## _cr06251

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---

### Executive Summary — Overview and Objectives
- Government requests a three-year PRGF arrangement in the amount of SDR 81 million (50 percent of quota) to support policies in the I-ANDS and MEFP for April 2006–March 2009.
- Main medium-term objectives (next three years):
  - achieve economic growth of about 10 percent a year;
  - reduce inflation to around 5 percent;
  - raise revenue to above 8 percent of GDP by 2010/11 while improving health and education services;
  - strengthen international reserve cover to about 5 months of imports.
- Key constraints and vulnerabilities:
  - lingering insecurity and weak control over provinces;
  - weak institutional capacity and a fragile social consensus;
  - persistent opium-related activities and expenditure pressures;
  - medium-term uncertainties about donor assistance.

### Performance under the Staff-Monitored Program (SMP) — 2005/06 Outcomes
- Compliance and benchmarks:
  - All end-December 2005 quantitative targets and structural benchmarks were observed except publication of audited 2004/05 core budget financial statements (published in March 2006).
- Real GDP and prices:
  - Real GDP estimated to have grown by 14 percent in 2005/06.
  - Year-on-year inflation in Kabul declined to 9.5 percent in March 2006 from 12.9 percent in September 2005.
- Fiscal outcomes 2005/06:
  - Operating budget deficit excluding grants estimated at 3.7 percent of GDP (program projection: 4.2 percent of GDP).
  - Revenues amounted to Af 13.3 billion during the first nine months of 2005/06 (program target: Af 12.7 billion).
  - Revenue collection estimated at 5.5 percent of GDP for 2005/06 (program target: 5.0 percent of GDP).
  - Core development spending estimated at 5.2 percent of GDP in 2005/06 (less than 40 percent of the MYR projection).
  - External grants to the core budget reached 8.0 percent of GDP in 2005/06.
  - Core budget deficit including grants estimated at 0.9 percent of GDP (program projection: 0.1 percent of GDP).
- Monetary and reserves:
  - Currency in circulation grew by 3.8 percent during the second half of 2005/06.
  - International reserves rose to $1.7 billion at end-March 2006 (4.7 months of prospective imports of goods and services).
  - Interest rates: overnight 1–2 percent; 30-day capital notes 4–6 percent.
  - Exchange rate fluctuated within 48.5–50.5 Afghanis per U.S. dollar; Afghani appreciated by 2 percent in real terms during the second half of 2005/06.
- Opium cultivation:
  - Preliminary estimates point to a possible rebound in 2006 after a 21 percent decline in 2005; dry opium prices in early 2006 were broadly unchanged compared with a year earlier.

### Medium-Term Program (PRGF-supported) — 2006–09 Aims and Projections
- Core aims:
  - sustain high growth by fostering a sound and stable macroeconomic environment and improving economic efficiency through structural reforms;
  - build on stabilization gains and strengthen public institutions and infrastructure in line with I-PRSP/I-ANDS.
- Growth and sectoral outlook:
  - Agricultural growth expected to return to trend; telecommunications, transport, and trade to provide additional impetus; construction to increase steadily but at a slower pace than recent years.
  - Expected to raise per capita income to more than $450 by 2008/09.
- Fiscal target:
  - increase revenue to above 8 percent of GDP by 2010/11 while improving provision of health and education services.
- Inflation and reserves:
  - target inflation around 5 percent;
  - strengthen international reserves to about 5 months of imports.
- Official transfers:
  - official transfers projected to average $2.4 billion a year over the medium term.

### The Program for 2006/07 — Key Macroeconomic Assumptions and Targets
- Macroeconomic projections:
  - real GDP growth assumed at 12 percent in 2006/07;
  - year-on-year inflation expected to decline to 9 percent.
- Fiscal targets and measures:
  - operating budget deficit targeted to decline to 2.9 percent of GDP in 2006/07 (from 3.7 percent in 2005/06).
  - domestic revenue targeted to rise by 0.5 percentage point of GDP in 2006/07, to 6 percent of GDP, on account of:
    - rationalization of the import tariff structure;
    - introduction of road tolls and excise taxes on a selected group of items;
    - full year effect of tax measures introduced in the third quarter of 2005/06.
  - operating expenditures programmed to decline from 9.3 percent of GDP in 2005/06 to 8.9 percent in 2006/07.
  - core development spending assumed to remain at 6.8 percent of GDP (well below the budgeted 14.2 percent of GDP).
- Monetary and exchange rate:
  - monetary program will continue to target currency in circulation within a managed float system.
  - circulation projected to increase at a slower pace than nominal GDP in 2006/07; authorities will tighten stance if inflationary pressures emerge.
- External sector:
  - external current account deficit excluding grants projected to narrow to 39½ percent of GDP in 2006/07.
  - deficit including grants projected at 1¾ percent of GDP in 2006/07.
- Program monitoring:
  - semiannual quantitative performance criteria; structural performance criteria; quarterly indicative targets and structural benchmarks; reviews every six months.

### Fiscal Sustainability, Debt Management, and Program Priorities
- Fiscal program focuses on:
  - mobilizing additional revenue;
  - prudently managing expenditures as fiscal operations are gradually consolidated within the core budget;
  - implementing an affordable public administration reform.
- Revenue mobilization measures:
  - strengthen the large taxpayers’ office;
  - improve transparency and simplify procedures to enhance voluntary compliance;
  - upgrade physical and human administrative capacity, especially in the provinces;
  - introduce an excise tax on selected goods.
- Expenditure strategy and public financial management:
  - publish a new budget calendar and reorganize the budget department and provincial treasuries;
  - target capacity building in line ministries for project management;
  - introduce computerized grant management and contract/commitment monitoring capabilities.
  - Externally-financed off-budget spending expected to remain substantial at around 24 percent of GDP.
- Debt management principles:
  - development expenditures expected to be covered predominantly with grants;
  - MoF must have sole responsibility for all borrowing and loan guarantees on behalf of the government, in line with the Public Expenditure and Financial Management Law.

### External Position, Reserves, and Debt Sustainability
- Current account and external transfers:
  - current account deficit excluding grants expected to narrow to around 24½ percent in 2009/10 (from 42½ percent of GDP in 2005/06).
  - current account deficit including grants would increase to over 6 percent of GDP by 2009/10 as transfers decline relative to GDP.
- Reserves and financing:
  - program projects increase in international reserves to 4.9 months of imports by year-end (for 2006/07 program target).
- Debt sustainability caveats:
  - external debt estimated at nearly 150 percent of GDP (including preliminary Russian claims).
  - Box 1 (Debt Sustainability Analysis) key quantitative points:
    - At end-2004/05, verified external debt stock amounted to $762 million (13 percent of GDP).
    - Including substantial Russian claims preliminarily estimated at around $10 billion would raise external debt to 150 percent of GDP at end-2005/06.
    - Even with comprehensive debt relief under the baseline assumptions, the NPV of external debt-to-exports would remain close to 200 percent in 2006/07.
    - Under a historical-average scenario, the NPV of debt-to-exports would exceed 300 percent by 2011.
    - In an extreme shock where official transfers are only half their programmed levels in 2007 and 2008 (replaced by concessional debt), the NPV of debt-to-GDP would double over the projection period and NPV of debt-to-exports would peak at 370 percent in 2008.
- HIPC and Paris Club:
  - External debt sustainability is predicated on a comprehensive debt restructuring in the context of the enhanced HIPC Initiative.
  - Paris Club creditors (Germany, Russia, United States) indicated intention to provide 100 percent debt relief under enhanced HIPC Initiative.

### Monetary Policy, DAB Modernization, and Banking Sector Reforms
- Monetary policy and central bank reforms:
  - continue targeting currency in circulation in the near term; move to broader monetary aggregate once building blocks in place.
  - adopt measures to deepen the capital notes market and introduce credit and deposit standing facilities.
  - clarify financial relations between government and DAB through a service level agreement.
  - process gold held in the palace vaults into a form that qualifies as a reserve asset.
  - finalize and submit DAB’s external audits for 2004/05 and 2005/06 to parliament.
  - develop a monthly balance sheet of DAB and a monthly monetary survey in line with international standards by end-2006/07.
- Banking sector restructuring and enabling measures:
  - liquidate or merge the Export Promotion Bank with Bank Pashtany and Bank Millie;
  - appoint a new Board for Bank Pashtany by end-June 2006;
  - adopt long-term restructuring plans for Bank Millie and Bank Pashtany by end-September;
  - work toward establishing an interbank money market and adoption of enabling laws; clarify land ownership rights;
  - reduce remuneration on private savings accounts held with DAB in provinces with no commercial banks to encourage commercial bank expansion.

### Structural Conditionality, Data, and Statistical Issues
- Structural conditionality coverage and status (Box 2 highlights):
  - Fiscal transparency: submission to parliament of the core budget’s audited financial statements for 2005/06 (PC).
  - Fiscal management: establishment of a certified monthly payroll system (SB); submission to parliament of legislation to eliminate nuisance taxes and introduce an excise tax (SB).
  - Banking restructuring: appointment of Board at Bank Pashtany (SB); adoption of restructuring plans for Bank Millie and Bank Pashtany (SB); liquidation/merger and deposit transfer of Export Promotion Bank (SB).
  - DAB modernization: development of a monthly monetary survey (SB); processing of palace gold into reserve asset (SB); submission of external audits of DAB for 2004/05 and 2005/06 (SB).
  - Public enterprise reform: adoption of comprehensive restructuring/divestment plan for public entities not covered by SOEs law (SB).
  - Status: All structural benchmarks under the SMP were observed, albeit with delays in a few cases.
- Data and statistical issues:
  - Quality and timeliness of fiscal and monetary data improved under the SMP, but substantial shortcomings continue to affect national accounts, balance of payments, monetary data, and social sector data.
  - Authorities committed to strengthening technical capacity; Fund technical assistance scheduled in statistics, tax and customs administration and policy, public expenditure management, liquidity and reserves management and banking supervision, financial markets legislation and operations.
  - Specific reporting frequencies in TMU (selected):
    - DAB net international reserves: reported weekly, no later than two weeks after the end of the week.
    - Monetary statistics: monthly, no later than three weeks after the end of the month.
    - Operational budget operations and financing: monthly, no later than four weeks after the end of the month.
    - External debt data: quarterly, no later than six weeks after the end of the quarter.
    - CPIs (Kabul and national): monthly, no later than four weeks after the end of the month.

### Program Access, Financing, and IMF Recommendations
- Proposed access over the three-year PRGF arrangement: SDR 81 million (50 percent of quota), to be disbursed in seven broadly equal tranches.
- Rationale: access below the norm for first- and second-time PRGF users given Afghanistan’s relatively strong reserve position and availability of donor financing on grant terms.
- Financing gap over the program period: $10.4 billion, most attributable to assumed settlement of external arrears (mainly Paris Club creditors). The remainder would be covered by PRGF disbursements.
- Projections:
  - Afghanistan’s total outstanding Fund credit expected to peak at 50 percent of quota in 2009/10.
  - Debt service obligations (after rescheduling) would average around 1¼ percent of domestic exports over the program period.
- IMF staff recommendation:
  - Staff recommend granting approval to the authorities’ request for Fund support under a three-year PRGF arrangement.
  - Executive Board approved a three year, SDR 81.0 million (about US$119.1 million) arrangement under the PRGF for Afghanistan covering through March 2009.
  - Initial disbursement under the PRGF arrangement: SDR 13.2 million (about US$19.4 million).

### Key Numeric Highlights and Selected Tables (preserved exact figures)
- Real GDP (market prices) growth series and projections (selected): 28.6 (2001/02), 15.7 (2002/03), 8.0 (2003/04), 13.8 (2004/05), 14.0 (2005/06), 11.7 (2006/07); projections include 12.0 (2006/07), 10.6 (2007/08), 11.1 (2008/09), 10.3 (2009/10), 10.0 (2010/11).
- Consumer prices (end-period Kabul CPI): -43.4 (2001/02), 52.4 (2002/03), 10.3 (2003/04), 14.9 (2004/05), 10.0 (2005/06), 9.5 (2006/07).
- Gross reserves (millions of U.S. dollars): 425 (2001/02), 820 (2002/03), 1,283 (2003/04), 1,662 (2004/05), 1,804 (2005/06); projected: 1,904 (2006/07), 2,004 (2007/08), 2,054 (2008/09).
- Nominal GDP (excluding opium production; millions of U.S. dollars): 2,463 (2001/02), 4,084 (2002/03), 4,585 (2003/04), 5,971 (2004/05), 7,309 (2005/06), 8,869 (2006/07).
- Per capita GDP: US$300 (2005/06); population: 21.8 million (2002/03).
- Trade balance (millions of U.S. dollars): -1,217.6 (2002/03), -1,892.0 (2003/04), -2,231.1 (2004/05), -2,622.5 (2005/06), -2,923.8 (2006/07).
- Current account (including grants, millions of U.S. dollars): -146.5 (2002/03), 139.8 (2003/04), 86.1 (2004/05), -67.5 (2005/06), -174.8 (2006/07).
- Domestic revenue (percent of GDP): 3.2 (2002/03), 4.5 (2003/04), 4.5 (2004/05), 5.2 (2005/06), 5.5 (2005/06 program), projected 6.0 (2006/07 program), 6.8 (2007/08), 7.4 (2008/09), 7.9 (2009/10).
- Core development spending (percent of GDP): budgeted 14.2 percent of GDP in 2006/07; program assumes 6.8 percent of GDP.
- External debt (selected): verified external debt stock $762 million (end-2004/05, 13 percent of GDP); including preliminary Russian claims ~ $10 billion would raise external debt to 150 percent of GDP at end-2005/06.
- PRGF disbursement schedule (Table 7): May 2006: 13.2 (8.2 percent of Quota); subsequent semiannual disbursements of 11.3 (7.0 percent) through May 2009; Total: 81.0 (50.0 percent of Quota).
- Financing gap over the program period: $10.4 billion.

### Risks, Contingencies, and Staff Advice
- Considerable risks include:
  - Insufficient progress in improving security;
  - Weakening government control over provinces;
  - Capacity constraints and political pressures delaying reforms;
  - Uncertainty about continued donor assistance;
  - Disruptive effects from eradication of opium-related activities.
- Staff advice:
  - Strengthen revenue administration (large taxpayers’ office, provincial capacity, excises);
  - Strict enforcement of manpower and appropriation ceilings and careful sequencing of pay and grading reforms;
  - Persist in strengthening monetary policy framework and DAB instruments and statistics;
  - Accelerate restructuring of state-owned banks and adopt enabling legal frameworks for financial sector development;
  - Pursue comprehensive debt relief under enhanced HIPC Initiative and consolidate MoF responsibility for borrowing.

