Islamic Republic of Afghanistan: Third Review Under the Extended Credit Facility Arrangement and Request for Modification of Performance Criteria—informational Annex
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Third Review of the Arrangement under the Extended Credit Facility-Press Release; Staff Report

Abstract

Third Review of the Arrangement under the Extended Credit Facility-Press Release; Staff Report

Relations with the Fund

(As of March 30, 2018)

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. Following the authorities’ request, the IMF staff has initiated a general review of Afghanistan’s exchange system to prepare for the authorities’ acceptance of obligations under Article VIII Sections 2(a), 3, and 4 of the IMF’s Articles of Agreements. The authorities are committed to stand ready to collaborate closely with IMF staff during this process. The de jure exchange rate regime is classified as managed floating. On March 31, 2018, the average of the buying and selling exchange rates in cash transactions on the Kabul money exchange market was 69.2 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 December 8, 2017. Article IV consultations with Afghanistan take place on a 24-month cycle in accordance with the provisions of Decision No. 14747, as amended.

Safeguards Assessment

An update safeguards assessment of 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. Weaknesses were noted in the legal provisions on the DAB’s mandate, institutional and personal autonomy, rules of profit distribution, recapitalization, and foreign reserve management. In November 2017, the authorities amended the DAB Law per safeguards assessment recommendations strengthening the areas where weaknesses were noted. The authorities are making efforts to resolve the Kabul Bank exposure, and have made progress in strengthening the internal audit function.

Technical Assistance, 2011–18

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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 March 2018)

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$3.85 billion in grants (90 percent) and credits (10 percent) in Afghanistan. The Bank also administers the ARTF (Afghanistan Reconstruction Trust Fund)—the World Bank Group’s largest single-country multi-donor trust fund which provides grant support to Afghanistan based on a three-year rolling financing strategy. The ARTF has generated over US$10 billion from 34 donors, making it the largest contributor to the Afghan budget, with disbursement of US$4.6 billion for the government’s recurrent costs and US$4.9 billion for government investment programs. 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.

3. 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 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. The Bank also launched a comprehensive and programmatic advisory and analytic program to support the full breadth of the Fiscal Performance Improvement Plan (FPIP)—Government’s flagship fiscal and PFM reform program.

4. The International Finance Corporation (IFC), the World Bank Group’s private sector development arm, continues to work with its investment and advisory service partners in Afghanistan. IFC’s cumulative committed portfolio stood at $52 million as of end-FY 2017 and its advisory services portfolio stood at $8.8 million. IFC’s Investment portfolio includes investments in the telecommunication sector and financial markets. The investment pipeline includes further investments in the financial markets as well as investments in the power sector and agribusiness. IFC’s Advisory Services program has been supporting the Investment program in access to finance, strengthening horticulture export, agri-businesses supply chain development, access to renewable energy, corporate governance structure enhancement, and investment climate reform interventions.

5. The Multilateral Investment Guarantee Agency (MIGA) has $116.1 million of gross exposure in three projects in Afghanistan. MTN is a joint project with IFC in the country’s critical telecommunication sector. The other two projects support dairy and cashmere production. MIGA’s global priorities for FY 2018–2020 are support for Foreign Direct Investment (FDI) projects in IDA countries, in fragile and conflict-affected states, as well as expanded commitment to climate change mitigation and adaptation. Afghanistan is an important country for MIGA in terms of delivering on these objectives. In 2013, MIGA launched its Conflict Affected and Fragile Economies Facility that uses donor partner contributions and guarantees, as well as MIGA guarantees, to provide an initial loss layer to insure investment projects in fragile and conflict contexts. This facility has been used to boost MIGA’s exposure in Afghanistan. In FY 2018, the IDA 18 Private Sector Window (PSW) MIGA Guarantee Facility (MGF) (PSW MGF) was launched. PSW MGF provides another risk mitigation solution executed by MIGA to support cross-border private sector investments in eligible IDA countries including Afghanistan. The first PSW MGF project in the Afghan raisin processing sector received approval by the WBG’s Board of Directors in March 2018.

