Islamic Republic of Afghanistan—IMF Management Completes Second Review of Staff-Monitored Program

Context. Afghanistan remains one of the poorest countries in the world, despite enormous progress over the past decade. Security and political uncertainties and the drawdown of international troops, together with weak governance and institutions, have held back growth and employment, and recently contributed to increased emigration. In May 2015, IMF management approved a nine-month Staff-Monitored Program (SMP), aimed at addressing fiscal and banking vulnerabilities, preserving macroeconomic stability, improving prospects for inclusive growth, and building a track record for a possible future IMF financial arrangement. Outlook and risks. On account of the sustained headwinds the economy faces, projections for real GDP growth in 2016 and beyond have been scaled back compared to those in the November 2015 Article IV staff report. The outlook remains highly challenging given political and security uncertainties and the related risks to reform implementation. Shortfalls in donor aid and continued emigration also pose important downside risks, and the banking system remains a key source of vulnerability.

Abstract

Context. Afghanistan remains one of the poorest countries in the world, despite enormous progress over the past decade. Security and political uncertainties and the drawdown of international troops, together with weak governance and institutions, have held back growth and employment, and recently contributed to increased emigration. In May 2015, IMF management approved a nine-month Staff-Monitored Program (SMP), aimed at addressing fiscal and banking vulnerabilities, preserving macroeconomic stability, improving prospects for inclusive growth, and building a track record for a possible future IMF financial arrangement. Outlook and risks. On account of the sustained headwinds the economy faces, projections for real GDP growth in 2016 and beyond have been scaled back compared to those in the November 2015 Article IV staff report. The outlook remains highly challenging given political and security uncertainties and the related risks to reform implementation. Shortfalls in donor aid and continued emigration also pose important downside risks, and the banking system remains a key source of vulnerability.

On April 13, 2016, the Management of the International Monetary Fund (IMF) completed the second and final review under the Staff-Monitored Program (SMP)1 with Afghanistan. The focus of the nine-month SMP was on addressing fiscal and banking vulnerabilities, preserving macroeconomic stability, improving prospects for inclusive growth, and building a track record for a possible future IMF financial arrangement. Despite difficult circumstances, the authorities implemented the program successfully and hence IMF management completed the SMP on schedule.

Notwithstanding this progress, Afghanistan’s economic situation remains very difficult. Security and political uncertainties and the drawdown of international troops, together with weak governance and institutions, have held back growth and employment, and recently contributed to increased emigration. The outlook is challenging, with real GDP growth projected at 2 percent in 2016, only marginally higher than in 2015. A further deterioration in security conditions and shortfalls in donor aid pose important downside risks, while the banking system continues to face several challenges despite key reforms and measures taken by the central bank to address the vulnerabilities in the financial sector.

To help address these difficult issues, the Afghan authorities recently requested a Fund financial arrangement (Extended Credit Facility—ECF). The ECF would help tackle some of the challenges and thus assist in improving the conditions for sustainable growth and in catalyzing support from donors. IMF management welcomes this request, and discussions on the new arrangement are slated to begin in May 2016.

Islamic Republic of Afghanistan: Selected Economic Indicators, 2013–16

(Quota: SDR 323.8 million)

(Population: 30.6 million)

(Per capita GDP: US$654; 2014)

(Poverty rate: 35.8 percent; 2011)

(Main exports: opium, US$2.7 billion; carpets, US$83.4 million; 2014)

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Sources: Afghan authorities; United Nations Office on Drugs and Crime; and Fund staff estimates and projections.

Excluding the narcotics economy.

Revised with improved coverage.

Since 2013, the fiscal year runs December 22–December 21 (in most years), which is moved aligned with the Gregorian calendar year.

Comprising mainly current spending.

Defined as domestic revenues minus operating expenditures.

Public sector only. Incorporates committed but not yet delivered debt relief. Debt relief recorded fully at time of commitment.

In months of next year’s import of goods and services.

1

An SMP is an informal agreement between country authorities and Fund staff to monitor the implementation of the authorities’ economic program. SMPs do not entail financial assistance or endorsement by the IMF Executive Board.

Islamic Republic of Afghanistan: Second Review Under the Staff-Monitored Program-Press Release; and Staff Report
Author: International Monetary Fund. Middle East and Central Asia Dept.