*IMF staff summary and excerpts from the IMF document contained in content unit _cr06251.*

### Executive Summary ......................................................................................................

### Executive Summary

### Overview
- Afghanistan delivered a strong performance under the Staff-Monitored Program (SMP) initiated in March 2004, achieving macroeconomic stabilization and significant fiscal and banking reforms.
- The government requests a three-year PRGF arrangement in the amount of SDR 81 million (50 percent of quota) to support policies in the I-ANDS and MEFP for April 2006–March 2009.
- Main medium-term objectives (next three years):
  - achieve economic growth of about 10 percent a year;
  - reduce inflation to around 5 percent;
  - raise revenue to above 8 percent of GDP by 2010/11 while improving health and education services;
  - strengthen international reserve cover to about 5 months of imports.
- Key constraints and vulnerabilities:
  - lingering insecurity and weak control over provinces;
  - weak institutional capacity and a fragile social consensus;
  - persistent opium-related activities and expenditure pressures;
  - medium-term uncertainties about donor assistance.

### Performance Under the SMP (through third quarter of 2005/06)
- Compliance and benchmarks:
  - All end-December 2005 quantitative targets and structural benchmarks were observed except publication of audited 2004/05 core budget financial statements (published in March 2006).
- Real GDP and prices:
  - Real GDP estimated to have grown by 14 percent in 2005/06 (in line with SMP projections).
  - Year-on-year inflation in Kabul declined to 9.5 percent in March 2006 from 12.9 percent in September 2005.
- Opium cultivation:
  - Preliminary estimates point to a possible rebound in 2006 after a 21 percent decline in 2005; dry opium prices in early 2006 were broadly unchanged compared with a year earlier.
- Fiscal outcomes 2005/06:
  - Operating budget deficit excluding grants estimated at 3.7 percent of GDP (program projection: 4.2 percent of GDP).
  - Revenues amounted to Af 13.3 billion during the first nine months of 2005/06 (program target: Af 12.7 billion).
  - Revenue collection estimated at 5.5 percent of GDP for 2005/06 (program target: 5.0 percent of GDP).
  - Core development spending estimated at 5.2 percent of GDP in 2005/06 (less than 40 percent of the MYR projection).
  - External grants to the core budget reached 8.0 percent of GDP in 2005/06.
  - Core budget deficit including grants estimated at 0.9 percent of GDP (program projection: 0.1 percent of GDP).
- Budget management and transparency:
  - MoF posting comprehensive fiscal reports monthly on its website.
  - Audit plan agreed for submission of 2005/06 financial statements to parliament by end-September 2006.
  - Revised tax manual and new income tax forms published in March 2006.
- Monetary and reserves:
  - Currency in circulation grew by 3.8 percent during the second half of 2005/06, remaining well below the program target for the year.
  - International reserves rose to $1.7 billion at end-March 2006 (4.7 months of prospective imports of goods and services), driven mainly by government deposits with DAB.
  - Interest rates: overnight 1–2 percent; 30-day capital notes 4–6 percent.
  - Exchange rate fluctuated within 48.5–50.5 Afghanis per U.S. dollar; Afghani appreciated by 2 percent in real terms against the U.S. dollar during the second half of 2005/06.
  - Monetary operations modernized: foreign exchange auction participants allowed to sell and buy dollars and enter multiple bids; DAB started publishing interest rates on capital note auctions and remunerating required reserves.
- Banking sector and SOEs:
  - New Board of Directors appointed at Bank Millie; team appointed to oversee liquidation of three former state-owned banks.
  - Appointment of new Board at Bank Pashtany postponed due to lack of qualified candidates.
  - Remaining deposits with Agricultural Development Bank reimbursed or transferred to DAB.
- External position:
  - External current account deficit excluding grants narrowed to an estimated 42½ percent of GDP in 2005/06 (from 51 percent of GDP in 2003/04).
  - Current account deficit estimated to have been more than covered by official grants and loans in 2005/06.
  - Contacts maintained with Paris Club creditors (Germany, Russia, United States) who indicated intention to provide 100 percent debt relief under enhanced HIPC Initiative.
  - Afghanistan’s external debt estimated at nearly 150 percent of GDP (including current estimates of Russian claims).

### The Medium-Term Program for 2006–09 (PRGF-supported)
- Core aims:
  - sustain high growth by fostering a sound and stable macroeconomic environment and improving economic efficiency through structural reforms;
  - build on stabilization gains and strengthen public institutions and infrastructure in line with I-PRSP/I-ANDS.
- Growth and sectoral outlook:
  - Agricultural growth expected to return to trend; telecommunications, transport, and trade to provide additional impetus; construction to increase steadily but at a slower pace than recent years.
  - Expected to raise per capita income to more than $450 by 2008/09.
- Fiscal target:
  - increase revenue to above 8 percent of GDP by 2010/11 while improving provision of health and education services.
- Inflation and reserves:
  - target inflation around 5 percent;
  - strengthen international reserves to about 5 months of imports.

### The Program for 2006/07 (key macro assumptions and policies)
- Macroeconomic projections:
  - real GDP growth assumed at 12 percent in 2006/07;
  - year-on-year inflation expected to decline to 9 percent.
- Fiscal targets and measures:
  - operating budget deficit targeted to decline to 2.9 percent of GDP in 2006/07, from 3.7 percent in 2005/06.
  - fiscal consolidation to be achieved through a combination of revenue measures and expenditure restraint.
  - fiscal program provides flexibility to accommodate higher development spending if implementation capacity improves and to incorporate in the budget operating expenditures currently financed by donors outside the budget.
- Monetary policy and exchange rate:
  - monetary program will continue to target currency in circulation within a managed float system due to weaknesses in banking statistics and shallow financial markets.
- Structural reform priorities:
  - fiscal and central bank reforms;
  - enhancing the statistical framework;
  - improving the business environment.
- Risk assessment:
  - risks to the program remain considerable, including security deterioration, government’s weak control over provinces, opium-related activities, expenditure pressures, and donor-assistance uncertainties.

### Other Notable Points
- Security situation:
  - volatile, with increased incidents in southern provinces due to resurgent Taliban activities and resistance to counternarcotics efforts; sporadic incidents in other provinces including Kabul.
- Donor and technical assistance:
  - continued technical assistance and highly concessional donor financing considered essential for implementing the authorities’ strategy.
- Program documentation:
  - MEFP attached reviews SMP performance and outlines macroeconomic and structural policies for April 2006–March 2009; Letter of Intent requests SDR 81 million PRGF arrangement.

*IMF staff summary of "Executive Summary" (content unit _cr06251) contained in the provided PDF.*

### 19.      Progress toward fiscal sustainability is predicated on implementing durable

### _cr06251 - 19.      Progress toward fiscal sustainability is predicated on implementing durable

### Fiscal sustainability, debt management, and program priorities
- Progress toward fiscal sustainability is predicated on implementing durable reforms supported by sound debt management.
- Authorities’ fiscal program focuses on:
  - mobilizing additional revenue;
  - prudently managing expenditures as fiscal operations are gradually consolidated within the core budget;
  - implementing an affordable public administration reform.
- Commitment to fiscal responsibility within the Medium-Term Fiscal Framework (MTFF) and the I-ANDS, and to channel donors’ aid through the core budget contingent on continued improvements in financial management and implementation capacity.
- Given Afghanistan’s large development financing needs, the government will continue to rely predominantly on grant financing and highly concessional borrowing.

### Revenue mobilization measures (findings and planned reforms)
- Reforms envisaged to increase tax revenue:
  - strengthen the large taxpayers’ office;
  - further improve transparency and simplify procedures to enhance voluntary compliance;
  - upgrade physical and human administrative capacity, especially in the provinces;
  - introduce an excise tax on selected goods.
- Consideration of transforming the current cascading business receipts tax into a more efficient consumption based tax.

### Expenditure strategy, risks, and public financial management
- Medium-term fiscal strategy faces considerable challenges and uncertainties; MTFF will need refinement to ensure consistency with the I-ANDS and annual budget process.
- Strategy must be flexible to cope with:
  - uncertainty related to pace of consolidation into the core budget of expenditures currently funded directly by donors;
  - improved execution of development spending;
  - implementation of public administration reform to raise productivity;
  - need to improve public financial management to increase transparency, reduce corruption, and enhance spending capacity.
- Program steps to improve budget credibility and execution:
  - publish a new budget calendar and reorganize the budget department and provincial treasuries;
  - target capacity building in line ministries for project management;
  - introduce computerized grant management and contract/commitment monitoring capabilities.
- Externally-financed off-budget spending expected to remain substantial at around 24 percent of GDP.

### Monetary policy and central bank reforms
- Program steps to improve conduct of monetary policy:
  - strengthen DAB’s implementation capacity through new monetary instruments and deepening of financial markets;
  - increase DAB’s policy formulation capacity by developing analytical tools and improving monetary statistics;
  - better manage public expectations through greater transparency in monetary management.
- Near-term operational stance:
  - continue targeting currency in circulation; once building blocks are in place, intend to focus on a broader monetary aggregate.
- Specific measures and operational targets:
  - adopt measures to deepen the capital notes market and introduce credit and deposit standing facilities;
  - clarify financial relations between government and DAB through a service level agreement;
  - strengthen DAB’s capital position by processing gold held in the palace vaults into a form that qualifies as a reserve asset;
  - finalize and submit DAB’s external audits for 2004/05 and 2005/06 to parliament;
  - develop a monthly balance sheet of DAB and a monthly monetary survey in line with international standards by end-2006/07.
- Banking sector restructuring and enabling measures:
  - liquidate or merge the Export Promotion Bank with Bank Pashtany and Bank Millie;
  - appoint a new Board for Bank Pashtany by end-June 2006;
  - adopt long-term restructuring plans for Bank Millie and Bank Pashtany by end-September;
  - work toward establishing an interbank money market, adoption of enabling laws, and clarification of land ownership rights;
  - reduce remuneration on private savings accounts held with DAB in provinces with no commercial banks to encourage commercial bank expansion.

### External position, reserves, and debt sustainability
- Current account projections and official transfers:
  - current account deficit excluding grants expected to narrow to around 24½ percent in 2009/10, reflecting mainly a further improvement in the trade balance.
  - official transfers projected to average $2.4 billion a year over the medium term.
  - as transfers decline relative to GDP, current account deficit including grants would increase to over 6 percent of GDP by 2009/10.
- Reserves and financing:
  - envisaged strengthening of international reserves to provide a comfortable buffer against potential vulnerabilities.
  - program projects increase in international reserves to 4.9 months of imports by year-end (for 2006/07 program target).
- External debt sustainability is predicated on a comprehensive debt restructuring in the context of the enhanced HIPC Initiative.
- Debt management principles:
  - development expenditures expected to be covered predominantly with grants;
  - MoF must have sole responsibility for all borrowing and loan guarantees on behalf of the government, in line with the Public Expenditure and Financial Management Law.
- Box 1 (Debt Sustainability Analysis) key quantitative points:
  - At end-2004/05, verified external debt stock amounted to $762 million (13 percent of GDP).
  - Including substantial Russian claims preliminarily estimated at around $10 billion would raise external debt to 150 percent of GDP at end-2005/06.
  - Even with comprehensive debt relief under the baseline assumptions, the NPV of external debt-to-exports would remain close to 200 percent in 2006/07.
  - Under a historical-average scenario, the NPV of debt-to-exports would exceed 300 percent by 2011.
  - In an extreme shock where official transfers are only half their programmed levels in 2007 and 2008 (replaced by concessional debt), the NPV of debt-to-GDP would double over the projection period and NPV of debt-to-exports would peak at 370 percent in 2008.

### The program for 2006/07 — macro targets and structural agenda
- Macroeconomic program assumptions for 2006/07:
  - real GDP growth of 12 percent, with agricultural growth returning to its historical trend;
  - decline in end-year inflation to 9 percent;
  - increase in international reserves to 4.9 months of imports by year-end.
- Structural reforms included:
  - measures to enhance tax and customs administration and public expenditure management;
  - improving central bank operations;
  - accelerating restructuring of the state-owned banks.
- Fiscal policy targets and measures (A):
  - operating budget deficit excluding grants programmed to decline from 3.7 percent of GDP in 2005/06 to 2.9 percent in 2006/07.
  - domestic revenue targeted to rise by 0.5 percentage point of GDP in 2006/07, to 6 percent of GDP, on account of:
    - rationalization of the import tariff structure;
    - introduction of road tolls and excise taxes on a selected group of items;
    - full year effect of tax measures introduced in the third quarter of 2005/06.
  - program’s revenue target exceeds the budget by 0.3 percentage points of GDP due mainly to better outturn in 2005/06.
  - operating expenditures programmed to decline from 9.3 percent of GDP in 2005/06 to 8.9 percent in 2006/07, notwithstanding absorption of significant costs previously funded directly by donors.
  - cost savings relative to the budget of around 0.3 percent of GDP expected from:
    - strict enforcement of approved manpower and appropriation ceilings via a certified monthly payroll system;
    - slower-than-budgeted implementation of pay and grading reforms due to capacity constraints;
    - strict enforcement of rules on the use of contingency funds.
  - program provides flexibility to incorporate expenditures currently financed directly by donors into the operating budget, subject to conditions and available financing.
  - core development spending assumed to remain at 6.8 percent of GDP (well below the budgeted 14.2 percent of GDP); program adjusters allow for larger use of government deposits with DAB contingent on reserve prudence.
- Monetary and exchange rate policies and financial sector reforms (B):
  - monetary program continues to target currency in circulation in context of a managed float;
  - circulation projected to increase at a slower pace than nominal GDP in 2006/07 due to shift to bank deposits;
  - authorities will stand ready to tighten monetary stance if inflationary pressures emerge.
  - floor on net international reserves provides room for tightening; downward adjustment capped to ensure minimum coverage of three months of imports.
- External sector policies (C):
  - external current account deficit excluding grants projected to narrow to 39½ percent of GDP in 2006/07.
  - deficit including grants projected at 1¾ percent of GDP in 2006/07.
  - decline in foreign direct investment expected following a large one-off telecommunications operation in 2005/06, resulting in lower reserve accumulation than previous years.
  - PRGF arrangement expected to facilitate comprehensive debt relief; Paris Club creditors have provided appropriate financing assurances in support of the PRGF-supported program.
  - HIPC eligibility and satisfactory PRGF performance would pave the way for comprehensive treatment of external debt under HIPC and Multilateral Debt Relief Initiatives.
- Structural policies and poverty reduction (D):
  - program measures include:
    - harmonizing and simplifying legislation, procedures, and regulations related to investment;
    - preparing and implementing a strategy for divestment of state-owned enterprises (SOEs) and other government agencies engaged in commercial activities not covered by the SOEs law;
    - enabling registration of land titles.
  - Afghanistan’s I-ANDS submitted as I-PRSP; emphasizes anti-poverty strategies including achieving the Millennium Development Goals, improving rural incomes, infrastructure (transport, power, water), natural resource management, building institutional and human capacity, and improving social protection.
  - government conducting a national vulnerability assessment; complementing with the ADB-financed household income and expenditures survey is important for PRSP poverty diagnostics.