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

(As of March 2018)

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 2017 and 2018. 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. Since the adoption of the Afghanistan National Peace and Development Framework (ANPDF), the World Bank’s engagement has become increasingly programmatic. Underpinned by advisory work, both policy and investment lending focus on the main engagement clusters: macro-fiscal management and institution building, stimulating private investments and growth to create jobs, governance and anti-corruption, human capital development and service delivery, citizen engagement and gender equality, as well as urbanization, infrastructure, and connectivity. Regarding economic management, since 2016, 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 and stability. Under the ARTF, the Incentive Program (IP) provides funds for achievements in structural reform. Since January 2013, the IP has also supported the government’s operation and maintenance expenditures. The IP provided a total financing envelope of US$900 million for 2015–17. The Bank also approved a US$100 million Development Policy Grant in May 2017 supporting a range of policy and legislative reforms to expand opportunities for the vulnerable and enable private sector development. The new Incentive Program for 2018–20 is currently under preparation.

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 (PFM); 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 March 2018)

1. Asian Development Bank (ADB) is Afghanistan’s leading partner in infrastructure and regional cooperation and brings in-depth experience delivering projects in fragile and conflict-affected situations. Afghanistan is a founding member of the ADB, which was established in 1966, and has since been supported by ADB over two periods. ADB resumed its partnership with Afghanistan after a hiatus from 1980 to 2001 and works with other development partners to support the country’s national development strategies and its national priority programs to establish a stronger foundation for growth and poverty reduction. ADB provided over US$4.4 billion in assistance during 1967–2017. ADB directs most of its financial assistance to address Afghanistan’s development needs for energy, transport, and agriculture and natural resources. ADB is also supporting inclusive economic growth, helping Afghanistan integrate better with its neighbors, and improving the efficiency and effectiveness of government. ADB’s support to Afghanistan is closely aligned with the country’s foremost development priorities, including the Afghanistan National Peace and Development Framework (ANPDF), the self-reliance and reform agendas, and National Priority Programs (NPPs).

2. Current ADB operations in Afghanistan are based on the Country Operations Business Plan (COBP) 2018–20 that operationalizes the priorities under the Country Partnership Strategy (CPS) 2017–21. The CPS, endorsed by ADB’s Board of Directors in October 2017, aims to establish a stronger foundation for more inclusive and sustainable growth in Afghanistan and to prevent the poverty rate from worsening. The CPS and COBP are aligned with ANPDF, the National Infrastructure Plan (NIP), and NPPs. ADB is basing its operations on three strategic pillars: (i) expanded access for women and men to economic opportunities, markets, and services; (ii) stronger institutions and human capacities; and (iii) increased environmental sustainability, climate change resilience, and disaster resilience. Under the CPS and COBP, ADB is expected to provide Afghanistan around US$231 million in grants annually through 2021, including US$5 million for disaster risk reduction. ADB operations will continue to focus on three priority sectors—energy, transport, and agriculture and natural resources, with special attention to regional cooperation, governance, and capacity building. ADB supports co-financing of its projects to increase synergies by combining the strengths of development partners, governments, commercial organizations, and ADB itself. As of 31 December 2017, cumulative sovereign official co-financing commitments for Afghanistan amounted to US$1.01 billion. This figure comprises both contractual (including ADB-administered trust funds) and collaborative co-financing. Total cumulative contractual co-financing for the same period amounted to US$991.21 million, of which US$963.10 million is for 28 investment projects and US$28.11 million is for 18 technical assistance projects.

