IMF Executive Board Completes First Review Under the Islamic Republic of Afghanistan's PRGF Arrangement and Approves US$17 Million Disbursement

Press Release No. 07/40
March 7, 2007

CORRECTED: March 8, 2007

The Executive Board of the International Monetary Fund (IMF) completed today the first review of the Islamic Republic of Afghanistan's performance under the program supported by a three-year, SDR 81.0 million (about US$121.7 million) Poverty Reduction and Growth Facility 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 million), which would bring total disbursements under the arrangement to SDR 24.5 million (about US$36.8 million).

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's performance under the Poverty Reduction and Growth Facility supported program remains on track, with positive economic growth, lower inflation, and a better external position. The authorities have also followed through resolutely with their structural reform agenda.

"Real GDP growth of 8 percent is expected in 2006/07, but will likely strengthen in 2007/08 owing to a rebound in the agricultural sector. Inflation has declined and is targeted to remain low. The exchange rate has been relatively stable. The external current account position continues to strengthen, and the level of official reserves remains adequate to deal with external shocks.

"The authorities' fiscal strategy strikes the right balance between addressing critical spending pressures and fiscal sustainability. The 2007/08 budget, which has been submitted to parliament, accommodates additional security expenditures, if financed by donors. The fiscal program is focused on improving revenue mobilization through tax and customs reforms and moving toward a broad based consumption tax, bearing in mind the need to prepare for an eventual decline in donor assistance. Also, expenditures are to be prioritized in keeping with the objectives of the Poverty Reduction Strategy Paper (PRSP), which will be finalized by mid 2008. Efforts are under way to ensure the full participation of stakeholders in the PRSP process.

"The current monetary stance remains appropriate, and helps underpin confidence in the Afghani, the national currency. Monetary policy effectiveness is being enhanced by deepening the capital notes market and improving the monitoring of liquidity and lending by private commercial banks. The authorities have formulated restructuring strategies to deal with the state owned banks. The recently announced merger of the Export Promotion Bank with Bank Pashtany represents an important step in this regard.

"The authorities are increasing their efforts to mitigate the risks to the program. However, the security situation remains tense, with an impact on project implementation and overall macroeconomic performance that cannot be disregarded. The authorities also recognize the need to address governance concerns and speed up the pace of reforms.

"Considerable progress has been made in the negotiations on rescheduling Afghanistan's debt to Paris Club creditors. Preparations are under way for the assessment of Afghanistan's eligibility for debt relief under the Heavily Indebted Poor Countries Initiative," Mr. Portugal said.

The PRGF is the IMF's concessional facility for low-income countries. PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in the Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty.

PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5½-year grace period on principal payments



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