*Source: _cr06251 - 19.      Progress toward fiscal sustainability is predicated on implementing durable*

### 39.      The data available for program monitoring purposes are broadly adequate. The

### 39.      The data available for program monitoring purposes are broadly adequate.

### Data and Statistical Issues
- The quality and timeliness of the fiscal and monetary data used to evaluate Afghanistan’s quantitative performance have improved over the course of the SMP.
- Some progress has been made in disseminating these data and enhancing consumer price information.
- Substantial shortcomings continue to affect:
  - national accounts
  - balance of payments
  - monetary data
  - social sector data
- In addition to the development of a monetary survey, the authorities will take significant steps to enhance the quality and reliability of balance of payments data (see paragraph 36 of the MEFP).
- The authorities are committed to strengthening technical capacity within the government and DAB and will receive Fund technical assistance in:
  - statistics
  - tax and customs administration and policy
  - public expenditure management
  - liquidity and reserves management and banking supervision
  - financial markets legislation and operations
- Further efforts are required to address statistical shortcomings; staff welcomes the authorities’ commitment to improve monetary and balance of payments statistics and to enhance social data, including through household surveys for the poverty diagnostics and PRSP profile.

### Box 2 — Structural Conditionality: Coverage and Status
- Structural performance criterion (PC) and benchmarks (SB) concentrate on areas critical for achieving the program’s macroeconomic objectives.
- Fiscal transparency:
  - submission to parliament of the core budget’s audited financial statements for 2005/06 (PC).
- Fiscal policy and management:
  - establishment of a certified monthly payroll system (SB)
  - submission to parliament of legislation to eliminate nuisance taxes and introduce an excise tax on selected goods (SB).
- Banking restructuring:
  - appointment of a new Board of Directors at Bank Pashtany (SB)
  - adoption by shareholders of long-term restructuring plans for Bank Millie and Bank Pashtany (SB)
  - publication of a public statement announcing the liquidation of the Export Promotion Bank or its merger with another licensed commercial bank, and completion of the transfer of its deposits (SB).
- Modernization of DAB:
  - development of a monthly monetary survey in line with international standards (SB)
  - processing of gold held in the palace vaults into a form that qualifies as a reserve asset (SB)
  - submission to parliament of the 2004/05 and 2005/06 external audits of DAB (SB).
- Public enterprise reform:
  - adoption of a comprehensive restructuring/divestment plan for public entities and government agencies engaged in commercial activities but not covered by the state-owned enterprises law (SB).
- Status: All structural benchmarks under the SMP were observed, albeit with delays in a few cases. This contributed to marked improvement in revenue collection and expenditure management, and to central bank modernization. Reconciliation of external debt has been difficult because some creditors have not provided requested documentation.

### Access and Capacity to Repay the Fund
- Proposed access over the three-year PRGF arrangement: SDR 81 million (50 percent of quota), to be disbursed in seven broadly equal tranches.
- Rationale: access below the norm for first- and second-time PRGF users given Afghanistan’s relatively strong reserve position and availability of donor financing on grant terms; nevertheless, further build-up of reserves is desirable due to political and economic uncertainty.
- Risk: reserves could be drawn down if the government uses its deposits with DAB to finance higher-than-envisaged core development expenditures or to cover operating outlays previously outside the budget if donors withdraw funding.
- Financing gap over the program period: $10.4 billion, most attributable to assumed settlement of external arrears (mainly Paris Club creditors) expected to be closed through rescheduling (Table 6). The remainder would be covered by PRGF disbursements.
- Program assumption: Afghanistan will not accumulate new external arrears.
- Projections:
  - Afghanistan’s total outstanding Fund credit expected to peak at 50 percent of quota in 2009/10.
  - Debt service obligations (after rescheduling) would average around 1¼ percent of domestic exports over the program period (Table 8).
- Staff note: In the event of large additional balance of payments needs arising from exogenous shocks, staff may consider augmenting access under the arrangement.

### Program Monitoring and Conditionality
- Monitoring instruments:
  - semiannual quantitative performance criteria
  - structural performance criteria
  - quarterly indicative targets and structural benchmarks
- Program reviews: every six months.
- Disbursement schedule: semiannual; first upon Board approval, second upon observance of the September 2006 performance criteria and completion of the first review (Table 7 and paragraph 43 of the MEFP).
- Quantitative and structural conditionality, including adjustors to quantitative performance criteria and indicative targets, specified in the technical memorandum of understanding.
- Safeguards: a full safeguards assessment of DAB is being completed. A safeguards mission identified vulnerabilities in:
  - external and internal audit mechanisms
  - financial reporting framework
  - system of internal controls
  - Recommendations made; several already being implemented per authorities. Capacity constraints may hamper effective and timely implementation. A follow-up mission is envisaged in one year.

### Staff Appraisal — Main Findings and Policy Recommendations
- Performance under the SMP (2005/06) was commendable:
  - Real GDP growth remained strong.
  - Inflation declined.
  - External position was strengthened.
  - Further advances in the structural area.
- Challenges remain to sustain rapid growth, reduce poverty, and attain I-ANDS goals.
- Objectives of successor three-year PRGF arrangement:
  - maintain strong growth
  - further reduce inflation
  - strengthen international reserves position
  - accelerate institutional and structural reforms to facilitate poverty reduction
- Fiscal policy recommendations:
  - 2006/07 fiscal program envisages reduction in operating deficit excluding grants through a significant increase in revenues and expenditure restraint.
  - Achievement of revenue targets requires strengthening the large taxpayers’ office, administrative capacity in provinces, and timely introduction of excises on selected goods.
  - On expenditures: avoid general wage increases while implementing pay and grading reforms; strictly enforce approved manpower and appropriation ceilings for employee compensation.
  - Operating spending to be reassessed at first review and revised if necessary for security needs or faster implementation of priority public administration reforms.
  - Program allows flexibility to increase development expenditures if implementation capacity improves or operating expenditures increase due to donor-transferred responsibilities.
  - Staff support incorporating amendments in the budget via an orderly and transparent process.
- Public finance and administration:
  - Consolidation into the core budget of donor-financed fiscal operations is positive but could reduce fiscal space if external assistance declines.
  - Need for well-implemented public administration reform to raise productivity and contain budgetary costs.
  - MTFF needs strengthening to link multi-year projections more closely with policies; measures welcomed include publication of a less compressed budget calendar and reorganization of the Budget Department.
  - Need to increase authorities’ capacity to spend productively and improve financial management capacity of line ministries and provinces.
- Monetary policy and central bank:
  - Authorities must persevere to reduce inflation.
  - Tightening in Q3 2005/06 appropriate and helped DAB meet its inflation objective for the year.
  - Recommendations: strengthen monetary policy framework by developing DAB’s analytical capacity, modernizing instruments, and improving monetary statistics.
  - Given uncertainties in money demand, DAB should be ready to tighten the monetary stance as needed under the managed float to achieve inflation target.
- Banking and financial sector:
  - Intensify reforms to build a resilient banking system.
  - Accelerate restructuring of state-owned banks and create an enabling environment for commercial banking.
  - Adopt appropriate legal and administrative framework for financial institutions, establish an interbank money market, and clarify land ownership rights.
- Investment climate and SOE reform:
  - Move decisively to improve investment climate and competitiveness: address corruption, improve security, harmonize and simplify investment regulations.
  - Develop and implement strategy for divestiture of SOEs and government agencies engaged in commercial activities.
  - Maintain a transparent and liberal trade regime; rationalize tariff structure and avoid protectionist measures.
- Debt relief and management:
  - Comprehensive debt relief, prudent debt management, and enhanced grant management essential for external sustainability.
  - Expected upfront cancellation of most Russian claims and Paris Club flow rescheduling will provide significant relief.
  - Continued PRGF progress critical to establish track record toward eligibility for enhanced HIPC Initiative and additional debt reduction.
  - MoF given sole responsibility for all borrowing and loan guarantees on behalf of the government will enhance debt management.

### Risks to the Program
- Considerable risks include:
  - Insufficient progress in improving security
  - Slow development of new political institutions
  - Weakening government control over provinces, which could slow reforms
  - Political pressures delaying reforms and limiting ability to meet program objectives
  - Implementation risks from capacity constraints, programmed containment of spending somewhat below the budget, and pace of consolidation of donor-funded expenditures into the core budget
  - Uncertainty about continued donor assistance
  - Efforts to eradicate opium-related activities could have disruptive effects on security

*Source: _cr06251 - 39.      The data available for program monitoring purposes are broadly adequate.*

### 56.      In light of Afghanistan’s commendable performance under the SMP and the

### _cr06251 - 56.      In light of Afghanistan’s commendable performance under the SMP and the

### IMF staff recommendation
- Staff recommend granting approval to the authorities’ request for Fund support under a three-year PRGF arrangement.

### Macroeconomic performance and medium-term projections
- Real GDP (at market prices): 28.6 (2001/02), 15.7 (2002/03), 8.0 (2003/04), 13.8 (2004/05), 14.0 (2005/06), 11.7 (2006/07); projections through 2009/10 include 12.0 (2006/07), 10.6 (2007/08), 11.1 (2008/09), 10.3 (2009/10), 10.0 (2010/11).
- Consumer prices (end of period, Kabul CPI unless stated): -43.4 (2001/02), 52.4 (2002/03), 10.3 (2003/04), 14.9 (2004/05), 10.0 (2005/06), 9.5 (2006/07); period average series: 5.1 (2001/02), 24.1 (2002/03), 13.2 (2003/04), 12.3 (2004/05), 9.2 (2005/06).
- Gross reserves (in millions of U.S. dollars): 425 (2001/02), 820 (2002/03), 1,283 (2003/04), 1,662 (2004/05), 1,804 (2005/06); projected: 1,904 (2006/07), 2,004 (2007/08), 2,054 (2008/09).
- Nominal GDP (excluding opium production; in millions of U.S. dollars): 2,463 (2001/02), 4,084 (2002/03), 4,585 (2003/04), 5,971 (2004/05), 7,309 (2005/06), 8,869 (2006/07).
- Per capita GDP: US$300 (2005/06); population: 21.8 million (2002/03).

### Prices, inflation contributions, and monetary developments
- Figures show Kabul CPI year-on-year changes and contributions by rents, bread and cereals, oil and gas, other food, other nonfood (last observation: March 2006).
- Currency in circulation (year-to-date change; in percent) tracked monthly from Mar-05 to Mar-06 against SMP and PRGF ceilings; 2005/06 SMP indicative ceiling and 2006/07 PRGF ceiling referenced.
- One-month capital note interest rate (end-period, in percent) reported historical points; capital note auctions and overnight/30-day notes series plotted (last observation: March 20, 2006).
- Reserve money and currency in circulation: reserve money series from Mar-05 to Mar-06; currency in circulation year-to-date and year-on-year change reported, including ceilings under the PRGF (in millions of Afghanis): 47,423; 50,217; 51,539; 52,862 (periods corresponding to program ceilings).

### External sector and balance of payments
- Trade and current account dynamics (in millions of U.S. dollars):
  - Trade balance: -1,217.6 (2002/03), -1,892.0 (2003/04), -2,231.1 (2004/05), -2,622.5 (2005/06), -2,923.8 (2006/07), -3,008.8 (2007/08), -3,057.0 (2008/09), -2,784.2 (2009/10).
  - Exports of goods: 1,290.6 (2002/03), 1,893.9 (2003/04), 1,642.3 (2004/05), 1,599.6 (2005/06), 1,725.7 (2006/07), 1,827.1 (2007/08), 1,921.6 (2008/09), 2,196.1 (2009/10).
  - Imports of goods: 2,508.2 (2002/03), 3,785.9 (2003/04), 3,873.4 (2004/05), 4,222.1 (2005/06), 4,649.5 (2006/07), 4,835.8 (2007/08), 4,978.6 (2008/09), 4,980.3 (2009/10).
  - Current account (including grants): -146.5 (2002/03), 139.8 (2003/04), 86.1 (2004/05), -67.5 (2005/06), -174.8 (2006/07), -501.2 (2007/08), -682.9 (2008/09), -920.8 (2009/10).
- Current transfers: 1,221.8 (2002/03), 2,475.9 (2003/04), 2,787.2 (2004/05), 3,047.5 (2005/06), 3,340.3 (2006/07), 3,106.6 (2007/08), 2,959.0 (2008/09), 2,439.8 (2009/10).
- Gross international reserves (in millions of U.S. dollars) and months of imports: gross international reserves 425 (2001/02) rising to 1,804 (2005/06); months of imports: 1.8 (2001/02), 3.0 (2002/03), 4.1 (2003/04), 4.7 (2004/05), 4.9 (2005/06), projected 4.9 (2006/07), 5.3 (2007/08), 5.1 (2008/09).

