in the medium-term, the teams agree to cooperate on relevant analysis.

  • Safeguarding the financial sector. Macroeconomic policies must be complemented by prudential measures to safeguard financial stability. The banking sector is weak and should be strengthened to be able to meaningfully contribute to economic development. Improving banking supervision at the central bank is critical to this effort.

  • Strengthening economic governance. The high level of corruption and deficiencies in the rule of law are serious constraints on growth and—in the case of Afghanistan—have the potential to destabilize the economy.

  • Improving absorption capacity and government effectiveness. Budget execution rates linger around 50 percent. Increasing on-budget aid, especially through the transfer on-budget of security expenditures previously managed by donors, is challenging absorption capacity. More efforts need to be undertaken in advancing public financial management (PFM) reforms, improving the capabilities of the civil service and lifting constraints to service delivery and the implementation of public infrastructure projects.

3. Prioritizing reforms. Teams agreed that policy recommendations for 2015 should focus on revenue mobilization, improved expenditure management, better coordination between the fiscal and monetary policies, and addressing vulnerabilities in the financial sector.

4. The Bank’s work program is guided by the Interim Strategy Note (ISN). The ISN, approved by the Bank’s Board in March 2012 and spanning 2012–14, envisages that the Bank will continue to expand its support to institutions and processes associated with transparent economic and financial management and community-level governance, especially through the National Solidarity Program. Regarding economic management, in 2014 and continuing into 2015, the Bank has supported the government with technical assistance in the areas of customs reforms, mineral resource management, and economic statistics. Under the ARTF, the bank’s team is preparing a new Incentive Program (IP) that will provide funds for achievements in revenue mobilization, strengthening PFM and revenue administration systems (including customs), and improving tax policy, investment climate and, land administration. Since January 2013, the IP has also supported the government’s operation and maintenance expenditures. The new Incentive Program will provide a total financing envelope of $900 million for 2015–2017. The Bank will also initiate consultations with the government toward the end of 2015 on designing a new Development Policy Grant (Table 1).

Table 1.

Afghanistan: Bank and Fund Planned Activities in Areas of Joint Interest, 2011–16

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5. The Fund’s work program focuses on close engagement through the SMP program approved in March 2015. The first SMP program review will take place in September 2015. The program has two test dates, June and December 2015. The SMP includes a set of informal quantitative targets and structural measures for 2015. These targets and measures aimed at maintaining macroeconomic stability and structural reform momentum. The authorities met all the quantitative targets for June test date. However, some structural benchmarks took longer than anticipated to implement.

6. The Fund focuses its efforts on helping the authorities maintain economic stability, manage the economic transition, and advance important pieces of legislation, including the new banking law, the central bank law, and AML and CFT laws. The Fund has also provided advice on the monetary policy, banking supervision, and customs reform. Technical assistance has been provided to the central bank on problem bank management and external sector statistics. In 2015, the Fund, through the SMP, is helping the authorities build on these achievements, including through strengthening economic governance, advancing structural reforms, central bank capitalization framework, developing a fiscal regime for natural resources, revenue mobilization, further strengthening banking supervision, and improving macroeconomic statistics. The Fund will continue its close engagement with Afghanistan to ensure the stability of macroeconomic framework.

Relations with the Asian Development Bank

(As of August 31, 2015)

1. Afghanistan is a founding member of the Asian Development Bank (ADB), established in 1966. After a hiatus from 1980 to 2001, ADB resumed its partnership with the Government of Afghanistan. In the London and Kabul conferences in January and July 2010, respectively, and in the Chicago (May 2012), Tokyo (July 2012), and London (December 2014) conferences, ADB reaffirmed its long-term development partnership with Afghanistan. This included the transition period (2012-14) and the transformation period (2015–2024) based on the government’s development strategies, which along with national priority programs (NPPs) will remain the agreed basis for partnership in the next decade.

2. Current ADB operations in Afghanistan are based on the Country Operations Business Plan (COBP), 2015–2017. The COBP is fully aligned with NPPs and the government’s priorities in the infrastructure sector—the backbone of economic and social development—with ADB’s investments contributing to Afghanistan’s socio-economic development in the transformation period. The COBP continues ADB’s focus on Afghanistan’s energy, transport, and agriculture and natural resources sectors, including management, governance, and further institutional and human capacity development. From 2009 to 2013, ADB’s operations were underpinned by the Country Partnership Strategy (CPS), which was aligned with the Afghanistan National Development Strategy (2008–2013). At present, ADB’s operations are based on the Interim CPS 2014–2015, which extends the strategic focus of the CPS 2009-2013. The Interim CPS is aligned with NPPs and the government’s development strategy—Towards Self Reliance—A Strategic Vision Beyond 2025.

3. ADB is one of the largest donors to the government of Afghanistan. By end-December 2014, ADB’s total assistance comprising grants, loans and technical assistance (TA) reached $4.03 billion. Since 2007, ADB has provided all of its public sector assistance on a 100 percent grant basis. Grants make up around 74 percent of ADB’s overall assistance to Afghanistan. In the July 2012 Tokyo Conference, ADB committed another $1.2 billion to support Afghanistan through 2016.

