Front Matter Page
IMF Country Report No. 16/252
THE ISLAMIC REPUBLIC OF AFGHANISTAN
REQUEST FOR A THREE-YEAR ARRANGEMENT UNDER THE EXTENDED CREDIT FACILITY—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR THE ISLAMIC REPUBLIC OF AFGHANISTAN
July 2016
In the context of the Extended Credit Facility Arrangement, the following documents have been released and are included in this package:
The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on July 20, 2016, following discussions that ended on June 15, 2016, with the officials of the Islamic Republic of Afghanistan on economic developments and policies underpinning the IMF arrangement under the Extended Credit Facility. Based on information available at the time of these discussions, the staff report was completed on July 1, 2016.
An Informational Annex prepared by the IMF staff.
A Debt Sustainability Analysis prepared by the staffs of the IMF and the International Development Association (IDA).
A Statement by the Executive Director for the Islamic Republic of Afghanistan.
The documents listed below have been or will be separately released.
Letter of Intent sent to the IMF by the authorities of the Islamic Republic of Afghanistan*
Memorandum of Economic and Financial Policies by the authorities of the Islamic Republic of Afghanistan*
Technical Memorandum of Understanding*
*Also included in Staff Report
The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.
Copies of this report are available to the public from
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© 2016 International Monetary Fund
Front Matter Page
ISLAMIC REPUBLIC OF AFGHANISTAN
REQUEST FOR A THREE-YEAR ARRANGEMENT UNDER THE EXTENDED CREDIT FACILITY
July 1, 2016
Key Issues
Context. Afghanistan is a fragile highly aid dependent state undergoing a difficult political, security, and economic transition that is posing difficult challenges for the government. Insecurity, political uncertainty, endemic corruption, weak institutions, an infrastructure deficit, weak human capital, and a large narcotics sector are the salient factors preventing robust and inclusive economic development.
Program objectives and modalities. Following the successful completion of the 2015 staff-monitored program, the authorities have requested a financial arrangement under the Extended Credit Facility to help consolidate progress on the macroeconomic and structural fronts and catalyze continued support from donors, helping to raise growth. The program’s structural reforms focus on areas of the Fund’s comparative advantage and are complementary to reforms supported by donors. While there are protracted medium-term balance of payments pressures, there is no immediate balance of payments need, given grants of about 40 percent of GDP and a comfortable international reserves position. Hence, a three-year program is envisaged with access at 10 percent of quota (SDR 32.38 million, about US$45 million), that can be augmented if adverse shocks were to cause international reserves to drop below an adequate level. Capacity to repay is assessed as adequate, although the country’s fragility and fluid political context imply some risks.
Program policies. The program sets out a structural reform agenda that focuses on institution building, fiscal and financial reforms, and measures to combat corruption to lay the foundations for scaled up private sector development. The envisaged reforms dovetail with Afghanistan’s National Development Framework currently being finalized. The program aims to preserve macro-financial stability by implementing prudent fiscal, monetary, and financial policies, and by maintaining external buffers and a flexible exchange rate regime.
Staff views. Staff supports the authorities’ request for an ECF arrangement under a Fund-supported program. The Letter of Intent and Memorandum of Economic and Financial Policies provide for appropriate policies to pursue the objectives of the program. The program, however, carries some risks including (i) a deterioration in the security situation; (ii) a shortfall in donor aid; and (iii) increased political uncertainty, particularly with regard to elections scheduled for the fall. These risks, were they to materialize, could lead to lower growth, unexpected financing gaps, and problems with program implementation.
Approved By
Daniela Gressani and Bob Traa
Discussions were held in Delhi during May 18–26, 2016. The staff team comprised Christoph Duenwald (head), Robert Tchaidze, Farid Talishli (all MCD), Ke Chen (LEG), Olivier Frecaut (MCM), Ichiro Fukunaga (SPR), Sailendra Pattanayak, Elif Ture (both FAD). Daniela Gressani (MCD) joined the conclusion of the mission. The team met with Finance Minister Hakimi, Governor Sediq, and other senior officials. Yi Liu (MCD) provided research assistance and Norma Cayo (MCD) document management.