### Public finances, core budget, and donor support
- Domestic revenue (in percent of GDP): 3.2 (2002/03), 4.5 (2003/04), 4.5 (2004/05), 5.2 (2005/06), 4.6 (2005/06 MYR), 5.5 (2005/06 program), projected 5.7 (2006/07), 6.0 (2006/07 program), 6.8 (2007/08), 7.4 (2008/09), 7.9 (2009/10).
- Donor assistance grants (to operating budget): 9,430 (2002/03), 10,074 (2003/04), 14,984 (2004/05), 16,878 (2005/06); ARTF recurrent window and LOTFA contributions shown across years (e.g., ARTF recurrent window: 8,182; 12,319; 13,580; 14,571 in successive periods).
- Total core budget expenditure (in millions of Afghanis): 15,514 (2002/03), 31,606 (2003/04), 39,550 (2004/05), 83,666 (2005/06 MYR), 43,628 (2005/06 11-month), 52,529 (2005/06 program), 103,541 (2006/07 budget), 69,436 (2006/07 program).
- Operating expenditure (in millions of Afghanis): 15,514 (2002/03), 22,151 (2003/04), 26,716 (2004/05), 33,601 (2005/06 11-month), 27,615 (2005/06 MYR), 33,606 (2005/06 program), 40,643 (2006/07 budget), 39,511 (2006/07 program).
- Operating budget balance (including grants, in percent of GDP): -0.1 (2002/03), -0.8 (2003/04), 0.4 (2004/05), 0.6 (2005/06 11-month), 1.6 (2006/07 program), 0.9 (2006/07 budget), 0.4 (2007/08 projection), 1.0 (2008/09 projection), 0.8 (2009/10 projection).
- Core budget development spending (in percent of GDP): recorded increases and detailed allocations across categories (security; governance, rule of law, and human rights; infrastructure and natural resources; education; health; agriculture and rural development; social protection; economic governance and private sector development) with specific program and projection amounts in millions of Afghanis.

### Debt dynamics and sustainability scenarios
- Indicators of public and publicly guaranteed external debt under alternative scenarios (2006–11) shown in Figure 4:
  - NPV of debt-to-GDP ratio and NPV of debt-to-exports ratio plotted for Baseline, Historical scenario (10-year averages for comparable post-conflict low-income members), Combined shock, and Shock to non-debt creating flows.
  - Debt service-to-exports ratio scenarios include Baseline, Export growth shock, Combined shock, Historical scenario.
- Total government debt (including unreconciled debts; excludes Russian claims) reported as 13.2 (2001/02), 14.6 (2002/03), 12.8 (2003/04), 11.6 (2004/05) (in percent of GDP as shown in Table 1 notation).

### External financing requirement and identified program financing
- External financing requirement (I. Total financing requirement, in millions of U.S. dollars): 1,529.8 (2002/03), 2,728.6 (2003/04), 3,179.9 (2004/05), 3,521.0 (2005/06), 13,817.4 (2006/07), 3,713.0 (2007/08), 3,747.1 (2008/09), 3,415.7 (2009/10).
- Available financing (II, in millions of U.S. dollars) components: current transfers, foreign direct investment, official medium- and long-term loans, other items. Financing gap I-II reported as 0.0 (2002/03–2005/06) and 17.6 (2006/07), 29.3 (2007/08), 10,233.8 (2008/09), 70.8 (2009/10), 71.1 (2010/11?), 56.2 (2009/10 in table context).
- Identified provisional financing (of which IMF PRGF): 35.1; 32.4; 32.4; 2.4; 16.2 in relevant periods (table shows "Of which: IMF PRGF 0.0 0.0 0.0 0.0 35.1 32.4 32.4 2.4 16.2" across columns).
- Table 7 proposed schedule of PRGF reviews and disbursements (in millions of SDRs and percent of quota):
  - May 2006: 13.2 (8.2 percent of Quota) — Approval of arrangement.
  - January 2007: 11.3 (7.0 percent) — First review and September 2006 performance criteria.
  - May 2007: 11.3 (7.0 percent) — Second review and March 2007 performance criteria.
  - January 2008: 11.3 (7.0 percent) — Third review and September 2007 performance criteria.
  - May 2008: 11.3 (7.0 percent) — Fourth review and March 2008 performance criteria.
  - January 2009: 11.3 (7.0 percent) — Fifth review and September 2008 performance criteria.
  - May 2009: 11.3 (7.0 percent) — Sixth review and March 2009 performance criteria.
  - Total: 81.0 (50.0 percent of Quota).

### Key fiscal and sectoral figures (selected)
- Gross fixed capital formation (in percent of GDP): 34.5 (2001/02), 42.0 (2002/03), 43.4 (2003/04), 43.2 (2004/05), 40.3 (2005/06), 40.7 (2006/07), 37.8 (2007/08), 34.0 (2008/09), 33.2 (2009/10).
- Sectoral shares of GDP (in percent): Agriculture: 49.8 (2001/02), 48.5 (2002/03), 37.2 (2003/04), 36.1 (2004/05), 35.9 (2005/06), 34.3 (2006/07), 32.9 (2007/08). Industry: 20.1 (2001/02) through 24.5 (2006/07). Services: 30.1 (2001/02) through 42.6 (2006/07).
- Opium production (in millions of U.S. dollars): 2,540 (2001/02), 2,300 (2002/03), 2,800 (2003/04), 2,700 (2004/05).

*Italic: Source — IMF staff estimates and projections, Central Statistics Office of Afghanistan, Da Afghanistan Bank, and Ministry of Finance as compiled in the provided IMF document.*

### 1. Principal

### 1. Principal

### GRA repurchases and PRGF repayments
- GRA repurchases0.00.00.00.00.00.00.00.00.00.0
- PRGF repayments0.00.00.00.00.00.00.00.00.00.0

### Charges and interest 2/
- PRGF interest0.00.00.00.00.00.00.00.00.00.0
- SDR assesments0.00.00.00.00.00.00.00.00.00.0
- SDR charges0.70.90.90.90.90.90.90.96.914.1
- Total obligations0.70.90.90.90.90.90.90.96.914.1
- Percent of quota
  - 0.40.60.60.60.60.60.60.64.38.7

### Obligations from prospective drawings 3/
1. Principal
- PRGF repayments0.00.00.00.00.01.34.99.465.481.0

2. Charges and interest 2/
- PRGF interest0.00.20.30.40.40.40.40.40.73.1
- Total obligations0.00.20.30.40.41.75.39.866.184.1
- Percent of quota0.00.10.20.20.31.13.36.040.852.0

### Cumulative obligations (existing and prospective)
1. Principal
- GRA repurchases0.00.00.00.00.00.00.00.00.00.0
- PRGF repayments0.00.00.00.00.01.34.99.465.481.0

*Source: _cr06251 - 1. Principal*

### 2. Charges and interest 2/

### _cr06251 - 2. Charges and interest 2/

### Charges and interest (PRGF and SDR)
- PRGF interest: 0.0, 0.2, 0.3, 0.4, 0.4, 0.4, 0.4, 0.4, 0.7, 3.1
- SDR net charges: 0.7, 0.9, 0.9, 0.9, 0.9, 0.9, 0.9, 0.9, 6.9, 14.1
- Total obligations: 0.7, 1.1, 1.2, 1.3, 1.3, 2.6, 6.2, 10.7, 73.0, 98.2
- Total obligations (percent of quota): 0.5, 0.7, 0.7, 0.8, 0.8, 1.6, 3.8, 6.6, 45.1, 60.7
- Outstanding Fund credit: 13.2, 35.8, 58.4, 81.0, 81.0, 79.7, 74.8, 65.4, ...... (ellipsis preserved)

Memorandum items — Outstanding Fund credit (selected ratios):
- In percent of: Exports of goods and services 4/: 1.3, 2.9, 4.1, 4.8, 4.1, 3.6, 4.8, 3.6, ... ...
- In percent of: External public debt: 0.6, 1.5, 2.2, 2.9, 2.8, 2.6, 2.4, 2.0, ... ...
- In percent of: Gross official reserves: 0.5, 1.3, 2.0, 2.7, 3.2, 3.0, 2.6, 2.2, ... ...
- In percent of: GDP: 0.1, 0.2, 0.3, 0.4, 0.4, 0.3, 0.3, 0.2, ... ...
- In percent of: Quota: 8.2, 21.2, 36.1, 50.0, 50.0, 49.2, 46.2, 40.4, ......

Total obligations — In percent of:
- Exports of goods and services 4/: 0.1, 0.1, 0.1, 0.1, 0.1, 0.1, 0.4, 0.6, ......
- External public debt: 0.0, 0.0, 0.0, 0.0, 0.0, 0.1, 0.2, 0.3, ......
- Gross official reserves: 0.0, 0.0, 0.0, 0.0, 0.1, 0.1, 0.2, 0.4, ......
- GDP: 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, ......
- Quota: 0.5, 0.7, 0.7, 0.8, 0.8, 1.6, 3.8, 6.6, 45.1, 60.7

Notes:
- Source: Fund staff estimates.
- Footnotes preserved exactly: 1/ March 31, 2006 to December 31, 2006. 2/ Projections are based on current interest rates for PRGF. The current SDR interest rate is assumed for net use of SDRs. 3/ Based on the proposed level and phasing of access, and subject to Executive Board approval. 4/ Excludes reexports.

### Millennium Development Goals and social indicators (selected series, 1990–2003)
- Percentage share of income or consumption held by poorest 20 percent: (data not provided numerically)
- Population below US$1 a day (in percent): (data not provided numerically)
- Population below minimum level of dietary energy consumption (in percent): (data not provided numerically)
- Poverty gap ratio at US$1 a day: (data not provided numerically)
- Poverty headcount, national (in percent of population): (data not provided numerically)
- Prevalence of underweight in children (under five years of age): 49.3
- Net primary enrollment ratio (in percent of relevant age group): 26.5
- Primary completion rate, total (in percent of relevant age group): 23.0
- Proportion of pupils starting grade 1 who reach grade 5: (data not provided numerically)
- Youth literacy rate (in percent ages 15–24): (data not provided numerically)
- Proportion of seats held by women in national parliament (in percent): 4.0
- Ratio of girls to boys in primary and secondary education (in percent): (data not provided numerically)
- Ratio of young literate females to males (in percent ages 15–24): (data not provided numerically)
- Share of women employed in the nonagricultural sector (in percent): 17.8
- Immunization, measles (in percent of children ages 12–23 months): 20.0, 40.0, 48.0, 35.0, 50.0 (series preserved)
- Infant mortality rate (per 1,000 live births): 168
- Under 5 mortality rate (per 1,000): 260
- Births attended by skilled health staff (in percent of total): 12.4, 14.0
- Maternal mortality ratio (modeled estimate, per 100,000 live births): 1,900
- Contraceptive prevalence rate (in percent of women ages 15–49): 10.0
- Tuberculosis cases detected under DOTS (in percent): 2.0, 9.0, 18.2
- Access to an improved water source (in percent of population): 13.0
- Access to improved sanitation (in percent of population): 8.0
- CO2 emissions (in metric tons per capita): 0.1, 0.1
- Forest area (in percent of total land area): 2.1, 2.1
- Nationally protected areas (in percent of total land area): 0.3
- Aid per capita (in U.S. dollars): 7.4, 11.1
- Fixed line and mobile phone subscribers (per 1,000 people): 2.2, 1.6, 1.3, 1.3, 11.8
- Internet users (per 1,000 people): 1.0
- Fertility rate, total (births per woman): 6.9
- GNI per capita, Atlas method (in U.S. dollars): 197.2
- GNI, Atlas method (in billions of U.S. dollars): 4.3
- Life expectancy at birth, total (years): 41.5
- Population, total (in millions): 17.7, 20.7
- Trade (in percent of GDP): 145.6
- Source: World Development Indicators database, April 2005.
- Table title preserved exactly: Table 9. Islamic Republic of Afghanistan: Millennium Development Goals, 1990–2003

### Government and government-guaranteed external debt, 2002/03–2006/07 (Table 10, selected figures)
- Total government external debt (2002/03–2006/07; in millions of U.S. dollars): 539, 669, 762, 847, 10,847, 1,549
- Bilateral creditors: 314, 347, 330, 301, 10,301, 857
- Of which: Paris Club creditors: 122, 151, 151, 155, 10,155, 711
- Multilateral creditors: 226, 322, 432, 546, 546, 692
- Of which: use of Fund resources: 0, 0, 0, 0, 0, 35
- Service on government external debt (selected years; cash basis through 2005/06 then commitment basis): 1.1, 7.5, 7.7, 9.2, ..., 11.3
- Of which: to the Fund (service): 1.1, 0.3, 0.6, 0.6, ..., 1.2
- Amortization paid: 0.0, 3.6, 3.3, 3.5, ..., 3.9
- Interest paid: 1.1, 3.9, 4.3, 5.7, ..., 7.4
- Total government external debt (in percent of GDP; selected series): 13.2, 14.6, 12.8, 11.6, 148.4, 17.5
- Bilateral creditors (percent of GDP): 7.7, 7.6, 5.5, 4.1, 40.9, 9.7
- Of which: Paris Club creditors (percent of GDP): 3.0, 3.3, 2.5, 2.1, 39.0, 8.0
- Multilateral creditors (percent of GDP): 5.5, 7.0, 7.2, 7.5, 7.5, 7.8
- Service on government debt (percent of GDP): 0.0, 0.2, 0.1, 0.1, ..., 0.1
- Total government external debt (in percent of exports of goods and nonfactor services): 164.6, 138.6, 138.6, 139.0, 1781.2, 182.6
- Bilateral creditors (percent of exports): 95.8, 72.0, 60.0, 49.4, 1691.5, 101.0
- Of which: Paris Club creditors (percent of exports): 37.4, 31.4, 27.5, 25.5, 1,667.6, 83.8
- Multilateral creditors (percent of exports): 68.8, 66.7, 78.6, 89.6, 89.6, 81.6
- Of which: use of Fund resources (percent of exports): 0.0, 0.0, 0.0, 0.0, 0.0, 4.1

Memorandum items:
- Stock of arrears (in millions of U.S. dollars): 313.7, 347.1, 329.6, 300.9, 10,300.9, 145.6
- In percent of GDP: 7.7, 7.7, 6.5, 5.5, 140.9, 1.6

Notes (selected footnotes preserved):
- 1/ End-2005/06 external debt stock assuming inclusion of preliminary estimates of Russian claims.
- 2/ The sizeable increase in the debt stock in 2006/07 reflects the inclusion of the Russian claims, net of the assumed the upfront cancellation of the majority of Soviet claims consistent with Paris Club practice and subsequent rescheduling of all Paris Club claims on favorable terms.
- 3/ Excludes Russian claims prior to their expected regularization via a Paris Club rescheduling.
- 4/ Cash basis through 2005/06; thereafter on an estimated commitment basis.
- 6/ Assumes rescheduling of Paris Club arrears in 2006/07, but authorities will also seek comparable treatment on remaining non-Paris Club arrears.
- (Table headings preserved: In millions of U.S. dollars; In percent of GDP; In percent of exports of goods and nonfactor services 5/)

