ECONOMIC HEALTH CHECK
Economic Gains Prepare Afghanistan for Transition Year
May 21, 2014
- Afghanistan maintains macroeconomic stability, implements structural reforms
- Political, security transitions stress importance of prudent economic policies
- IMF committed to continued close engagement with Afghanistan
With the presidential elections and the drawdown of foreign troops under way, Afghanistan faces a year of transition.
Despite prudent management of the economy and the economic gains made over the past decade, Afghanistan remains one of the poorest countries in the world with very low human development indicators.
To mark the publication of the IMF’s regular assessment of the Afghan economy—the Article IV report—IMF mission chief to Afghanistan Paul Ross reviewed the performance of the country.
IMF Survey: This is an important year for Afghanistan, how do you evaluate the overall economic performance of the country?
Ross: The overall performance of the economy has been good. The efforts of the past 12 years have yielded benefits: inflation and debt are low and international reserves are high. Its budget is balanced after grants and its current account deficit is in small surplus after grants. Also, Afghanistan has managed to implement important structural reforms to strengthen its economic institutions. So I think a lot has been achieved, but there are still risks and vulnerabilities.
IMF Survey: Can you say what are some of the remaining economic challenges and vulnerabilities that the country is facing?
Ross: The risks relate to adverse domestic or regional security developments, political instability, inadequate implementation of economic policies, and donor fatigue. The authorities need to continue to push for prudent fiscal, monetary, and exchange rate policies. They also need to mobilize more domestic revenue for the budget, to manage their expenditure carefully, and to push ahead with structural reforms by passing key economic laws in banking, value-added tax, tax administration, central banking, anti-money laundering and countering of financing of terrorism. Finally, Afghanistan needs to maintain stability in the banking system, and improve economic governance by combating corruption.
IMF Survey: Donor dependency has been highlighted as one of Afghanistan's vulnerabilities Can you tell us how the IMF is advising the government in this area?
Ross: Afghanistan is donor dependent because the country still has a very limited capacity to collect revenues to finance its expenditures. Revenue mobilization has not been particularly strong in the past 12 months, and has declined from 11 percent of GDP in 2011 to 9½ percent in 2013, despite technical assistance from the IMF and other donors. Expenditures need to be prioritized to ensure that salaries are paid on time and to make needed development investments to promote economic growth.
IMF Survey: What is the Fund doing to help authorities strengthen the financial sector after the fallout of the Kabul Bank?
Ross: The IMF has worked with the central bank to improve banking supervision and strengthen the central bank’s capital, governance and accountability. The authorities have also acted: with increased staffing of the banking supervision department and preparation of a new banking law, which is currently being discussed by the parliament. And the IMF has been urging the government to privatize New Kabul Bank, the bridge bank that was created after the Kabul Bank crisis.
IMF Survey: How is the Fund working with other donors in Afghanistan?
Ross: We work very closely with them under the Tokyo Mutual Accountability Framework, established in 2012. Under this accountability framework, the existence of an IMF program provides an anchor for the economic management and reform.
IMF Survey: Can you tell us what is the status of the current program with Afghanistan and how do you see the role for the Fund going forward?
Ross: The current program started in November 2011 and the first review was completed in June 2012. Despite maintaining macroeconomic stability and implementing some structural reforms, subsequent reviews have been delayed as some of the quantitative targets were missed and some of the structural reforms took longer than envisaged to be implemented. Nonetheless, the IMF has maintained a very close dialogue on both policy and technical assistance, and we are ready to discuss a program with the new government as soon as it enters office, if the new government so wishes.
IMF Survey: The Fund witnessed great loss with the death of the Resident Representative in Afghanistan, Wabel Abdallah. Did this affect your relationship with the authorities and when will the Fund assign a new Resident Representative?
Ross: It was a great and terrible tragedy. We've never experienced such a tragedy. We all miss Wabel at the IMF. However, this tragedy does not affect at all the way in which the IMF, as an institution, deals with Afghanistan. On replacing him, we don't have a decision yet. We're in the process of conducting a security review. That review, the needs of the Afghan government and the Afghan central bank, and those of our international partners will determine whether and when a new Resident Representative will be assigned.
IMF Survey: Afghanistan remains desperately poor and lagging behind its neighbors in human development indicators. How can the Fund help?
Ross: Well, I think we can help by continuing to promote macroeconomic stability and improving the functioning of the economy to lift growth and ensure that growth is inclusive, by which I mean broad-based and creating jobs for all the population.