Request for Disbursement Under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for the Islamic Republic of Afghanistan

Abstract

Request for Disbursement Under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for the Islamic Republic of Afghanistan

This debt sustainability analysis (DSA) assesses Afghanistan’s external and overall risk of debt distress as high.1 Afghanistan’s debt sustainability depends on donor grants inflows (currently around 38 percent of GDP) to finance underlying fiscal and external deficits. Both external and public debt will remain low and mechanical signals over the 10-year horizon suggest moderate risk of debt distress. However, as grants are expected to decline over the medium and long term and be replaced by debt financing, the mechanical risk ratings based on extended 20-year periods are used. One of these—the ratio of present value of debt to exports—breaches the threshold under the baseline scenario, suggesting the high-risk rating. Political uncertainty, threat of violence, deeper than expected drop in aid, and weather shocks all provide significant downside risks. The authorities should continue improving revenue mobilization and strengthen debt management capacity, including effective monitoring of state-owned corporations (SOC) and public private partnerships (PPPs). In addition, Afghanistan should continue improving its debt carrying capacity through diversification of exports and strengthening debt management, including through local debt market development.

Islamic Republic of Afghanistan Joint Bank-Fund Debt Sustainability Analysis1

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Debt coverage is the same as in the previous DSA which includes central government and central bank borrowing on behalf of the government.

Afghanistan’s Composite Indicator score is 2.61 and its debt-carrying capacity is assessed to be weak based on the October 2019 WEO and CPIA 2019.

Metrics used for the long term are averages over the 2025–39 period for the previous DSA and the 2026–40 period for this DSA.

Table 1.

Islamic Republic of Afghanistan: External Debt Sustainability Framework, Baseline Scenario, 2017–40

(In percent of GDP, unless otherwise indicated)

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Sources: Countr y authorities; and staff estimates and projections.1/ Includes both public and private sector external debt.2/ Derived as [r – g – ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.3/ Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.4/ Current-year interest payments divided by previous period debt stock.5/ Defined as grants, concessional loans, and debt relief.6/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).7/ Assumes that PV of private sector debt is equivalent to its face value.8/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projectio n and the next 10 years.
Table 2.

Islamic Republic of Afghanistan: Public Sector Debt Sustainability Framework, Baseline Scenario, 2017–40

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates a nd projections.1/ Coverage of debt: The central government, central bank. Definition of external debt is Currency-based.2/ The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections.3/ Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt.4/ Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period and other debt creating/reducing flows.5/ Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question.6/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Table 3.

Islamic Republic of Afghanistan: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2020–30

(In percent)

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Sources: Country authorities; and staff estimates and projections

Variables include real GDP growth, GDP deflator (in U.S dolar terms), non-interest currert accourrt inpercert of GDP and non-debt creating flows.

Includes offidal and private transfers and FDL

Table 4.

Islamic Republic of Afghanistan: Sensitivity Analysis for Key Indicators of Public Debt, 2020–30

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Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP.

Includes official and private transfers and FDI.

Figure 1.
Figure 1.

Islamic Republic of Afghanistan: Indicators of Public and Publicly Guaranteed External Debt Under Alternatives Scenarios, 2020–40

Citation: IMF Staff Country Reports 2020, 143; 10.5089/9781513542591.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2030. Stress tests with one-off breaches are also presented (if any), while these one-off breaches are deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.2/ The magnitude of shocks used for the commodity price shock stress test are based on the commodity prices outlook prepared by the IMF research department.
Figure 2.
Figure 2.

Islamic Republic of Afghanistan: Indicators of Public Debt Under Alternatives Scenarios, 2020–40

Citation: IMF Staff Country Reports 2020, 143; 10.5089/9781513542591.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2030. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.
Figure 3.
Figure 3.

Islamic Republic of Afghanistan: Drivers of Debt Dynamics—Baseline Scenario

Citation: IMF Staff Country Reports 2020, 143; 10.5089/9781513542591.002.A002

1/ Difference betw een anticipated and actual contributions on debt ratios.
Figure 4.
Figure 4.

Islamic Republic of Afghanistan: Realism Tools

Citation: IMF Staff Country Reports 2020, 143; 10.5089/9781513542591.002.A002

1/ Historical private and public investment rates are different from previous DSA due to data revisions.
1

This joint World Bank/IMF Debt Sustainability Analysis (DSA) has been prepared in the context of the 2020 request for emergency financing from the Fund, RCF. The macro framework underlying this DSA is the same as that included in the staff report of the 2020 RCF request which reflects recent global and domestic developments. The current macroeconomic framework reflects currently available information. However, updates with respect to economic impact and policy response to the COVID-19 crisis are rapidly evolving and risks are heavily tilted to the downside.

Islamic Republic of Afghanistan: Request for Disbursement Under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for the Islamic Republic of Afghanistan
Author: International Monetary Fund. Middle East and Central Asia Dept.
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    Islamic Republic of Afghanistan: Indicators of Public and Publicly Guaranteed External Debt Under Alternatives Scenarios, 2020–40

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    Islamic Republic of Afghanistan: Indicators of Public Debt Under Alternatives Scenarios, 2020–40

  • View in gallery

    Islamic Republic of Afghanistan: Drivers of Debt Dynamics—Baseline Scenario

  • View in gallery

    Islamic Republic of Afghanistan: Realism Tools