3. ADB and the government work together to promote and attract more donors to the Afghanistan Infrastructure Trust Fund (AITF) to finance and co-finance projects and provide a larger resource envelope for Afghanistan. AITF, administered by ADB, is the only dedicated trust fund for infrastructure development in Afghanistan. It provides an efficient mechanism for bilateral, multilateral, and individual contributors in financing infrastructure investments and improve the livelihood of the Afghan people through infrastructure. AITF allows development partners to meet the pledge of 50 percent on-budget expenditure and 80 percent alignment with NPPs as agreed in the 2010 Kabul Conference. As of 31 December 2017, AITF donors committed US$808.93 million. The total amount received was US$566.86 million. In 2017, Afghanistan received US$60.00 million grant co-financing from AITF for the Energy Supply Improvement Investment Program—Tranche 4, and US$15.00 million loan co-financing from the Islamic Development Bank for the Energy Supply Improvement Investment Program—Tranche 3.

4. ADB is the largest on-budget donor in the transport sector. As of December 2017, ADB has provided US$2.418 billion in on-budget assistance for 17 key road projects to construct or upgrade over 1,700 kilometers 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. In addition, ADB is 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 to increase passenger volumes, which are 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 carried around 3.9 million tons of freight in 2017. ADB supported the establishment of the Afghanistan Railway Authority to regulate and ensure the sustainability of the railway sector.

5. In the energy sector, ADB has helped deliver electricity to more than 5 million people in Afghanistan who often used to receive 4 hours or less of power in the early 2000s. To date, ADB has provided nearly US$1.175 billion to support energy infrastructure in Afghanistan. An additional US$1 billion is planned for the energy sector during 2016–24. These projects include construction of: (i) 1,500 km of power transmission lines, (ii) 16 substations, (iii) 143,000 new power distribution connections to the electricity grid and system, and (iv) 10 gas wells, to strengthen the country’s energy supply chain. ADB’s technical assistance projects have provided policy and analytical support through the Inter-Ministerial Commission for Energy (ICE), Renewable Energy Roadmap, Gas Sector Development Master Plan, and Energy Sector Master Plan. ADB is also contributing to policy dialogue and donor coordination in the sector, including the financing of a master plan 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-Uzbekistan-Tajikistan-Afghanistan-Pakistan (TUTAP) electricity project, the Turkmenistan-Afghanistan-Pakistan-India (TAPI) natural gas pipeline project, and the Turkmenistan-Afghanistan-Pakistan (TAP) power interconnection project.

6. The natural resources sector is another government priority sector assisted by ADB. As of December 2017, total investment reached US$478 million to: (i) rehabilitate and establish new irrigation and agricultural infrastructure, (ii) strengthen the institutional environment to facilitate economic growth, and (iii) improve water resources management. Around 300,000 hectares of irrigated land have been rehabilitated and upgraded, with work continuing on an additional 300,000 hectares. The investments have led to a more efficient use of water resources, a rise in agricultural productivity, and improved farm livelihoods.

7. 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.

8. ADB’s private sector operations in Afghanistan began in 2004. As of 31 December 2017, cumulative approvals in six transactions in Afghanistan amounted to US$198.1 million. ADB provided financing to Telecom Development Company Afghanistan Limited (Roshan) with direct loans totaling US$130 million for Phase 1, Phase 2 and Phase 3 of the project, and B loans and a political risk guarantee. The project addressed unmet demand for affordable telecommunications service and expanded data networks, mobile money, e-commerce, and telemedicine. In 2012, this project received an award for Excellence in Fragile States Engagement from the US Treasury. Roshan Telecom became a multinational company in March 2014. In another private sector project, ADB invested US$2.6 million in Afghanistan International Bank (AIB), the first private commercial bank in the post-Taliban era. Through its investment, ADB was able to support tangible development in financing and supporting SMEs. 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.

9. 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. ADB supported the preparation of the National Infrastructure Plan (NIP) and Senior Official Meeting (SOM) 2017 in Kabul. ADB is a member of the 5+3+31 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 regards to project design and implementation.

Statistical Issues

(As of March 2018)

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Table of Common Indicators Required for Surveillance

(As of April 4, 2018)

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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

5+3+3 is a group of countries/organizations that support Afghanistan. The five countries are US, UK, Japan, Germany and the EU. Canada, Australia, Denmark are the first three and the last three are the UNAMA, World Bank, and ADB.

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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