IMF Executive Board Completes Second Review Under the PRGF Arrangement with the Islamic Republic of Afghanistan, Approves US$17.2 Million Disbursement, and Agrees on Afghanistan Reaching the Decision Point Under the Enhanced HIPC Initiative

Press Release No. 07/154
July 9, 2007

The Executive Board of the International Monetary Fund (IMF) completed today the second review of the Islamic Republic of Afghanistan's performance under the economic program supported by a three-year, SDR 81.0 million (about US$123.4 million) Poverty Reduction and Growth Facility (PRGF) arrangement (see Press Release No. 06/144). Completion of the review enables the release of an amount equivalent to SDR 11.3 million (about US$17.2 million), which would bring total disbursements under the arrangement to SDR 35.8 million (about US$54.5 million).

Executive Directors also agreed that the Islamic Republic of Afghanistan has taken the steps necessary to reach the decision point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative. The IMF Executive Board decision follows consideration of the decision point document by the World Bank Executive Board on July 3. A separate press release regarding these deliberations will be issued jointly with the World Bank.

At the conclusion of the Board's discussion of Afghanistan's performance under its IMF-supported economic program, Mr. Murilo Portugal, Deputy Managing Director and Acting Chairman, issued the following statement:

"Despite a difficult security environment and persistent expenditure pressures, Afghanistan continues to maintain macroeconomic stability and move forward with its structural reform agenda. Performance during 2006/07 conformed broadly with the objectives of the PRGF-supported program.

"Real GDP growth is projected to increase strongly in 2007/08, owing primarily to a rebound in agriculture. Inflation is expected to remain contained at 6 percent. The program's fiscal objectives are to increase both revenues and development expenditures. In the event of revenue shortfalls, the authorities are prepared to accelerate reforms to ensure that longer-term expenditure corrections can be avoided. Continued strong donor support and a comfortable official reserves position should provide an adequate buffer for external shocks.

"The continued success of the program will hinge on maintaining macroeconomic discipline and deepening structural reforms. Fiscal policy should pay increasing attention to medium-term sustainability, and the medium-term fiscal framework should serve to underpin fiscal policy design and donor engagement. Reinvigorating government-wide support for the revenue reform agenda and avoiding ad hoc policies that erode the revenue base will be crucial to strengthen revenue mobilization and attain the program's fiscal objectives. The authorities are also encouraged to accelerate the restructuring and, where appropriate, the divestment of state-owned banks and enterprises.

"The current monetary stance remains appropriate, with growing confidence in the Afghani. The deepening of the capital notes market should enhance the effectiveness of monetary policy. Looking ahead, the authorities intend to strengthen bank supervision and introduce regulations on managing credit risk," Mr. Portugal said.



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