Islamic Republic of Afghanistan: First Review Under the Extended Credit Facility Arrangement and Request for Modification of Performance Criteria—Informational Annex
Author: International Monetary Fund. Middle East and Central Asia Dept.
Publication Date:
05 Jun 2017
eISBN:
9781484302972
Language:
English
Keywords:
ISCR; CR; debt; real GDP; deficit; ARTF Research and Analysis Program; ADB assistance; Kabul money exchange market; ADB operation; direct loan; External sector statistics; Anti-money laundering and combating the financing of terrorism (AML/CFT); Customs administration core functions; development priority
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First Review Under the Extended Credit Facility Arrangement and Request for Modification of Performance Criteria

Abstract

First Review Under the Extended Credit Facility Arrangement and Request for Modification of Performance Criteria

Relations with the Fund

(As of March 31, 2017)

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 Fund 1

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

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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 cannot 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. Afghanistan maintains an exchange system that is free of multiple currency practices and restrictions on the making of payments and transfers for current international transactions. The authorities confirmed their interest to move to Article VIII status. The de jure exchange rate regime is classified as managed floating, although the authorities have been implementing a de facto float system with no predetermined path for the exchange rate. On March 20, 2017, the average of the buying and selling exchange rates in cash transactions on the Kabul money exchange market was 67.87 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 November 18, 2015. 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

An update safeguards assessment of the DAB was completed in January 2017. The assessment found that the DAB continues to face significant capacity constraints and operational risks in light of the difficult security situation. Governance and external audit arrangements are nonetheless broadly sound, and work on draft amendments to the DAB Law had been initiated, with particular emphasis on provisions on DAB’s mandate, institutional and personal autonomy, rules of profit distribution, recapitalization, and foreign reserve management. However, progress has been slow in the work on the draft amendments, and in some other key areas such as the resolution of the Kabul Bank exposure and strengthening the internal audit function. The assessment recommended that full resolution of the DAB’s exposure to Kabul Bank be anchored by a signed agreement between the MOF and DAB with explicit repayment commitments in the period 2017–19. It also recommended that draft amendments to the DAB Law be submitted to Cabinet, and that controls over the compilation of program monetary data be strengthened.

Technical Assistance, 2011–17

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Afghanistan is a participant in the Middle East Technical Assistance Cente

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 March 2017)

1. The World Bank Group’s Program in Afghanistan is governed by Country Partnership Framework (CPF), for the four-year period from FY 2017 through FY 2020. Prior to the CPF the World Bank engagement was defined by Interim Strategy Notes. The CPF is aligned with country priorities as outlined in the Government’s Afghanistan National Peace and Development Framework. The CPF also builds on the findings and recommendations of the Systematic Country Diagnostic (SCD), completed in February 2016.

2. Since 2002, the International Development Association (IDA) has committed a total of US$3.6 billion in grants (86 percent) and credits (14 percent) in Afghanistan. In addition, the Afghanistan Reconstruction Trust Fund (ARTF) has generated US$9.5 billion from 34 donors, and committed US$4.2 billion for the government’s recurrent costs and US$4.5 billion for government investment programs. As of October 2016, there were thirty active investment projects in the portfolio in key sectors including agriculture and rural development, health, education, infrastructure, and public financial management.

3. The Bank also administers the ARTF—the World Bank Group’s largest single-country multi-donor trust fund. The ARTF provides grant support to Afghanistan based on a three-year rolling financing strategy. Together, the IDA and the ARTF provide close to US$1 billion per year in grant resources (about US$200 million from IDA and about US$800–US$900 million from the ARTF). The ARTF is a key vehicle for providing the Government with predictable and transparent on-budget financing and provides a platform for policy dialogue between Government and donors.

4. In FY 2017, the World Bank Board approved the Citizen’s Charter Afghanistan Project which aims to improve the delivery of core infrastructure and social services to participating communities through strengthened Community Development Councils. This project was financed from a combination of IDA resources (US$100 million) and ARTF funds (US$400 million). Under the ARTF, two new projects were approved including US$2.9 million for the Urban Development Support Program, US$4.95 million for the Support to the Afghanistan Independent Land Authority Program. Additional financing for existing projects included US$70 million for the Irrigation Restoration and Development Project, US$90 million for the National Horticulture and Livestock Project, and US$57.3 million for the Emergency National Solidarity Project.

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. The ARTF Research and Analysis Program (RAP) was recently established to support the government’s policy reform agenda and decision-making. The program provides an opportunity to introduce innovative ways of working with the government, universities and local research institutions to undertake analysis and generate knowledge. As part of the RAP, the Bank is currently engaged in a series of analytical work to enhance understanding of Afghanistan’s growth and fragility challenges and to inform development response by Government and international development partners. The initial results of this work were presented at the 2016 Brussels Conference on Afghanistan.