4. ADB supports co-financing of its projects to increase synergies by combining the strengths of development partners, governments, and ADB itself. As of August 31, 2015, the cumulative direct value-added official co-financing amounted to $518.6 million for 22 investment projects and $14.7 million for 14 TA projects. ADB manages the Afghanistan Infrastructure Trust Fund (AITF)—a financing modality for development partners and private sector who are interested in pooling resources to finance infrastructure projects in Afghanistan. AITF allows development partners to meet the pledge of 50 percent on-budget and 80 percent alignment with NPPs as agreed in the 2010 Kabul Conference. As of 30 June 2015, the total amount received in AITF was $350.65 million, with total commitments of $490.55 million, including funds from Japan (Embassy of Japan, $126.0 million), United States (USAID, $105.0 million), and United Kingdom (DFID, $119.6 million out of a total commitment of $259.55 million).

5. ADB is the largest on-budget donor in the transport sector. As of December 31, 2014, ADB has provided $2.2 billion to construct or upgrade over 1,700 km of regional and national roads and to rehabilitate four regional airports. All four are fully operational, with usage more than doubled. Travel times on selected national roads decreased by more than half as a result of ADB-assisted projects. ADB funded Afghanistan’s first railway line between Mazar-e-Sharif and the border of Uzbekistan, which became fully operational in 2012. To date, about 9 million tons of goods have been transported. ADB supported the establishment of the Afghanistan Railway Authority to regulate and ensure the sustainability of the railway sector.

6. ADB is the largest on-budget donor in the energy sector. As of 31 December 2014, ADB has invested $921.31 million in Afghanistan’s energy sector, and committed an additional $750 million to strengthen the country’s energy supply chain. ADB-assisted projects have added 590 km of transmission lines, providing electricity to more than 5 million people. Ongoing projects will generate an additional 4.5 megawatts of power, add 500 km of transmission lines, and provide 100,000 new power connections. ADB financed the power master plan of the government and is currently working on the gas sector master plan. ADB also supports the Turkmenistan, Afghanistan, Pakistan and India (TAPI) gas pipeline project as well as the Turkmenistan, Uzbekistan, Tajikistan, Afghanistan and Pakistan (TUTAP) electricity project.

7. The natural resources sector is another government priority sector assisted by ADB. As of December 31, 2014, total investment reached $545.48 million to rehabilitate and establish new irrigation and agricultural infrastructure, and strengthen the institutional environment to facilitate economic growth and improve water resources management. Around 140,000 hectares of irrigated land have been rehabilitated and upgraded. The investments have led to a more efficient use of water resources, a rise in agricultural productivity, and improved farm livelihoods.

8. ADB assistance has improved fiscal management through policy, institutional and capacity-building reforms covering expenditure and revenue management, civil service management, provincial administration, and transparency and accountability in the public sector.

9. ADB’s private sector operations in Afghanistan began in 2004. As of August 31, 2015, cumulative approvals in six projects have amounted to $198.1 million. Total outstanding balances and undisbursed commitments to private sector projects amounted to $3.5 million. One of the major private sector projects is the lending to Roshan Cellular Telecommunications Project. ADB provided financial assistance in the form of direct loans totaling $70 million for Phases 1 and 2 of the project, as well as B loans and a political risk guarantee. In 2008, ADB approved a direct loan of $60 million to finance Roshan’s Phase 3 expansion. In 2012, this project received an award for Excellence in Fragile States Engagement from the US Treasury. In the financial sector, ADB invested $2.6 million in Afghanistan International Bank (AIB), thus establishing the first private commercial bank in the post-Taliban regime.

10. ADB is an active member of the Joint Coordination and Monitoring Board (JCMB) and 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. ADB strongly supports all international policy dialogues on Afghanistan. Furthermore, it takes the lead in the infrastructure sector and regional cooperation-related policy dialogues. ADB is a member of the core donor group (5+3) to ensure coordination and harmonization among donors and the government over policy reforms and development programs. ADB consults continuously with civil society and non-governmental organizations with regard to project design and implementation.

Islamic Republic of Afghanistan: Statistical Issues

(As of October 17, 2015)

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Afghanistan: Table of Common Indicators Required for Surveillance

(As of August 17, 2015)

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Any reserve assets that are pledged or otherwise encumbered are specified separately.

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

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

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Cover IMF Staff Country Reports
Islamic Republic of Afghanistan: 2015 Article IV Consultation and First Review Under the Staff-Monitored Program-Press Release; Staff Report; and Statement by the Executive Direct for the Islamic Republic of Afghanistan
Author: International Monetary Fund. Middle East and Central Asia Dept.
Volume/Issue:
Volume 2015: Issue 324
Publisher:
International Monetary Fund
ISBN:
9781513592817
ISSN:
1934-7685
Pages:
112
DOI:
https://doi.org/10.5089/9781513592817.002