### External Debt Sustainability Framework — Baseline scenario and projections (Table 11a, selected lines)
Actual and projected external debt (nominal, percent of GDP; selected years):
- External debt (nominal): 13.2, 14.6, 12.8, 11.6, 17.5, 16.3, 15.2, 14.0, 13.1, 12.2
- Change in external debt (selected): ..., 1.4, -1.8, -1.2, 5.9, -1.2, -1.1, -1.2, -0.9, -0.9

Identified net debt-creating flows (selected):
- Noninterest current account deficit: 3.4, -3.3, -1.6, 0.8, -0.2, 2.9, 1.4, 4.4, 5.3, 6.3, 8.8, 5.9, 5.3
- Exports (excludes reexports): 8.0, 10.5, 6.7, 6.3, 6.3, 6.3, 6.4, 6.6, 7.0, 7.1
- Imports: 61.4, 82.6, 64.9, 57.8, 52.4, 46.7, 41.6, 36.3, 33.1, 29.8
- Net current transfers (negative = inflow): -29.9, -54.0, -46.7, -41.7, -43.1, 10.1, -37.7, -30.0, -24.7, -17.8, -13.1, -12.3, -22.6
- Net FDI (negative = inflow): -1.2, -1.3, -3.1, -5.2, -2.7, 1.9, -2.5, -3.2, -3.8, -4.8, -5.0, -4.7, -4.0

Endogenous debt dynamics (selected contributions):
- Contribution from nominal interest rate: 0.2, 0.2, 0.2, 0.3, 0.5, 0.4, 0.4, 0.3, 0.3
- Contribution from real GDP growth: -1.8, -0.9, -1.5, -1.1, -1.7, -1.5, -1.3, -1.0, -0.9
- Contribution from price and exchange rate changes: 0.4, -2.5, -0.9, .................. (ellipsis preserved)

Residual (3-4) (selected): 7.1, 6.1, 5.4, 7.8, -1.2, -1.5, -1.7, -4.1, -1.5

NPV of external debt (selected projections):
- NPV of external debt (percent of GDP): 16.1, 12.2, 11.1, 10.1, 9.2, 8.4, 7.8
- In percent of exports (excluding reexports): 256.5, 193.4, 175.9, 157.8, 138.7, 120.8, 108.9

Debt service-to-exports ratio (in percent; excluding reexports): 3.6, 4.0, 5.4, 5.1, 10.6, 8.4, 7.3, 6.3, 5.3, 4.7

Total gross financing need (in billions of U.S. dollars; selected): 0.1, -0.2, -0.3, -0.3, 0.0, 0.2, 0.2, 0.3, 0.7, 0.3

Key macroeconomic assumptions (selected):
- Real GDP growth (in percent): 28.6, 15.7, 8.0, 14.0, 16.6, 8.7, 12.0, 11.1, 10.3, 10.0, 8.0, 8.0, 9.9
- GDP deflator in U.S. dollar terms (change in percent): -2.9, 20.6, 7.4, 8.3, 11.8, 8.3, 5.0, 5.0, 4.0, 3.7, 3.7, 5.0
- Effective interest rate (in percent): 1.8, 1.5, 1.5, 1.6, 0.2, 3.5, 3.2, 3.0, 2.8, 2.7, 2.6, 3.0
- Growth of exports of goods and services (U.S. dollar terms, in percent): 47.2, -17.6, 15.1, 14.9, 32.4, 22.0, 16.5, 17.7, 18.4, 18.4, 14.1, 17.9
- Growth of imports of goods and services (U.S. dollar terms, in percent): 50.9, 2.3, 9.0, 20.8, 26.4, 10.1, 4.0, 3.0, 0.0, 1.9, 0.9, 3.3
- Grant element of new public sector borrowing (in percent) (selected): 49.7, 49.9, 49.5, 52.2, 56.9, 56.9, 52.5

Memorandum:
- Nominal GDP (in billions of U.S. dollars): 4.1, 4.6, 6.0, 7.3, 8.9, 10.3, 12.0, 13.7, 15.4, 17.2

Notes:
- Table title preserved: Table 11a. Islamic Republic of Afghanistan: External Debt Sustainability Framework, Baseline Scenario, 2002–11 1/
- Footnotes preserved exactly where referenced in the source text.

### Sensitivity analyses for key indicators of public and publicly guaranteed external debt (Table 11b, 2006–11; selected outcomes)
Baseline projections (selected indicators, 2006–2011):
- Baseline (year-by-year index values shown in table): 12, 11, 10, 9, 8, 8 (corresponding table cells preserved)
- Baseline (alternative scaling shown in table): 193, 176, 158, 139, 121, 109 (selected cells preserved)
- Baseline (another indicator series in table): 118, 76, 55 (selected cells preserved)

Alternative scenarios (selected labels and outputs preserved):
- A1. Key variables in line with historical averages for selected post-conflict countries in 2007–26 1/: 12, 15, 17, 19, 20, 22 (first series); 193, 236, 269, 291, 287, 310 (second series); 109, 99, 98, 8 (third series)
- A2. New public sector loans on less favorable terms in 2007–26 2/: 12, 12, 11, 11, 11, 10 (first series); 193, 186, 175, 160, 144, 135 (second series); 108, 88, 77, 6 (third series)

Bound tests (selected):
- B1. Real GDP growth at historical average minus one standard deviation in 2007–08: 12, 11, 11, 11, 10, 9 (first series); 193, 176, 158, 139, 121, 109 (second series)
- B4. Net non-debt creating flows halved relative to baseline in 2007–08 4/: 12, 19, 24, 21, 20, 18 (first series); 193, 298, 370, 325, 285, 259 (second series)

Memorandum item:
- Grant element assumed on residual financing (i.e., financing required above baseline) 7/ 8/: 54, 54, 54, 54, 54, 54, 54, 54, 54, 54 (as shown in table)

Notes (footnotes preserved exactly):
- 1/ Variables include real GDP growth, GDP deflator (in U.S. dollar terms), noninterest current account in percent of GDP, and nondebt creating flows. Given that Afghanistan only has reliable data since 2001, the historical average scenario was based on 10-year averages (WEO) for non-transition low-income members receiving emergency post-conflict assistance from the Fund since 1995.
- 2/ Assumes that the interest rate on new borrowing is by 4 percentage points higher than in the baseline, while grace and maturity periods are the same as in the baseline.
- 3/ Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).
- 4/ Includes official and private transfers and FDI. Given the high level of transfers since 2001 and absence of a longer data series, the standard bound test of one standard deviation below the average would have produced higher than programmed transfers in 2007–08. To better reflect Afghanistan's sensitivity to official support, an alternative shock of halving nondebt creating flows was applied.
- 5/ Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.
- 6/ Excludes reexports and staff estimates of smuggling.
- 7/ Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.
- 8/ The calculation of the grant element for this DSA differs from that used for program purposes. While the former uses a more current discout rate, the latter uses a discount rate based on 10-year average interest rates plus an additional premium reflecting the loan’s maturity.
- Table title preserved: Table 11b. Islamic Republic of Afghanistan: Sensitivity Analyses for Key Indicators of Public and Publicly Guaranteed External Debt, 2006–11 (In percent)

### Relations with the Fund (Appendix I, as of March 31, 2006)
I. Membership status:
- Joined July 14, 1955; Article XIV.

II. General Resources Account (SDR Million; percent of quota):
- Quota: 161.90, 100.00
- Fund holdings of currency: 161.92, 100.01
- Reserve position in Fund: 0.00, 0.00
- Holdings Exchange Rate: (label preserved; no numeric value)

III. SDR Department (SDR Million; percent Allocation):
- Net cumulative allocation: 26.70, 100.00
- Holdings: 0.02, 0.09

IV. Outstanding Purchases and Loans: None

V. Financial Arrangements: None

VI. Projected Obligations to Fund (SDR million; based on existing use of resources and present holdings of SDRs) — Forthcoming 2006–2010 (Principal, Charges/Interest, Total):
- 2006: Principal 0.00, Charges/Interest 0.69, Total 0.69
- 2007: Principal 0.00, Charges/Interest 0.92, Total 0.92
- 2008: Principal 0.00, Charges/Interest 0.93, Total 0.93
- 2009: Principal 0.00, Charges/Interest 0.92, Total 0.92
- 2010: Principal 0.00, Charges/Interest 0.92, Total 0.92

VII. Implementation of HIPC Initiative: Not Applicable

VIII. Exchange arrangement:
- Afghanistan is an Article XIV member country. The authorities are implementing a liberal exchange system.
- Based on information currently available to the staff, no exchange restrictions and multiple currency practices are currently in place.
- Authorities have provided documents to IMF staff related to laws and regulations on the exchange regime and have requested technical assistance from the Fund to formalize the current liberal regime.
- Managed float system with no predetermined path for the exchange rate.
- As of May 2, 2006, the average exchange rate on the Kabul money exchange market was Af 49.62 per $1.
- To conduct monetary policy, authorities rely on foreign exchange auctions since May 2002, and on short-term capital note auctions since September 2004.
- Auctions: biweekly for foreign exchange auctions, daily for capital note auctions.
- Foreign exchange auctions initially open only to licensed money changers; since June 2005 open to commercial banks. Capital note auctions open to commercial banks.

IX. Article IV Consultation:
- Last Article IV consultation discussed by the Executive Board on March 6, 2006.
- Consultations on the standard 12-month cycle.

X. Safeguards assessment:
- A safeguards assessment of Da Afghanistan Bank (DAB) is being completed.
- Safeguards mission to Kabul took place from April 2–11 and revealed serious vulnerabilities in four of the five safeguards areas: external and internal audit mechanisms, the financial reporting framework, and the system of internal controls.
- Staff made recommendations; ongoing modernization program expected to help address vulnerabilities.
- Capacity constraints within DAB may hamper effective and timely implementation.
- Staff envisages a follow-up visit in approximately one year to take stock of improvements.

XI. Technical Assistance, 2005–06 (Department, Date, Purpose — entries preserved)
- FAD: March 2004 (ongoing) — Resident Treasury expert
- FAD: May 19–25, 2005 — Seminar on reorganization of the MoF
- FAD: October 18–25, 2005 — Tax policy
- FAD: February 21–March 04, 2006 — Public financial management
- FAD: April 30–May 09, 2006 — Tax policy
- FIN: April 2–11, 2006 — Safeguards assessment
- LEG: January 29–February 12, 2005 — Income tax law
- LEG/MFD: May 2–10, 2006 — Legal framework of DAB’s monetary and payment system policies
- MFD: September 2004–March, 2006 — Training coordinator
- MFD: February 2–15, 2005 — Implementation of DAB balance sheet reconstruction and capital adequacy recommendations
- MFD: May 16–25, 2005 — Monetary policy and financial markets
- MFD: October 11–20, 2005 — Monetary policy
- MFD: November 20–29, 2005 — Financial markets
- MFD: January 22–February 5, 2006 — Monetary policy MFD
- MFD: May 2–10, 2006 — Monetary policy, foreign reserve management, money markets and insurance
- STA: January 15–February 15, 2005 — Multisector statistics
- STA: March 23–June 11, 2005 — Multisector statistics
- STA: July 20–August 31, 2005 — Multisector statistics
- STA: October 31, 2005–January 12, 2006 — Multisector statistics
- STA: March 8–May 2, 2006 — Multisector statistics
- STA: March 6–15, 2006 — Balance of payments statistics
- STA: March13–April 1, 2006 — Monetary and financial statistics
- MCD: April 16–20, 2005 — Basic macroeconomic accounting and financial programming
- METAC: November 15–20, 2005 — Tax policy and administration

Additional TA and arrangements:
- Afghanistan is a participant in the Middle East Technical Assistance Center.
- A resident treasury expert for the Ministry of Finance, Mr. Platais, was appointed in March 2004.
- Two FAD missions covering tax administration and tax policy issues are scheduled in 2006.
- A resident multisector statistical advisor, Mr. Soulatha, was stationed in Kabul on July 17, 2002.
- STA provided peripatetic multisector missions starting January 2004; missions suspended in July 2004 due to security, recommenced January/February 2005.
- With financial support from the Sweden Technical Assistance SubAccount, the Fund sponsored training activities for DAB officials.
- A long-term training advisor, Mr. Khan, was posted at DAB from September 2004–March 2006 and will now conduct quarterly technical assistance missions.
- Sweden financed a monetary policy peripatetic advisor (position shared by Mr. Coats and Mr. Gray).

XII. Resident Representatives:
- During the first half of 2002, the Fund’s resident representative in Pakistan, Mr. Ghesquière, assisted in maintaining relations with the Afghan authorities.
- A resident representative, Mr. de Schaetzen, took up his post in Kabul on August 24, 2002.
- Mr. Charap succeeded him on June 13, 2005.

*Source: _cr06251 - 2. Charges and interest 2/ (extracted content from the provided IMF PDF).*

### 1. A second Transitional Support Strategy was presented to the World Bank Board of

### _cr06251 - 1. A second Transitional Support Strategy was presented to the World Bank Board of

### World Bank strategy and timing
- A second Transitional Support Strategy was presented to the World Bank Board of Executive Directors in March 2003.
- The Strategy was due to be updated by March 2005 following the culmination of the political process outlined in Bonn.
- Presidential election: successful in October 2004.
- Parliamentary elections: held in September 2005 (delay from initial expectations).
- A new Interim Strategy Note (ISN) was prepared and anticipated for Board discussion on May 25, 2006.
- The new ISN reflects a minor shift in strategy, notably to provide a greater focus on rural development.

