Program note
Islamic Republic of Afghanistan
Last Updated: December 16, 2009
Current IMF-Supported Program
Three-year US$120 million loan under the Poverty Reduction and Growth Facility (PRGF), approved by the IMF’s Executive Board on June 26, 2006. The Board completed the fifth review of the program on April 22, 2009.
The arrangement will expire in March 2010.
Background
Seven years have passed since the Taliban regime was toppled at the end of 2001, leaving behind extraordinary challenges: destroyed infrastructure and institutions, half of the country’s (pre-1979) population dead, crippled, homeless, or exiled, and many of those that survived living in abject poverty.
The most pressing economic tasks involved restoring economic stability, beginning to rebuild the country’s institutions, and laying the foundations for growth and the eradication of poverty. The challenge was all the greater because of the simultaneous need to reform the political process and pave the way for a democratic government, while also trying to contain an unstable security situation and reverse an ingrained culture of corruption.
Role of the IMF
The IMF became involved in Afghanistan in 2002, sending staff teams to assist on rebuilding economic institutions and provide advice to the government on macroeconomic policy and reform. The relationship strengthened in 2004 with a Staff Monitored Program that established a track-record for a full program supported by the PRGF, which the country entered into in 2006.
The program aims to continue the process of rebuilding key economic institutions, putting public finances on a sustainable path, and laying the foundation for growth and poverty reduction. Heavily dependent on donor support from the outset, a key long-run objective of the program is also to move towards fiscal independence.
The program seeks to address these challenges by strengthening institutions and governance and reforming public enterprises while ensuring economic stability and low inflation. The program focuses on measures to increase tax revenues and improve governance in tax agencies, strengthen the monitoring of public enterprises, and keep inflation low.
In addition, the Fund is providing technical assistance to help Afghanistan develop monetary instruments, strengthen the central bank and banking supervision, modernize foreign exchange regulations, reform tax and customs administration, and enhance public financial management.
Satisfactory performance under the program and other conditions will allow for nearly 100 percent debt relief from key creditors of Afghanistan under the Highly Indebted Poor Country (HIPC) initiative.
Progress to Date
During the first two years of the program, growth averaged about 10 percent per year, although this fell back to about 3½ percent in fiscal year 2008/09 because of a drought. Inflation ranged from 5 percent in 2006/07 to over 20 percent in 2007/08 (because of the surge in commodity prices). Growth is expected to recover to nearly 15 percent in 2009/10 in light of a strong recovery in agriculture and higher donor inflows, and inflation is targeted to reach no more than 6 percent.
One area where performance was disappointing is in raising domestic revenue. Government revenues have remained around 7 percent of GDP in recent years, one of the lowest ratios in the world. With total spending in excess of 20 percent of GDP, the gap has to be covered by donors—a situation that must be redressed as the country aims at reducing its dependence on external aid. Revenues have recovered since early 2009, and are expected to increase to more than 8 percent of GDP in 2009/10.
The Challenges Ahead
There has been progress under the program across a range of objectives. However, the deteriorating security situation over the past few years has created a great deal of uncertainty, facilitated the expansion of illicit poppy cultivation, and encouraged corruption. This has slowed implementation of the reform agenda.
In the current fiscal year, the government has committed to focus its reforms on improving governance in customs and tax administration and tightening controls of key public enterprises. This should pave the way for a more ambitious economic reform program for the next three years.