Contents
CONTEXT
ECONOMIC DEVELOPMENTS, OUTLOOK, AND RISKS
A. Recent Developments
B. Outlook and Risks
THE AUTHORITIES’ PROGRAM
A. Broad Strategic Issues
B. Design of the Program
C. First Pillar: Structural Reform Priorities
D. Second Pillar: Preserving Macro-Financial Stability
PROGRAM MODALITIES
STAFF APPRAISAL
FIGURES
1. Real Sector
2. Fiscal Sector
3. Monetary Sector
4. External Sector
TABLES
1. Selected Economic Indicators, 2013–17
2. Medium-Term Macroeconomic Framework, 2015–21
3a. Central Government Budget, 2013–21 (In billions of Afghanis)
3b. Central Government Budget, 2013–21 (In percent of GDP)
4a. Central Bank Balance Sheet, 2013–21
4b. Central Bank Balance Sheet, 2013–21 (At program exchange rates)
5. Monetary Survey, 2013–21 (At current exchange rates)
6. Balance of Payments, 2013–21
7. Financial Soundness Indicators, 2012–15
8. Proposed Schedule of Reviews and Disbursements Under the ECF Arrangement
9. External Financing Requirements and Sources, 2014–19
10. Projected Payments and Indicators of Capacity to Repay the Fund
11. Millennium Development Goals
ANNEXES
I. Risk Assessment Matrix
II. What Ails Afghanistan’s Economy?
III. Lessons from the Ex Post Assessment
IV. The Kabul Bank Crisis: Completing the Burden Allocation Process
APPENDIX
I. Letter of Intent
Attachment I. Memorandum of Economic and Financial Policies for 2016–2019
Attachment II. Technical Memorandum of Understanding
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ISLAMIC REPUBLIC OF AFGHANISTAN
REQUEST FOR A THREE-YEAR ARRANGEMENT UNDER THE EXTENDED CREDIT FACILITY—INFORMATIONAL ANNEX
July 1, 2016
Prepared By
The Middle East and Central Asia Department (In collaboration with other departments, the World Bank, and the Asian Development Bank)
Contents
RELATIONS WITH THE FUND
RELATIONS WITH THE WORLD BANK
IMPLEMENTATION OF THE JOINT MANAGEMENT ACTION PLAN ON BANK-FUND COLLABORATION
RELATIONS WITH THE ASIAN DEVELOPMENT BANK
STATISTICAL ISSUES
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ISLAMIC REPUBLIC OF AFGHANISTAN
REQUEST FOR A THREE YEAR ARRANGEMENT UNDER THE EXTENDED CREDIT FACILITY—DEBT SUSTAINABILITY ANALYSIS
July 1, 2016
Approved By
Daniela Gressani and Bob Matthias Traa (IMF), Satu Kähkönen (IDA)
International Monetary Fund1
International Development Association
Afghanistan continues to be at a high risk of debt distress. Although public debt remains modest, Afghanistan’s debt sustainability will critically hinge on continued donor grant inflows (38 percent of GDP in 2015, including both on and off-budget grants) under substantial fiscal and external deficits and downside risks in the economic outlook.
Given continued donor support in the form of grants, Afghanistan’s debt outlook, under the baseline scenario, is benign. However, a change in the structure of donor financing with a gradual shift to loan financing (a customized illustrative scenario) would quickly lead to an unsustainable debt burden.
Moreover, the outlook is subject to significant downside risks. In addition to aid shortfalls, risks include the fragile security situation, political uncertainty, domestic revenue shortfalls, migrant outflows, and exchange rate depreciation. Accordingly, the authorities should continue their efforts to mobilize revenue and press ahead with their reform efforts, while donors should continue to provide financing in the form of grants.
Front Matter Page
Press Release No. 16/348
FOR IMMEDIATE RELEASE
July 20, 2016
International Monetary Fund
Washington, D.C. 20431 USA
Telephone 202-623-7100
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