### World Bank project approvals and IDA financing (FY 2002–FY 2006)
- FY 2002 (projects prepared/negotiated to utilize IDA grant funds): total of $100 million.
- First IDA credit (Emergency Transport Project): $108 million, approved by the Board in March 2003.
- By end-FY 2003 additional approvals:
  - Emergency Health Sector Rehabilitation: $59.6 million
  - Emergency Public Administration II: $8.4 million
  - National Emergency Employment II: $39.2 million
  - Total allocation for FY 2003: $215 million
- FY 2004 (five IDA credits/grants negotiated): total of $293 million. Programs include:
  - Emergency Communications Project: $22 million
  - Emergency Customs Modernization and Trade Facilitation Project: $31 million
  - National Solidarity Program II: $95 million
  - Emergency Irrigation Rehabilitation Program: $40 million
  - Emergency Power Rehabilitation Program: $105 million
- FY 2005 (six projects and two supplementals approved): total of $285 million. Projects include:
  - Programmatic Support for Institution Building (first budget-support operation): $80 million
  - Kabul Urban Reconstruction Project: $25 million
  - Investment Guarantee Facility (with MIGA): $5 million
  - Education Quality Improvement Program: $35 million
  - Public Administration Capacity Building: $27 million
  - Strengthening Higher Education: $40 million
  - Supplemental financing for Emergency Transport Project: $45 million
  - Supplemental financing for National Solidarity Program: $28 million
- FY 2006 (six projects planned): total IDA grant commitment of $230 million.
  - Approved to date by the Board:
    - Programmatic Support for Institution Building II (second budget support operation): $80 million (approved in December 2005)
    - Health Sector Emergency Rehabilitation: $30 million
    - National Solidarity Program: $40 million

### Afghanistan Reconstruction Trust Fund (ARTF)
- ARTF became effective in May 2002.
- ARTF mobilized and disbursed in its early years:
  - First year of operation (2002/03): mobilized $185 million and disbursed $65 million.
  - Paid-in contributions for 2003/04: $286 million; disbursements: $254 million.
  - Paid-in contributions for 2004/05: $380 million; disbursements: $292 million.
  - Paid-in contributions for 2005/06 reached $470 million, with $405 million paid in (as of March 20, 2006).
- ARTF is increasing financing of investments and has potential to support better donor coordination, simplified processes, and fast results.
- Discussions under way with donors to increase focus on policy reform.

### World Bank advisory, analytical work, and use of special funds
- Current analytical work focuses on:
  - civil service reform
  - urban development and land management
  - education policy reform
  - labor market and pensions
  - oil/gas infrastructure development
  - broader regional trade work with Afghanistan’s neighbors
- A Gender Assessment was released in January 2006.
- A major Public Finance Management (PFM) review was completed, incorporating assessment of public expenditures and fiduciary aspects including procurement and financial management; Fund staff contributed an analysis of domestic revenue prospects.
- The World Bank has utilized the Post Conflict Fund and continues to use resources from the Japan Social Development Fund for on-the-ground support.
- Future analytical work planned to focus on anti-corruption efforts and public administration reform.

### Portfolio size and disbursement
- As of April 2006, World Bank IDA portfolio: 20 investments and four supplementals (one project has closed).
- Commitments since 2001 total $1043.2 million, of which $606.8 million are in grants.
- Disbursements are at 62 percent.
- Total commitments for FY 2006 expected to reach $230 million, entirely in grants.

### Government letter and PRGF request (Kabul, May 15, 2006)
- The government reported meeting all end-December 2005 quantitative indicators and structural benchmarks except the one related to publication of the 2004/05 audited core budget financial statements (met with delay).
- Interim Afghanistan National Development Strategy (I-ANDS) developed to address medium-term challenges.
- Request: a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) in the amount of SDR 81 million (50 percent of quota).
- Government and Da Afghanistan Bank (DAB) commit to:
  - consult with the Fund on further measures as appropriate,
  - provide all information necessary to monitor implementation in a timely manner,
  - conduct two reviews with the Fund during the first year of the PRGF arrangement: first no later than end-January 2007 and second before end-June 2007.
- Government authorized posting of the letter, attached MEFP, and technical memorandum of understanding after Executive Board consideration.

### Macroeconomic developments and performance under the SMP (2005/06 and prior)
- Growth and output:
  - Real GDP estimated to have grown by 14 percent in 2005/06, in line with SMP projections and above the 2004/05 outcome (8 percent).
- Inflation (Kabul CPI and components):
  - Year-on-year inflation in Kabul declined from 12.9 percent in September 2005 to 9.5 percent in March 2006.
  - Food prices increased by 2.6 percent over that period (compared with 12 percent over same period of 2004/05).
  - Rents increased by 24.8 percent during 2005/06.
  - Petroleum product prices increased by 26.6 percent during 2005/06.
  - Excluding rents and petroleum, year-on-year inflation declined to 6.8 percent in March, from 12.6 percent in September 2005.
  - National CPI (covers five major cities in addition to Kabul) increased by 8.5 percent in 2005/06.
- Opium cultivation:
  - Opium cultivation declined by 21 percent in 2005.
  - Cultivation expected to increase in 2006; rapid assessment indicated potential sharp increases in 7 provinces (which contributed to 43 percent of cultivation in 2005) and moderate increases in 6 provinces (representing 9 percent of 2005 cultivation). Cultivation expected to remain broadly unchanged or decline in the remaining 19 provinces.
  - Government and donors intensified eradication efforts to prevent a rise in production.
- Fiscal performance (2005/06):
  - Operating budget deficit excluding grants expected to be 3.7 percent of GDP (lower than midyear budget review estimate of 4.1 percent).
  - External grants to the operating budget projected to reach 4.7 percent of GDP in 2005/06.
  - Surplus after grants projected at 0.9 percent of GDP (compared with MYR estimate of 0.6 percent).
- Revenue performance:
  - Revenues excluding grants amounted to Af 13.3 billion during first 9 months of 2005/06 (program target Af 12.7 billion).
  - Annual revenue collection expected to be around 5.5 percent of GDP (MYR projection 5.2 percent of GDP; SMP program target 5.0 percent of GDP; 2004/05 outcome 4.5 percent of GDP).
  - Overflight charges: Af 880 million for 2006/07 received.
  - The 2-percent income withholding tax on importers introduced in 2005/06; procedural oversight corrected and around Af 1.7 billion expected to be swept from central bank branch accounts during the fourth quarter.
- Expenditure pressures and management:
  - Operating expenditures during first 9 months of 2005/06 broadly in line with budget projections but funded considerable unanticipated costs within the operating budget.
  - Expected to meet additional costs within existing operating budget ceiling (9.3 percent of GDP).
  - Issues noted: delays in paying salaries in a limited number of provinces; apparent breach of manpower ceiling by Ministry of Education; demands by other ministries for additional wage appropriations.
  - Planned response: limit recruitment and strictly enforce financial and manpower controls pending review of civil service recruitment, remuneration, and human resource management in key sectors.
- Core budget development spending (2005/06):
  - Expected to reach less than 40 percent of MYR estimates.
  - Implementation problems due to capacity constraints, security concerns, and weaknesses in budget formulation.
  - Donor-funded spending implemented outside the core budget estimated at about 28 percent of GDP in 2005/06 (donors still to provide detailed information).
  - Planned reorganization of the Budget Department along sector lines and additional technical assistance.
- Audit and financial reporting:
  - 2004/05 core budget audited financial statements published in March 2006 (initially an end-September 2005 benchmark).
  - A working group (MoF and CAO) developed an audit plan to ensure 2005/06 financial statements are submitted to parliament by legal deadline of end-September 2006.
- Monetary and reserve developments:
  - Monetary stance tightened during second half of 2005/06.
  - Currency in circulation increased by 3.8 percent during this period, amounting to Af 44.6 billion at end-March (indicative ceiling Af 49.5 billion).
  - International reserves rose to $1.7 billion at end-March 2006 (equivalent to 4.7 months of 2006/07 imports of goods and services).
  - Interest rates on overnight and 30-day capital notes in the 1–2 percent and 4–6 percent ranges, respectively.
- Exchange rate and real appreciation:
  - Exchange rate fluctuated within 48.5–50.5 Afghanis per U.S. dollar range.
  - Afghani appreciated by 2 percent in real terms against the U.S. dollar during the second half of 2005/06.
- Central bank modernization and banking sector actions:
  - Foreign exchange auctions: participants now allowed to both sell and buy dollars, and to enter multiple bids.
  - Interest rates on capital note auctions started to be published.
  - Enforcement of reserve requirements strengthened; initiated remuneration of required reserves; capital notes excluded from eligible assets.
  - State-owned banks: new Board of Directors appointed at Bank Millie to oversee restructuring; team appointed to oversee liquidation of three former state-owned banks that had not been relicensed.
  - Completed transfer of remaining deposits with the Agricultural Development Bank.
- Current account and external sector (2005/06):
  - Preliminary estimates: current account deficit, excluding grants, moderated to 42½ percent of GDP in 2005/06 (from just over 45 percent of GDP in 2004/05).
  - Current account including grants shifted from a surplus of just under 1½ percent of GDP in 2004/05 to a deficit nearing 1 percent of GDP in 2005/06 (owing to decline in public transfers as a share of GDP).
  - Total donor disbursements largely unchanged in dollar terms; tapering of concessional loan disbursements offset by higher official transfers.
  - Current account deficit including grants more than covered by a doubling of foreign direct investment (FDI) to more than 5 percent of GDP, driven by one-off telecommunication investments.
- Balance of payments statistics improvements:
  - Surveys of non-recorded trade and travel undertaken in line with May 2005 IMF technical assistance mission recommendations.
  - March 2006 technical assistance follow-up mission recommendations to support compilation and analysis of surveys and improve data reporting and collection from commercial banks, major FDI enterprises, money changers, foreign embassies, and international organizations.

*Source: _cr06251 - 1. A second Transitional Support Strategy was presented to the World Bank Board of*

### 15.      Progress in verifying external debt owed to Paris Club and non-Paris Club

### 15. Progress in verifying external debt owed to Paris Club and non-Paris Club

### Verification of external debt claims
- Progress in verifying external debt owed to Paris Club and non-Paris Club creditors continued, albeit at a slower-than-desired pace.
- During the fourth quarter of 2005/06, the Slovak Republic agreed to forgive our arrears.
- Progress with other non-Paris Club creditors constrained by delays in obtaining documentation needed to validate and reconcile related claims.
- Paris Club creditors—Germany, Russia, and the United States—announced their intention to provide 100 percent debt relief in the context of the enhanced HIPC Initiative.

### Statistical capacity and institutional reforms
- Adoption of the statistical law led to establishment of a National Statistical Council to supervise implementation of statistical policy and reform plan.
- Reorganization of the Central Statistics Office is underway.
- Continued work on drafting metadata necessary to participate in the General Data Dissemination System.
- The National Statistical Council is expected to include representatives from: the Vice President Office; Ministry of Finance; Ministry of Economy; Ministry of Education; Ministry of Health; Da Afghanistan Bank; Central Statistics Office; the Oversight Committee of ANDS; women from academia; and the private sector.

### Medium-term strategy (PRGF program objectives)
- Primary objectives: sustained broad-based growth and poverty reduction.
- I-ANDS reform agenda aims to: consolidate macroeconomic stability; diversify sources of growth; set policies for fiscal and external sustainability; remove institutional and structural impediments to private sector development; gradually eliminate opium-related activities.
- Poverty-reducing elements of I-ANDS focus on:
  - increasing employment and enterprise creation;
  - developing human capital through better education and health, and adequate social protection;
  - rural development;
  - establishing a solid infrastructure base to exploit natural resources.
- Macroeconomic framework consistent with:
  - average annual real GDP growth of about 10 percent a year over the next five years;
  - annual inflation declining to less than 5 percent by 2009.
- Medium-term fiscal strategy components:
  - funding the operating budget exclusively through own revenue and trust fund grants;
  - maintaining the “no-overdraft rule” (central bank financing limited to drawdown of government deposits with DAB);
  - refraining from borrowing at any commercial bank;
  - strengthening revenues from around 5.5 percent of GDP in 2005/06 to over 8 percent by 2010/11;
  - public administration reform to contain costs;
  - improving implementation of the development budget.
- Reserve and external targets:
  - bring international reserve coverage to no less than five months of imports of goods and services over the medium term;
  - current account deficit, excluding grants, should decline to about 24 percent of GDP by 2009/10.
- Note: additional donor resources—by way of debt rescheduling—will be required until permanent settlement of arrears under the enhanced HIPC Initiative.

### The 2006/07 program (growth, income, inflation, external)
- Real economic growth projected at 12 percent in 2006/07.
- Per capita income projected to increase to $354, up from $300 in 2005/06.
- Monetary policy target: limit year-on-year inflation to 9 percent by end 2006/07.
- Current account deficit excluding grants expected to decline from 42½ percent of GDP in 2005/06 to 39 percent of GDP in 2006/07.
- FDI expected to decline in 2006/07 following large one-off telecommunication investments in 2005/06.
- Donor disbursements expected to accelerate, bolstered by pledges at the recent International Donors’ Conference.

### Fiscal policy and budget targets
- Budgeted operating deficit excluding grants for 2006/07: 3.5 percent of GDP (higher than 2.1 percent of GDP envisaged under the MTFF).
- Operating expenditures budgeted at 9.2 percent of GDP in 2006/07 (compared to 9.3 percent in 2005/06 and MTFF projection of 8.9 percent of GDP).
- Factors for higher-than-expected spending:
  - absorption of significant costs previously funded directly by donors (including Afghan National Army, National Security Council and presidential protective services, Election Commission, Ministry of Counter Narcotics);
  - significant increase in the number of teachers in 2005/06;
  - introduction of pay and grading reform for the civil service.
- Domestic revenue budgeted at 5.7 percent of GDP in 2006/07 (a 0.2 percent of GDP increase), less than the 1.3 percent of GDP increase envisioned under the MTFF.
- Revenue measures and assumptions include:
  - rationalizing the import tariff structure (moving some items from the lowest 2.5 percent rate to higher rates within existing band structure; top rate remains 16 percent);
  - introducing excise taxes and road tolls;
  - full year implementation of tax measures introduced in third quarter of 2005/06 (including a higher turnover tax rate for specific services; a wage withholding tax; an airport departure fee).
- Measures to ensure actual operating deficit excluding grants will not exceed 3.0 percent of GDP in 2006/07:
  - contingency for an additional 17,000 staff not expected to be required → fiscal savings equivalent to 0.1 percent of GDP;
  - slower implementation of pay and grading reforms → likely further reduce expenditure by 0.1 percent of GDP;
  - strict enforcement of guidelines governing use of contingency funds;
  - an additional 0.3 percent of GDP in savings attributable to higher-than-budgeted revenue.
- Expected grant funding of 3.9 percent of GDP from the two multi-donor trust funds; excess resources to be allocated to boost development budget spending.
- Any further spending amendments to be agreed with development partners, including the IMF, during the MYR process.

