Transcript of a Conference Call on Afghanistan Article IV Consultation

May 22, 2014

Washington, D.C.
Wednesday, May 21, 2014

Paul Ross, Mission Chief for Afghanistan, Middle East and Central Asia Department
Randa Elnagar, Communications Officer, Communications Department

MS. Elnagar: Good morning. This is the conference call on 2014 Article IV Consultation for Afghanistan Economy. The call is under embargo until 9:00 a.m. Eastern Standard Time.

I have with me Mr. Paul Ross, the Mission Chief for Afghanistan who's going to give the opening remarks and answer your questions. Thank you.

MR. ROSS: Good morning everybody and thank you for joining the call this morning. If I may, I'd like to start with a few opening remarks, and then we can discuss any questions that you have.

The IMF Board, has just concluded the Article IV Consultation which is the annual review on the economy for Afghanistan. I'd like to start by highlighting a few key issues.

First of all, I'd like to say that Afghanistan has made a lot of progress in reconstruction, development and lifting incomes of its population over the past 12 years. With significant reform efforts and donor support from the international community Afghanistan has maintained macroeconomic stability, by which I mean: low inflation, low debt, a balanced budget, and a small surplus in its external current account.

It has also implemented important structural reforms to build up its economic institutions. It also accumulated some policy buffers. In particular, it has a very comfortable international reserves position equivalent to about seven months of imports.

The IMF has been supporting Afghanistan, both through technical assistance, to help it build up its economic institutions, policy advice, and also an IMF program. The most recent program began in November 2011. It's a three year extended credit facility arrangement.

Now, the second issue I'd like to point to that this a crucial year, 2014, because of political and security transitions. The presidential elections are underway, and the drawdown of international troops is scheduled to be completed by the end of this year.

Then we enter the transformation decade which will go from 2015 to 2024 when Afghanistan moves through its transformation to become a stronger and less donor-dependent economy.

Now, assuming a smooth political and security transitions, continued reform efforts, and donor financing, the outlook for Afghanistan economy should be positive. Macroeconomic stability will need to be maintained. Structural reform will continue to need to be pursued. But if it is, and there's political stability, as well as continued donor support, there should be inclusive growth which should help lead to a broad-based improvement in living standards and employment for all of the Afghan population.

There are, of course, risks. Many are on the downside. Those risks relate to domestic and regional security developments, political developments in Afghanistan, a risk of some inadequate implementation of economic policies, or possible donor fatigue. They are things to keep an eye out for and be prepared to manage.

Last of all, I'd like to say that the strategy the government and Central Bank have is the right one in our view, which is to maintain macroeconomic stability, strengthen the financial sector, improve economic governance, and move toward fiscal sustainability.

Sustained implementation of this strategy will safeguard growth, and allow the government and Central Bank to manage any economic shocks that arise.

This strategy’s policies should continue to strengthen revenue collection, manage money growth to control inflation while preserving exchange rate facility, strengthen banking supervision, and move ahead enacting key economic laws including the anti-money laundering, countering the financing of terrorism, banking law, Central Bank law amendments and value added tax legislation.

So those are my remarks. I'd be happy to respond to questions that you may have. Thank you.

QUESTIONER: I've got a quick question. There was a report, I forget exactly what it was, IMF report of, I think last February, that estimated, I think it was Afghanistan would need donor support in the civilian aid and development side through 2032. I’m trying to remember. You might have a better idea of that.

Does that still hold? What's your current sense of -- I mean, your current projection? How long Afghanistan will need aid from the international community to support its government? Outside of security forces.

MR. ROSS: I don't have an exact time frame. But on the development side in Tokyo donors made a commitment through 2015 of specific amounts, and they also committed to continue assistance at similar levels through 2017. I would imagine the development assistance will continue beyond that.

In terms of Chicago, you know, the security partners at the NATO summit, there were pledges for a 10 year period. Both of sets of pledges will be revisited in future NATO summits and future donor conferences.

Now, to speak more directly to your question, Afghanistan has quite extensive needs for security and development spending over the next 10 to 20 years. I think that domestic revenue will need to increase, but there will be a gap between domestic revenue and expenditure needs.

So there will be a need for continued donor support. Now, I don't exactly have an endpoint because it would depend how successful revenue mobilization efforts are. But a key message is that, you know, the government made very good progress between 2007 and 2011 in increasing revenue efforts.

Over the past two years, partly because of economic shocks and other factors, revenue mobilization has not been successful. One of the challenges going forward is to reinvigorate that effort and really make it move ahead because that's one of the keys to Afghanistan's economic sustainability and greater economic independence. Because the more domestic revenue that can be mobilized, the more able Afghanistan is to meet its own development and security needs.

QUESTIONER: Do you know what its current revenue was in the last fiscal year?

MR. ROSS: Yes. It was about 9.5 percent of GDP.

QUESTIONER: Do you know the total dollar figure or AF figure?

