Islamic Republic of Afghanistan -- Statement of the IMF Staff at the Conclusion of the Staff Visit

July 24, 2007

Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries). Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, and as part of other staff reviews of economic developments.

Kabul, July 24, 2007

An IMF staff team visited Kabul during July 14-24, 2007. Discussions with the Ministry of Finance and Da Afghanistan Bank focused on maintaining macroeconomic stability, reform priorities for the IMF-supported program, and actions to be taken in the context of the Heavily Indebted Poor Countries Initiative. The mission explored with the authorities ways to bolster domestic revenue performance and reached preliminary understandings on reversing recent adverse trade policy measures. The mission and the authorities also discussed the next steps in preparing the Afghanistan National Development Strategy.

1. Performance under the IMF-supported program was broadly satisfactory over the first quarter of 2007/08, with the notable exception of government revenue falling about 8 percent short of target. Nonetheless, preliminary data suggest that expenditure restraint permitted the observance of the operating budget deficit and domestic bank financing targets. The monetary stance remained appropriate, and the currency in circulation and net international reserves targets also appear to have been met. Rising prices of imported foodstuffs contributed to the recent increase in consumer prices. The firming up of the Afghani vis-à-vis the U.S. dollar—reflecting increased supply of foreign currency in the market—mitigated inflationary pressures.

2. The domestic revenue shortfall in the first quarter of 2007/08 raises concern about the government's commitment to revenue reform. Lack of high-level support for key revenue measures, difficulty in enforcing administrative decisions, and under-resourcing of the revenue department are undermining the authorities' track record of good revenue performance. The mission explored with the authorities possible measures to bring revenues back on track. The mission stressed that it will be critical to build a strong government consensus to support the Ministry of Finance (MoF) efforts to reform revenue policy and administration. A forthcoming strategy document, intended to clarify the tax policy framework, should provide a strong public statement in this regard. The mission welcomes recent decisions to re-staff the revenue department and resist reinstating tax holidays.

3. The authorities continued to make progress in preparing the Afghanistan National Development Strategy (ANDS), but will need to step up efforts to meet their stated objective of completing it in early- to mid-2008. The mission discussed the authorities' plans to cost and align priority sector strategies with the 2008/09 budget, and underscored the importance of a consistent medium-term macroeconomic and fiscal framework guiding the ANDS. Engaging all stakeholders—including the MoF, DAB, ANDS Secretariat, Central Statistics Office, and donors—will be crucial to cost accurately and prioritize effectively across sector strategies. In this connection, the mission welcomes that the MoF will take the lead in costing sector strategies and use the Medium-Term Fiscal Framework to set a resource envelope reflecting the government's fiscal policy objectives.

4. DAB continued to strengthen its monetary policy framework and operations, and implement its broad-based reform agenda. While implementation of the accounting system has reached an advanced stage, there is a need to strengthen the system of control and reconciliation. These efforts need to be complemented by training. Weaknesses revealed by the draft 2006/07 external audit should be addressed. In light of the rapid growth in commercial bank activity, the mission urges the authorities to improve banking supervision and put in place regulations on credit risk management, including credit-granting standards and credit monitoring processes. In this connection, the mission welcomes the intention to increase the number of advisors in the banking supervision department and develop a comprehensive plan on how to strengthen supervision.

5. The mission welcomes the government's commitment to unwind recently introduced ad-hoc and discretionary trade policy measures. Of most concern were the doubling, to 40 percent, of the tariff rate on soft drinks and bottled water, and the discretionary application of a 1 percent rate—instead of regular rates—on raw materials and intermediate goods for selected producers. The authorities' plan to reverse these policies will contribute to achieving their stated objective of a streamlined and transparent trade regime that is simple to administer and provides a level playing field. Nevertheless, a systematic review of the customs regime may be needed to correct distortions and, in the interim, the authorities should refrain from ad-hoc changes to tariff rates.

6. The mission also welcomes the renewed focus on legal compliance and good financial governance in public institutions. In this context, the mission encourages the authorities to proceed in a way that fosters accountability, while safeguarding DAB's operational independence and the effective functioning of the Ministry of Finance.

7. Progress has been made toward restructuring the remaining state-owned banks. The external audit of Bank Millie has been completed and an external audit has commenced at Bank Pashtany. Bank Millie started its restructuring, while Bank Pashtany recently finished the preparation of its restructuring plan. The mission urges the interim management teams of both banks to take the steps necessary to enable the unconditional renewal of their licenses. More generally, progress in restructuring and privatizing public enterprises continues to be slow. The mission welcomes the authorities' intentions not to support Ariana, which is in line with the program understandings.

8. Economic growth and good progress in structural reforms create the opportunity for raising the living standards of all Afghans. Nevertheless, redoubled efforts are needed to overcome bottlenecks in critical areas, notably electricity supply, to maintain this positive momentum. In this context, the mission would like to underscore that the government's reform program would benefit from better coordination among donors, and between donors and the authorities.

9. The mission will return to Kabul in October/November 2007 to conduct discussions for the third review under the PRGF-supported program and the 2007 Article IV consultation.

10. As on previous occasions, we very much appreciated the open and frank dialogue with the Afghan authorities and other public and private sector representatives. We would like to thank them for the time and effort that they put into the discussions.


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