### Public sector wage bill and payroll reforms
- Wage bill accounted for almost 65 percent of the operating budget in 2005/06.
- Measures to reinforce expenditure discipline:
  - monitor and enforce manpower ceiling (Tashkeel) and appropriation ceilings for employee compensation, benefits and allowances;
  - accelerate roll-out of the verified payroll system (revised plan to be published by end-June 2006);
  - joint investigation by the civil service commission, largest line ministries, and MoF to verify number and location of public servants, recent recruitment practices, and trends in remuneration and payroll management;
  - findings to inform 2006/07 MYR and recommendations to improve payroll management and recruitment controls.
- No across-the-board wage increase envisaged in 2006/07; future increases linked to pay and grading reform and performance, subject to affordability from own revenues.

### Revenue structural reforms (priority reforms for 2006/07)
- Strengthen audit capacity of the large taxpayers’ office and promote voluntary compliance, including self assessment.
- Publish taxpayer manuals and procedures by tax and customs authorities to improve transparency and accountability.
- Upgrade physical and human capacity, particularly in the provinces, to establish professional tax administration.
- Establish a transparent appeals process for customs and tax administrations by end-September 2006.
- Submit to parliament by end-December 2006 new legislation introducing an excise tax on selected goods and removing “nuisance” taxes and illicit charges.
- Produce a strategy document, in consultation with major stakeholders, to promote phased extension of a broad-based consumption tax to replace the current cascading business receipts tax.

### Development budget execution and reforms
- Core development budget of 14.2 percent of GDP; target to raise implementation rate to around 50 percent of the budget.
- Measures to improve execution:
  - publish a strategic plan for MoF and plans for reorganizing the budget department and reforming provincial treasuries (Mustofiats);
  - target capacity building for line ministries in project identification, appraisal, planning and budgeting;
  - introduce computerized grant management and contract/commitment monitoring capabilities.
- External budget expected to remain significant at around 24 percent of GDP.
- Timetable for preparation of the 2007/08 budget to be published by end-April.

### Monetary and exchange rate policies
- Monetary program for 2006/07 to target currency in circulation within a flexible exchange rate framework; aim for inflation to decline to 9 percent by end-2006/07.
- Currency in circulation expected to increase by 18.4 percent in 2006/07, compared with a 22.0 percent increase in nominal GDP.
- Increase in velocity of currency expected largely from expansion of commercial banking sector and shift from currency in circulation to deposits.
- International reserves expected to increase further to more than $1.8 billion at end-2006/07 (equivalent to 4.9 months of 2007/08 imports of goods and services).
- Program floor on net international reserves set lower than projected under the program, consistent with a threshold of 4.2 months of imports at end-2006/07.

### DAB operational and monetary framework reforms
Planned measures and deadlines:
- Implement regulations related to commercial banks’ foreign exchange open positions (end-August 2006).
- Adopt measures to deepen the capital notes market (e.g., open auctions to licensed money changers, authorize banks to bid on behalf of clients, introduce notes with longer maturities).
- Introduce a standing deposit facility and an overnight collaterized credit facility, with capital notes eligible as collateral.
- Submit to parliament the external audits of DAB for 2004/05 and 2005/06 (end-September 2006).
- Complete a review of financial relations of government and DAB by end-September 2006 and develop a service level agreement setting charges for financial services and remuneration of government deposits.
- Process the gold held in the palace vaults into a form that qualifies as a reserve asset (end-September 2006).
- Develop a monthly balance sheet of DAB covering all provincial branches (end-September 2006) and a comprehensive monetary survey (end-March 2007).
- Note: accounting department of DAB currently compiles balance sheet annually; existing balance sheet considered incomplete and insufficiently detailed for monetary statistics.

### Banking sector restructuring and legal reforms
- By end-June 2006: appoint new Board of Directors at Bank Pashtany.
- Export Promotion Bank: publish decision to liquidate or merge with Bank Pashtany and Bank Millie and complete transfer of its deposits by end-September.
- Adopt long-term restructuring plans for Bank Millie and Bank Pashtany by end-September.
- Work with banking community to establish an interbank money market.
- Intensify efforts to address administrative and legal impediments to banking sector development.
- By end-2006/07: adopt a core group of enabling laws, including legislation on secure transactions, business organization, and negotiable instruments; clarify land ownership rights.
- DAB to reduce significantly the interest rate it pays on savings accounts in provincial branches by end-September to encourage commercial banking development in provinces.
- Observation: most private banks’ holdings of Afghani-denominated assets insufficient to comply with foreign currency open position requirements, while state-owned banks appear overly liquid in Afghanis.

*Source: _cr06251 - 15. Progress in verifying external debt owed to Paris Club and non-Paris Club*

### 33.      With the envisaged foreign support, we expect the balance of payments position

### _cr06251 - 33.      With the envisaged foreign support, we expect the balance of payments position

### Balance of payments and external financing
- With envisaged foreign support, the balance of payments position is expected to remain manageable.
- Current account pressures:
  - Current account deficit excluding grants is likely to amount to 39 percent of GDP in 2006/07.
  - Current account, including grants, is expected to record a deficit of nearly 1½ percent of GDP in 2006/07, widening somewhat over the medium term as donor financing tapers off.
- Policy implication: continued financial assistance from the international community—including IMF support under the PRGF—predominantly in the form of grant financing, is underscored as essential.

### Debt management strategy and external sustainability
- Strategy:
  - Continue a cautious approach to external borrowing and regularization of relations with external creditors as the basis for restoring external sustainability.
  - Rely primarily on grants and highly concessional loans, reflecting pledges made at the International Donors’ Conference.
  - Observe ceilings on short-term external debt owed or guaranteed by the government or DAB and on contracting or guaranteeing medium- and long-term nonconcessional external debt by the government or DAB (performance criteria) under the PRGF.
- 2006/07 financing gap and arrears:
  - Anticipated large financing gap in 2006/07 will be covered principally through the rescheduling of bilateral debt.
  - Having verified debts and arrears to bilateral creditors, the authorities intend to request debt relief from the Paris Club on favorable terms, and comparable relief from other creditors, as a step toward settling bilateral arrears.
  - Commitment to remain current on other external financial obligations.

### Trade policy, exchange system, and WTO preparatory work
- Trade and tariff policy:
  - Commitment to maintaining a liberal and transparent trade regime to enhance growth prospects.
  - Envisaged rationalization of the tariff structure will focus on correcting anomalies and resist demands for a more protectionist tariff structure.
  - In 2007/08, begin to compile merchandise trade statistics according to the Standard International Trade Classification.
- WTO preparations:
  - Pursue preparatory work for discussions toward membership to the World Trade Organization (WTO) to gain access to the WTO dispute settlement mechanism and technical assistance.
- Foreign exchange system:
  - Commitment to maintaining a foreign exchange system free of restrictions and to progress toward establishing an adequate legal framework for the exchange system.
  - Request for further IMF technical support to formalize a liberal exchange rate system and to accept the obligations under Article VIII, Sections 2, 3, and 4 of the Fund’s Articles of Agreement.

### Data quality, debt tracking, and structural reform priorities
- Balance of payments and statistics:
  - Commit to enhancing the quality and reliability of balance of payments data.
  - Use recently completed surveys of non-recorded trade and travel to refine estimates of goods and services trade.
  - Continue regular engagement with primary providers of data on other financial flows and private remittances.
- External debt tracking:
  - MoF, in close collaboration with DAB, will strengthen tracking of external debt data and reconcile obligations regularly with all outside parties.
- Structural reforms guided by the I-ANDS:
  - Focus areas under the PRGF-supported program include:
    - Harmonizing and simplifying legislation, procedures, and regulations related to investment.
    - Establishing and implementing a strategy for the divestment of state-owned enterprises and government agencies engaged in commercial activities but not covered by the Tassady law (end-September 2006 structural benchmark).
    - Enabling registration of land titles in rural and all major urban areas.
- Governance and monitoring:
  - Strengthen information on social indicators to monitor poverty reduction strategy progress and transition from I-ANDS to ANDS.
  - Joint Monitoring and Coordination Board established for Compact implementation and progress against I-ANDS objectives.
  - Submit to parliament the audited financial statement of the 2005/06 core budget (end-September 2006 structural performance criterion) and introduce new accounting standards for the public sector by end 2006/07.
  - Ratify the UN Convention on Corruption and introduce complementary national legislation modifications to fight corruption and strengthen economic governance.

### Safeguards, statistics, and technical assistance needs
- Safeguards and governance at DAB:
  - Commit to maintaining DAB’s financial soundness by adhering to principles of good governance and IMF safeguards guidelines.
  - Pending completion of the requested safeguards assessment, strengthen internal auditing capacity and make best use of existing financial supervision apparatus and legislation, including anti–money laundering and counter-terrorist financing measures.
- Technical assistance priorities:
  - Continue working with multilateral and bilateral partners to strengthen administrative capacity in: tax and customs administration and policy, public expenditure management, civil service reform, liquidity management and banking supervision, and financial markets legislation and operation.
  - Continue assistance to improve economic statistics: national accounts, balance of payments, monetary statistics, and poverty and social indicators.

### Program monitoring, contingencies, and program design features
- Monitoring framework:
  - First year of the three-year PRGF-supported program monitored via quantitative performance criteria for September 21, 2006 and March 21, 2007, and quantitative indicators for June 21 and December 21, 2006. Quantitative targets are cumulative from March 21, 2006.
  - Structural performance criteria and benchmarks under the 2006/07 program are defined in the Technical Memorandum of Understanding (TMU).
- Reviews and conditionality:
  - First review under the PRGF arrangement scheduled to be completed by end-January 2007, conditional upon observing the September 2006 performance criteria.
  - At first review, quantitative indicative targets for March 2007 will be converted to performance criteria and additional structural conditionality may be set for the second review, scheduled to be completed by end-June 2007.
- Contingencies and adjustors:
  - Monitoring framework includes adjustors relating to potential deviations from program projections in development spending and/or in external financing and receipts from the transfer of nonfinancial assets (described in the TMU).
  - Program provides room for moving on budget of expenditures currently financed directly by donors.
  - Government stands ready to adopt additional measures, in consultation with IMF staff, if necessary to meet program objectives.
- External transaction restrictions:
  - During the program period, Afghanistan will not impose or intensify restrictions on payments and transfers for current international transactions, introduce or modify multiple currency practices, conclude bilateral payments agreements inconsistent with Article VIII, or impose or intensify import restrictions for balance of payments purposes.
- Internal monitoring:
  - Continue to monitor execution of the PRGF-supported program internally through the Technical Coordination Committee.

### Key quantitative indicators and targets (selected figures from program tables)
- Gross international reserves of the central bank (floor) (in millions of U.S. dollars): 100; 248; 158 (Table preceding).
- Memorandum item: Currency in circulation (level triggering consultation): 10,151; ...; 13,234.
- Table 3 — Program performance criteria and indicative targets (cumulative changes from end-March 2006; in millions of Afghanis unless otherwise indicated):
  - Floor on fiscal revenue of the government: 5,317; 10,636; 17,201; 26,595.
  - Ceiling on currency in circulation: 2,794; 5,587; 6,910; 8,233.
  - Ceiling on net central bank financing of the government: 3,587; 9,042; 8,254; 1,242.
  - Indicative target (ceiling) on the operating budget deficit excluding grants of the government: 4,561; 9,120; 12,432; 12,915.
  - Floor on net international reserves of DAB (in millions of U.S. dollars): -124.3; -198.6; -217.2; -68.5.
  - Zero ceilings (continuous performance criteria) on:
    - Contracting or guaranteeing new medium- and long-term nonconcessional external debt by the government and DAB.
    - Short-term external debt owed or guaranteed by the government or DAB.
    - Nonaccumulation of new external payments arrears, excluding interest on preexisting arrears.
- Earlier quantitative ceilings/levels (Table 1 excerpt):
  - Currency in circulation (ceiling) 1/: 7,822; 4,249; 10,758.
  - Claims of the banking system on the central government (ceiling): 0; 0; 0.
  - Gross international reserves of the central bank (floor) (in millions of U.S. dollars): 100; 248; 158.
  - Fiscal revenue of the central government (floor): 12,676; 13,346; 18,328.
  - External debt new medium- and long-term nonconcessional external debt contracted or guaranteed by the government (ceiling) 2/ 3/: 0; 0; 0.
  - New nonconcessional debt with original maturity less than one year (ceiling) 3/ 4/ 5/: 0; 0; 0.

*Source: Excerpts from IMF staff–authorities memorandum and Technical Memorandum of Understanding for the PRGF-supported program for Afghanistan.*

### 3.      The quantitative performance criteria and indicative targets specified in Table 3 of the

### _cr06251 - 3.      The quantitative performance criteria and indicative targets specified in Table 3 of the

### Quantitative performance criteria and indicative targets (summary)
- The quantitative performance criteria and indicative targets specified in Table 3 of the MEFP are:
  - a floor on fiscal revenue of the central government;
  - a ceiling on currency in circulation;
  - a ceiling on the net central bank financing (NCBF) of the central government;
  - a floor on net international reserves (NIR);
  - a zero ceiling on contracting and/or guaranteeing new medium- and long-term nonconcessional external debt by the government and DAB;
  - a zero ceiling on short-term external debt owed or guaranteed by the government or DAB;
  - a zero ceiling on the accumulation of external payment arrears, excluding interest on preexisting arrears; and
  - an indicative target (ceiling) for the operating budget deficit excluding grants of the central government.

### A. Program exchange rate
- Program exchange rates for monitoring quantitative targets:
  - All foreign assets and liabilities denominated in U.S. dollars will be converted into Afghanis using a program exchange rate of 49.94 Afghanis per U.S. dollar (average of the U.S. dollar/Afghani buy and sell cash rates, as reported by the DAB as of March 20, 2006).
  - Assets and liabilities denominated in SDRs and in foreign currencies other than the U.S. dollar will be converted into U.S. dollars at their respective exchange rates prevailing as of February 28, 2006.
  - Gold holdings will be valued at 552.85 dollars by ounce (price as of March 20, 2006).

