Statement by IMF Staff on Donors’ Senior Officials Meeting on Islamic Republic of Afghanistan

September 5, 2015

As prepared for delivery

This statement provides an overview of Afghanistan’s program being monitored by the staff of the IMF. It discusses recent economic developments and the implementation of the Staff Monitored Program (SMP), which was approved in May 2015 and covers the period April–December 2015. Preliminary data show program targets have been met through June and significant progress in implementing structural benchmarks. In early September, an IMF mission will meet with the authorities to review performance under the SMP to confirm these preliminary findings. The authorities have also taken steps to address the vulnerabilities with regard to revenue collection and the banking sector.

In 2014, political and security uncertainties were a drag on economic activity, but macroeconomic stability was maintained. Election related delays and security concerns affected confidence in the economy and growth declined. Fiscal and banking sector vulnerabilities emerged in 2014. Lower revenue and continued expenditure resulted in a severe erosion of the treasury’s cash balance and the emergence of arrears. Uncertainties also weighed on the banking sector. The financial positions of some banks deteriorated (lower asset quality and capital) in early 2014. Eight of the 15 banks were classified as weak (rated three, four or five according to CAMEL methodology). Two important banks were very vulnerable. Nonetheless, some progress was made with economic governance legislation. New anti-money laundering (AML) and countering the financing of terrorism (CFT) laws were enacted in mid-2014.

In 2015, economic vulnerabilities have been reduced. The delays in appointing a new government and attacks by insurgents have slowed the recovery in economic confidence and growth has remained subdued, despite a good harvest, while inflation has declined because of weak domestic demand and the impact of lower global fuel and food prices.

The fiscal vulnerabilities were addressed through donor support and policy actions. Domestic revenue collection increased in the first six months by 12 percent (to Af 52 billion) because of improved compliance. Tariff increases, however, yielded less than projected as traders cut their import orders. While execution of the operating budget underperformed, owing to delays in budget approval and centralization of the public procurement, development expenditures increased, as 2014 arrears were repaid.

In the banking sector, action has been taken to address vulnerabilities. In late 2014, corrective measures started to be implemented and in 2015, enforcement actions against all weak banks were in place and decisive actions were taken to strengthen the capital of the two vulnerable banks.

Monetary growth has declined this year. Lower confidence and the impact of restructuring measures taken by weak banks reduced monetary growth, while higher emigration and uncertainty boosted the demand for foreign exchange, resulting in downward pressures on the Afghani and some reserves loss.

Progress has been made with economic legislation. The AML law was amended by presidential decree in April 2015, CFT regulations finalized in October 2014, and the banking law was enacted in August 2015.

In May 2015, IMF management approved a nine-month Staff-Monitored Program (SMP) covering AprilDecember 2015. The SMP aims to address fiscal and banking vulnerabilities, preserve macroeconomic stability, and help lay the ground for sustainable inclusive growth. The SMP is also designed to build a track record of policy implementation that would support a possible future request for a Fund financial arrangement.

Preliminary data show program targets have been met and significant progress in implementing structural reforms, despite worse-than-expected security conditions and delays in forming a government.

  • All end-June 2015 quantitative targets have been met. Higher-than-programmed revenue contributed to meeting fiscal targets. Monetary targets were also met, including that on the adjusted net international reserves.

  • Progress on structural reforms has been significant, but slower than planned. Three of the four June benchmarks have been implemented, with delays. Revenue measures, including the increase in the business receipts tax, introduction of a telecommunications tax, and increases in the fuel fees collected at customs, were implemented by decree on August 19. The banking law was also issued by decree on August 19. The structural benchmark on hiring an independent party to audit bad debt recoveries at a state bank has been met. Issuing a regulation on currency reporting has been partially met.

  • Follow-through on earlier reforms has proceeded mostly as planned. DAB did communicate its enforcement actions to the vulnerable systemic bank, which has increased its capital above minimum levels and is working to reduce its large exposures and foreign exchange open position. The tax policy measures that did not need parliamentary approval were implemented. For the other vulnerable bank, a five-year operating strategy has been prepared and is being reviewed by DAB. Chief Operating and Credit Officers have been hired, but a qualified candidate for Chief Executive Officer has not, because it has not been possible to identify a qualified candidate that is interested in the position. Unaudited financial statements indicate that the end-June capital target for this bank was met. The private systemic bank has been recapitalized, preparations for the sale of New Kabul Bank proceed, and a draft DAB regulation on AML preventive measures for financial institutions has been prepared. Implementation of structural benchmarks to strengthen the revenue administration is on track.

An IMF staff mission will meet the authorities during September 8–21 to assess the medium-term macroeconomic outlook and conduct discussions on the first review of the SMP. The mission will also follow up on the implementation of revenue measures, review budget execution, the treasury’s cash position, and assess progress in financial sector and governance reform. The authorities have identified measures to offset the impact of delayed implementation of revenue measures. The mission will seek revisions to the currency reporting regulation to meet FATF standards and follow up on recruitment of a Chief Executive Officer for the vulnerable state bank.

Given Afghanistan’s considerable development and security needs, donor financing will be needed over the medium term. Continued provision of substantial external grant financing is needed to support the move toward fiscal sustainability and to enhance confidence in the Afghan economy.

IMF staff welcomes the progress made by the new administration in pressing ahead with economic reform. IMF staff will remain closely engaged with the Afghan authorities to support economic policy design and implementation of economic reforms. The IMF wishes to support and contribute to the administration’s efforts to address economic challenges and lay the foundation for high and inclusive growth for the Afghan economy.


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