6. IFC’s committed Investment portfolio in Afghanistan has more than doubled between FY08 and FY14—from around US$58 million to about US$135 million in FY14. Currently, IFC’s portfolio stands at about US$54 million and includes one investment in the telecommunication sector (Roshan), one investment in the hotel sector (TPS), and two operations in financial markets (First Microfinance Bank, Afghanistan International Bank–trade facility). IFC’s investments have had a transformational impact (in terms of access to finance and outreach), particularly in the microfinance and telecommunication sectors. IFC’s Advisory Services program has been supporting the Investment program in the areas of access to finance, Small and Medium Enterprises (SMEs) capacity development, horticulture/agribusiness, and investment climate. IFC will continue to seek new investment opportunities and engage with local players in order to support the development of Afghanistan’s private sector, particularly in the areas of infrastructure, finance, manufacturing, agribusiness, and services.

7. The Multilateral Investment Guarantee Agency (MIGA) has US$117.5 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 (supporting telecom operator MTN). The other two operations are MIGA-only dairy and cashmere production projects.

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

(As of April 2017)

1. The Afghanistan country teams of the World Bank (led by Mr. Chaudhuri, country director) and the IMF (led by Mr. Duenwald) held several consultations in 2016 and 2017. The teams regularly exchanged views on the recent economic developments and outlook, identified the macroeconomic priorities and challenges facing Afghanistan, and discussed ways to coordinate their respective work programs.

2. As noted, the Bank’s work program is guided by the Country Partnership Framework (CPF) for 2017-2020. The new CPF envisages that the Bank will continue to expand its support to expanding education and health services, energy, rural infrastructure, as well as institutions and processes associated with transparent economic and financial management. Regarding economic management, in 2016 and continuing into 2017, the Bank has supported the government with technical assistance in the areas of customs reforms, revenue administration, public financial management, debt management, public investment management, and economic statistics. The Bank will also continue to support the Government’s efforts towards greater financial inclusion. Under the ARTF, the Incentive Program (IP) provides funds for achievements in revenue mobilization, strengthening PFM and revenue administration systems (including customs), improving tax policy, the investment climate, and land administration. Since January 2013, the IP has also supported the government’s operation and maintenance expenditures. The IP provides a total financing envelope of US$900 million for 2015–2017. The Bank is also preparing a US$100 million Development Policy Grant supporting a range of policy and legislative reforms to expand opportunities for the vulnerable and enable private sector development.

3. The Fund’s work program focused on close engagement through the Extended Credit Facility (ECF) arrangement approved in July 2016. The arrangement supports a program which sets out a structural reform agenda that focuses on institution building, fiscal and financial reforms, and measures to combat corruption to lay foundations for scaled up private sector development. The program aims to preserve macroeconomic and financial stability by implementing prudent fiscal, monetary, and financial policies, and by maintaining external buffers and a flexible exchange rate regime. The program’s major elements are: fiscal reforms, including revenue mobilization and improved public financial management; anti-corruption measures; and safeguarding the financial sector. The ECF includes a set of performance criteria as well as structural benchmarks that are assessed semi-annually. As part of the cooperation effort, the World Bank team participates in ECF missions as observer.

4. To help the authorities build on past achievements, the Fund provides continuous advice on macro-financial policies, structural reforms in its areas of comparative, and delivers technical assistance and training. Technical assistance has been provided to the central bank on problem bank management, and monetary, financial and external sector statistics. It has also provided TA to the Ministry of Finance, mainly in the areas of tax policy and administration, and public financial management. The Fund will continue its close engagement with Afghanistan.

Table 1.

Islamic Republic of Afghanistan: Bank and Fund Planned Activities in Areas of Joint Interest

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Timing is tentative

Relations with The Asian Development Bank

(As of December 2016)

1. Afghanistan is a founding member of the Asian Development Bank (ADB), established in 1966. Resuming its partnership with Afghanistan, after a hiatus from 1980 to 2001, ADB supports the country’s Afghanistan National Peace and Development Framework (ANPDF) which was presented by the Government of Afghanistan at the Brussels Conference on Afghanistan in October 2016 as country’s new development strategy document. ADB has demonstrated strong commitment to Afghanistan’s development priorities through participation in the London, Kabul, Chicago and Tokyo conferences and reaffirmed its medium- to long-term partnership at the 2014 London conferences, subsequent meetings of senior officials in 2015 and the 2016 Brussels Conference on Afghanistan.

2. Current ADB operations in Afghanistan are based on the Country Operations Business Plan (COBP) 2017–2019 that extends the priorities under the Interim Country Partnership Strategy (CPS) 2014–2015. The COBP is aligned with the Interim CPS (extended to cover 2016) and a new CPS that will be prepared for the period 2017–2021. The new CPS will be based on the ANPDF, National Infrastructure Plan (NIP) and other relevant National Priority Programs (NPPs). The current COBP is fully aligned with ANPDF, NIP and relevant NPPs—the backbone documents for economic and social development—with ADB’s investments contributing to Afghanistan’s socio-economic development. The COBP continues ADB’s focus on Afghanistan’s energy, transport, and agriculture and natural resources sectors and will promote inclusive economic growth, regional integration, governance, and capacity development.