MR. ROSS: Yes. It's in the report; I think it was 109 or 110 billion Afghanis.

QUESTIONER: I mean, is there a plan in place for increasing revenue? That seems like a pretty significant drop from the high watermark. Obviously, that leads a huge gap in terms of how to finance --

MR. ROSS: Yes.

QUESTIONER: -- pay for themselves.

MR. ROSS: There is a strategy. The strategy has four main pillars, I would say. One is to improve compliance. Compliance has suffered in the past couple of years. I think that with the elections out of the way hopefully they'll be more scope for better compliance which is crucial and will need to be improved over time. It's also something that can be started quickly, providing there's a political consensus.

Second, the value added tax. As you know, the government has submitted a law to Parliament. It's being discussed. It's important that the 10 percent rate proposed is maintained.

Then it's important that the government continue to move ahead with preparing the ground for the introduction to VAT which needs to be done carefully.

In particular, the Tax Administration needs to be prepared, and the government needs to reach out and educate tax payers and the private sector as to how the VAT will operate so it will be introduced smoothly.

Third, the mining sector. As you know, there are some contracts that have been signed. One of the projects has begun. Others will begin, we hope, later this decade. There's significant potential revenue there.

That will not only depend on moving ahead with these projects, but also improving the business environment so the companies that are working on these mines can go about their business in an effective way.

Fourth, there will be a need for, probably, some new taxes to be introduced in addition to the VAT over time. The obvious ones are excise taxes which can be introduced. We'll be working with the government on these areas as we have been in the past.

Also, the other thing I want to raise is that, you know, another important reason for raising taxes is so that Afghanistan has enough money to address its social needs and protect the poor and vulnerable. It's just introduced a new benefit for the disabled and martyrs which is a good thing to help protect vulnerable groups. But you need revenue to be able to make good on providing that needed social protection.

QUESTIONER: On the banking law, you know, some of these banks have some questionable practices or clientele. They all have swift codes at the moment which gives them a pretty big entering into the international financial system. If the banking law isn't passed, if regulations aren't improved, what's the long-term diagnosis there?

Do they lose that access? Do they keep it? I mean, what are the self-protection mechanisms there? It seems like a pretty big backdoor into legitimate banking around the world.

MR. ROSS: I think, One of the issues related to Afghan commercial banks’ correspondent relationships is to move ahead and enact anti-money laundering and countering financing of terrorism legislation that are in line with the Financial Action Task Force’s recommendations.

My understanding is that the new laws were presented to Parliament yesterday. We see that as an important step because in the report you'll see that some banks are facing some difficulties in maintain and establishing correspondent banking relations.

I think because of the types of reasons that you've just mentioned the banking law also, when it's passed, will help. But there are some other initiatives that are ongoing that should also help banks to improve their governance. Which I think is our way of saying that, you make sure that they're dealing with the right customers in the right way.

They are the improvements in banking supervision. One is that the Central Bank has adopted a five-year strategic plan last June to improve banking supervision. It's moving ahead with its implementation.

Two is that new regulations have been prepared to actually help implement the new banking law, as soon as it is passed by the Parliament.

Three is, the supervision efforts are not only on the banking side, they're also related to improving supervision related to anti-money laundering and countering of the financing of terrorism.

Fourth, the banking law does have provisions for improved corporate governance. So again, that should help banks know better their customers, and avoid some people using the banks for improper purposes.

QUESIONER: On mines, do you know where they are in terms of getting a mining law passed? I guess, is that waiting for the next president now?

MR. ROSS: I believe the Lower House has passed it. That's my understanding. So I think it needs to go to the Upper House next.

QUESIONER: That's a small victory.

MR. ROSS: Yeah, there's been some progress in the last few weeks on the legislative front.

QUESTIONER: Anything else you'd want to add about, kind of, prognosis here? It's, you know, every kind of look at this is a pretty grim kind of prognosis that it's going to be either really ugly or just not so great, at best not so great. When you look at those assessments what's your reaction, and what do you think?

MR. ROSS: Well, I think that in the short-term, we have to wait for the electoral process to proceed and be completed. I think then the new government will, on the one hand, inherit some challenges. But on the other hand there are a number of reforms that have been prepared.

I think that one of the first things to do will be to take stock of where things are, and decide how to move ahead early on, to really set the tone that the government is determined to ensure that the economy continues to improve.

I think there's an opportunity there for the incoming government to take stock of what has been done, to look at its own priorities, and then set the economic agenda. It will also have other non-economic priorities, but we feel that there will be an opportunity to make significant progress once the new government is in place.

We are ready to work with a new government and provide advice and assistance that they wish to have from the IMF to design an economic program. We'll give our thoughts. But at the end of the day it will be the government's program, and we're very happy to support them, both in terms of technical assistance and also policy advice.

MS. Elnagar: Okay. Thank you very much.

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