3. ADB is one of the largest donors to the government of Afghanistan. By end-December 2016, ADB’s total assistance comprising grants, loans, and technical assistance (TA) reached US$4.9 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 2017, ADB plans to approve $294.8 million in funding for Afghanistan, including $219.8 million from the Asian Development Fund (ADF) and $75 million in co-financing.

4. ADB supports co-financing of its projects to increase synergies by combining the strengths of development partners, governments, multilateral financing institutions, commercial organizations, and ADB itself. As of December 31, 2016, the cumulative direct value-added official co-financing amounted to US$903.1 million for 27 investment projects and US$26.4 million for 17 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 31 December 2016, the total amount pledged by AITF donors was $789 million, total amount committed was $648 million and the total amount received was $466.2 million from the governments of Japan ($127.5 million), United States ($113.0 million and another $40 million has been committed past the reporting period), United Kingdom ($85.7 million out of total commitment of $228 million) and the NATO Trust Fund (comprising five governments; $140 million out of a total pledged of $200 million). Kreditanstalt fuer Wiederaufbau (KfW) has also pledged €75 million ($81 million).

5. ADB is the largest on-budget donor in the transport sector. As of December 31, 2016, ADB has provided US$2.55 billion to construct or upgrade over 1,700 km of regional and national roads across Afghanistan. This includes US$808 million for the Transport Network Development Investment Program, which has more than halved travel times on 570 km of regional and national roads. ADB is also financing the rehabilitation of 232 km of the ring road, as well as supporting a feasibility study and engineering design for the Salang Tunnel, as part of the Central Asia Regional Economic Cooperation (CAREC) Corridors 5 and 6. ADB has also helped rehabilitate four regional airports, increasing passenger volumes now more than double the pre-upgrade levels. ADB funded Afghanistan’s first railway line between Mazar-e-Sharif and the border of Uzbekistan, which became fully operational in 2012.The line carries around 3 million tons of freight per year. ADB supported the establishment of the Afghanistan Railway Authority to regulate and ensure the sustainability of the railway sector.

6. As the largest on-budget donor for Afghanistan’s energy sector, ADB has helped deliver electricity to more than 5 million people. To date, ADB has provided nearly US$1.43 billion to support energy infrastructure in Afghanistan. An additional $1 billion is planned for 2016–24, to support energy infrastructure in Afghanistan. These projects include construction of 1,500 km of power transmission lines, 16 substations, 143,000 new power distribution connections to electricity grid and system and 8 gas wells, to strengthen country’s energy supply chain. The technical assistance projects provide policy and analytical support through the Inter-Ministerial Commission (IMC), Renewable Energy, Gas Sector Development Master Plan, and Energy Sector Master Plans. ADB is also contributing to policy dialogue and donor coordination in the sector, including the financing of master plans for the power and gas subsectors. Key regional projects for Afghanistan are being supported under the Central Asia-South Asia Regional Electricity Markets including the Turkmenistan, Afghanistan, Pakistan, and India (TAPI) gas pipeline project and 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, 2016, total investment reached US$584 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 160,000 hectares of irrigated land have been rehabilitated and upgraded, with work continuing on an additional 260,000 hectares. 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 December 31, 2016, cumulative approvals in six projects have amounted to US$198.1 million. Total outstanding balances and undisbursed commitments to private sector projects amounted to US$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 US$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 US$60 million to finance Roshan’s Phase 3 expansion. In 2012, this project received an award for Excellence in Fragile States Engagement from the U.S. Treasury. In the financial sector, ADB invested US$2.6 million in Afghanistan International Bank (AIB), thus establishing the first private commercial bank in the post-Taliban regime. Awarded by The Banker Magazine of Financial Times Newspaper as the best bank in Afghanistan for four straight years (2012, 2013, 2014, and 2015), it is the largest and most profitable bank in Afghanistan with a balance sheet just short of US$1 billion. In January 2016, ADB divested its last shares of AIB but had received US$11.2 million from dividends and put options.

10. ADB is an active member of the Joint Coordination and Monitoring Board (JCMB) and the Afghanistan Reconstruction Trust Fund Management Committee. Furthermore, ADB takes the lead in the infrastructure sector and regional cooperation-related policy dialogues. The ADB supported the preparation of NIP and regional side event at the 2016 Brussels Conference. ADB is a member of the 5+3+3 donor group 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.

Statistical Issues

(As of March 2017)

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Table of Common Indicators Required for Surveillance

(As of March 2017)

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Any reserve assets that are pledged or 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 positions vis-à-vis nonresidents.

Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA).

1/

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

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Cover IMF Staff Country Reports
Islamic Republic of Afghanistan: First Review Under the Extended Credit Facility Arrangement and Request for Modification of Performance Criteria-Press Release; and Staff Report
Author: International Monetary Fund. Middle East and Central Asia Dept.
Volume/Issue:
Volume 2017: Issue 144
Publisher:
International Monetary Fund
ISBN:
9781484302972
ISSN:
1934-7685
Pages:
98
DOI:
https://doi.org/10.5089/9781484302972.002