- Exchange rate Program rate (currency pairs and rates as reported):
  - Dollar/Canadian Dollar 0.861700
  - Dollar/UAE Dirham 0.272280
  - Dollar/Egyptian Pound 0.174370
  - Dollar/Euro 1.190650
  - Dollar/Hong Kong Dollar 0.128841
  - Dollar/Indian Rupee 0.022532
  - Dollar/Pakistani Rupee 0.016633
  - Dollar/Polish Zloty 0.306876
  - Dollar/Iranian Ryal 0.000109
  - Dollar/Saudi Ryal 0.266640
  - Dollar/Russian Ruble 0.035660
  - Dollar/Swiss Franc exchange rate 0.760980
  - Dollar/UK Pound exchange rate 1.736050
  - Dollar/SDR 1.447570

### B. Currency in circulation
- Definition for program monitoring:
  - Currency in circulation is total currency issued by DAB.
  - Excludes currency held in the presidential palace vault, in DAB main vault, and in the vaults of DAB’s provincial branches.
  - Includes currency in the vaults of DAB’s district branches.
  - Note: This definition differs slightly from international standards owing to the unavailability of reliable and timely currency data from DAB’s district branches.

### C. Net central bank financing (NCBF) of the government
- Definition for program monitoring:
  - NCBF = central bank’s claims on the government − deposits of the government with DAB.
  - Government deposits include deposits held at DAB headquarters, but exclude deposits held at DAB’s branches.
  - Note: This definition differs slightly from international standards owing to the unavailability of reliable and timely government deposit data from DAB’s branches.

### D. Net international reserves (NIR)
- Definition:
  - NIR = reserve assets − reserve liabilities of DAB.
- Reserve assets (BPM5 definition and program-specific inclusions/exclusions):
  - Included: DAB holdings of monetary gold, SDRs, Afghanistan’s reserve position in the IMF, foreign currency cash (including foreign exchange banknotes in the vaults of DAB, but excluding cash held in DAB’s branches), and deposits abroad (including balances on accounts maintained with overseas correspondent banks).
  - Excluded: any assets that are pledged, collateralized, or otherwise encumbered; claims on residents; precious metals other than monetary gold; assets in nonconvertible currencies; illiquid assets; and claims on foreign exchange arising from derivatives in foreign currencies vis-à-vis domestic currency (such as futures, forwards, swaps, and options).
  - Specific exclusion: assets that are counterpart of the government's foreign currency deposits that back letters of credit are excluded from reserve assets. Assets that are counterpart of other government deposits are included in reserve assets.
- Reserve liabilities (program definition):
  - Defined as short-term (original maturity) foreign exchange liabilities of DAB to nonresidents (held at DAB headquarters); all credit outstanding from the IMF; foreign currency reserves of commercial banks held at DAB headquarters; commitments to sell foreign exchange arising from derivatives (such as futures, forwards, swaps, and options); and all arrears on principal or interest payments to commercial banks, suppliers, or official export credit agencies.
- Both reserve assets and reserve liabilities will be expressed in U.S. dollars.

### E. Revenues of the central government
- Definition (GFSM 2001, cash basis, excluding foreign grants):
  - Revenue is an increase in net worth of the central government resulting from a transaction.
  - Revenues include taxes and other compulsory transfers imposed by central government units, property income from ownership of assets, sales of goods and services, social contributions, interest, fines, penalties and forfeits, and voluntary transfers received from nongovernment other than grants.
  - Non-exhaustive list of revenues: corporate income tax, personal income tax, business receipts tax, taxes on properties, fixed withholding taxes on imports and exports, excise taxes, presumptive taxes in lieu of the income tax, import duties, and other charges and fees.
  - Excludes: grants and other non-compulsory contributions received from international organizations; receipts collected by central government on behalf of non-central government units (e.g., Red Crescent fees); receipts from the sale of nonfinancial assets (such as privatization); transactions in financial assets and liabilities (such as borrowing), except interest payments.
- Recognition and reporting:
  - Revenues should be recognized on a cash basis and recorded when cash is received.
  - Excludes any revenues received prior to March 21, 2006 but where funds are not transferred to government’s accounts at DAB by this date.
  - Exceptional advanced payments will be treated as if received on the normal due date.
  - All revenue must be supported by relevant documentation.
  - Revenue receivables and revenues payable should be separately reported on a gross basis.

### F. External debt and arrears
- Definition of “debt” (from Guidelines on Performance Criteria with Respect to Foreign Debt, Decision No. 12274-00/85; August 24, 2000):
  - Debt = a current (not contingent) liability, created under a contractual arrangement through provision of value in the form of assets (including currency) or services, requiring the obligor to make one or more payments in assets or services at future time(s) to discharge principal and/or interest liabilities.
- Forms of debt (primary examples):
  - (a) loans (advances of money; deposits, bonds, debentures, commercial loans, buyers’ credits; repurchase agreements; official swap arrangements);
  - (b) suppliers’ credits (deferred payments for goods/services); and
  - (c) leases (property provided for use where lessor retains title).
  - Exclusion: leases of real property by Afghan embassies or other foreign representations of the government.
- Leases valuation and arrears:
  - For guidelines, lease debt = present value (at inception) of all lease payments expected during the agreement period, excluding payments for operation, repair, or maintenance.
  - Arrears, penalties, and judicially-awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt.
  - Failure to make payment on an obligation not considered debt (e.g., payment on delivery) will not give rise to debt.
- Ceiling on medium- and long-term external debt (paragraph 14 rules):
  - Applies continuously to contracting or guaranteeing by the government or DAB of new nonconcessional external debt with original maturity > one year.
  - “Government” includes the central government (including government departments) and official agencies that do not seek profit and whose budgets are issued independent of the annual operational or development budgets.
  - MoF should have sole responsibility for contracting and guaranteeing external debt on behalf of the government (consistent with PFEM law).
  - Applies to debt as defined and commitments contracted or guaranteed for which value has not been received.
  - For program purposes:
    - external debt is considered contracted at the point the loan agreement or guarantee is signed by the MoF (on behalf of the government) or DAB Governor;
    - guarantee arises from any explicit legal obligation of the government or DAB or any other agency acting on behalf of the government to service such a debt in event of nonpayment, or indirectly through any other obligation to cover shortfalls.
  - Excluded from the limits: refinancing credits and rescheduling operations, credits extended by the IMF, and credits on concessional terms defined as those with a grant element of at least 60 percent.
  - Grant element calculation: use currency-specific discount rates based on OECD Commercial Interest Reference Rates (CIRRs): for maturities < 15 years, grant element calculated based on six-month averages of CIRRs; for maturities > 15 years, based on 10 year averages.
  - Debt falling within the limit shall be valued in U.S. dollars at the exchange rate prevailing at the time the contract or guarantee becomes effective.
- Ceiling on short-term external debt (paragraph 15 rules):
  - Applies continuously to the stock of short-term external debt owed or guaranteed by the government or DAB with original maturity up to and including one year.
  - Applies to debt as defined in paragraph 13.
  - Excluded: rescheduling operations (including deferral of interest on commercial debt) and normal import-related credits.
  - Debt falling within the limit valued in U.S. dollars at the exchange rate prevailing when the contract or guarantee becomes effective.
- Continuous performance criterion on external payment arrears (paragraph 16):
  - Nonaccumulation of new external payments arrears on external debt contracted or guaranteed by the central government or the DAB.
  - External payment arrears = external debt service obligations (principal and interest) falling due after March 20, 2006 and not paid when due as specified in contractual agreements.
  - Excluded from the prohibition on new arrears:
    - (a) arrears arising from interest on the stock of arrears outstanding as of March 20, 2006;
    - (b) external arrears subject to debt rescheduling agreements or negotiations.

### G. Adjusters for Net International Reserves and Net Central Bank Financing
- Core assumptions (cumulative core budget development spending from March 20, 2006):
  - June 21, 2006 Af 3,741 million
  - September 21, 2006 Af 11,222 million
  - December 20, 2006 Af 18,704 million
  - March 20, 2007 Af 29,926 million
- Adjustment rule (development spending):
  - Should core budget development spending exceed these projections, the NIR floor will be adjusted downward and the NCBF ceiling will be adjusted upward by the difference between the actual level (up to the appropriated amount) and the projected level of development spending.
- External financing and nonfinancial asset receipts assumptions (cumulative from March 20, 2006):
  - June 21, 2006 Af 4,715 million
  - September 21, 2006 Af 11,300 million
  - December 20, 2006 Af 22,882 million
  - March 20, 2007 Af 41,599 million
- Adjustment rule (external financing and nonfinancial asset receipts):
  - Should external financing of the core budget (including that associated with off-budgetary spending coming on budget) and receipts from sale or transfer of nonfinancial assets collectively exceed (fall short of) these projections, the NIR floor will be adjusted upward (downward) and the NCBF ceiling will be adjusted downward (upward) by the difference between their actual level and the projected level.
- On donor-financed expenditures moved on-budget:
  - If expenditures currently financed directly by donors outside the budget are moved onto the operating budget, then:
    - the NIR floor will be adjusted downward,
    - the NCBF ceiling and the indicative target (ceiling) for the operating budget deficit excluding grants will be adjusted upward,
    - adjustments apply by the actual amount of these expenditures provided that:
      - (a) the move on-budget is justified by a statement from donors indicating their decision to stop financing them outside the budget, and
      - (b) they are subject to a supplementary appropriation approved by parliament.
- Cap on downward adjustment to NIR floors:
  - The overall downward adjustment to the NIR floors will be capped at $375 million.

### III. Provision of information to Fund staff (reporting and frequencies)
- General:
  - Government of Afghanistan and DAB will provide to Division A of the Middle East and Central Asia Department (MCD), through the office of the Resident Representative of the IMF in Afghanistan, the information specified and summarized in reporting tables provided by Fund staff to the Technical Committee.
- Reporting frequencies and lags (actual outcomes):
  - DAB net international reserves:
    - Reported weekly, no later than two weeks after the end of the week.
  - Monetary statistics (including exchange rates, government accounts with DAB, and currency in circulation):
    - Reported monthly, no later than three weeks after the end of the month.
    - Monetary survey: quarterly, and then monthly starting in March 2007, including balance sheets of DAB and a consolidated balance sheet of the commercial banking sector.
  - Operational budget operations and financing:
    - Reported monthly, no later than four weeks after the end of the month.
    - Core development budget operations and financing: reported monthly, no later than four weeks after the end of the month.
    - Structure of financing (grants and loans separately identified) and expenditure data should be on a consistent cash basis.
    - Core operating expenditures: reported monthly using the budget appropriation economic (Object) and administrative classification in addition to program and functional classification as reported in budget documents.
    - Core development expenditures: reported monthly using the budget program classification in addition to economic (Object), administrative and functional classification consistent with the operating budget.
    - All data should compare outturns against the approved budget (or figures reported in the budget documents).
    - Core operating and development revenues and expenditures should be reported by province, separately on the same monthly basis.
  - External budget operations and financing (donor funded spending outside the core budget treasury systems):
    - Reported at least semi-annually (more frequently if possible) and no later than eight weeks after the end of the period.
    - External development expenditures: reported on a disbursement basis using the budget program classification (and administrative, functional and provincial classification where possible).
  - External debt data:
    - Reported quarterly, no later than six weeks after the end of the quarter.
    - Include: (a) details of new loans contracted or guaranteed during the quarter, including terms of each new loan; (b) stock of debt at end of quarter, including short-term, and medium- and long-term debt; (c) loan disbursements and debt service payments (interest and amortization) during the quarter; (d) information on all overdue payments on short-term debt and on medium- and long-term debt, including new external arrears (if any); and (e) total outstanding amount of arrears.
  - National accounts data:
    - Reported annually and no later than eight weeks after the end of the quarter.
  - Consumer price indices (CPIs):
    - CPIs for the city of Kabul and for Kabul and five other major cities (“national” CPI): reported monthly and no later than four weeks after the end of the month.
- Structural reform reporting:
  - Government of Afghanistan and DAB will prepare and send to the IMF reports explaining progress in implementing structural reforms, particularly those included as structural performance criteria and benchmarks in the program.
  - These reports will include appropriate documentation to substantiate progress and will explain any deviations relative to initial reform plans or timetable, specifying expected revised completion date.

*Source: _cr06251 - 3.      The quantitative performance criteria and indicative targets specified in Table 3 of the*

### 24.      Other details on major economic and social measures taken by the government that

### _cr06251 - 24.      Other details on major economic and social measures taken by the government that

### Program monitoring and information sharing
- Other details on major economic and social measures that are expected to have an impact on program sequencing (changes in legislation, regulations, or any other pertinent document) will be sent in a timely manner to IMF staff, for consultation or information.
- The Technical Committee of Coordination (TCC) will provide Division A of MCD with any other information required by IMF staff for effective monitoring of the program.
- For program monitoring purposes, working meetings are planned, at least biweekly, with participation of representatives of the designated members of the TCC, including any party that could facilitate monitoring implementation of the program.

### Budget revisions and fiscal measures (June 2006)
- Parliament approved a revised budget for 2006/07 on June 3, 2006, after rejecting the original budget on May 21, 2006, because it did not include a general increase in wages for civil servants and pensions for retirees, the disabled, and martyrs.
- The revised budget incorporates increases in wage and pensions equivalent to about half of those originally requested by parliamentarians.
- The revised budget provides:
  - An average increase of about 10 percent in the basic salaries of civil servants (excluding the police and the military), effective at midyear (September 21).
  - A moderate adjustment in pensions for martyrs and the disabled, effective as of March 21, 2006.
  - End-year inflation is targeted at 9 percent in 2006/07.

### Fiscal impact, offsets, and budget composition
- Fiscal impact of the salary and pension measures: Af 713 million (0.16 percent of GDP) in 2006/07.
- The Af 713 million is fully offset by:
  - Reductions in appropriations for goods and services (Af 348 million),
  - Reductions in contingency reserves (Af 289 million),
  - Reductions in capital expenditures (Af 7 million),
  - Specific cuts in the wage bill (Af 69 million).
- Contingency reserves declined from 3.5 percent of operating expenditures to 2.8 percent.
- Because basic salaries are a small share of total civil servants’ remuneration, the total wage bill is projected to increase by only 2 percent relative to the original budget.
- Overall, total operating expenditures (and the operating budget deficit) remain as originally programmed.
- The authorities issued a supplement to the Memorandum of Economic and Financial Policies (MEFP) describing the modifications and including a firm commitment to avoid any additional across-the-board wage increases during the remainder of 2006/07.

### Attachment I: Government commitments (Kabul, June 10, 2006)
- The revised 2006/07 fiscal program includes:
  - A Af 300 increase in monthly basic salaries of civil servants (excluding police and military), effective from September 21, 2006.
  - A Af 100 increase in monthly pensions for the disabled and martyrs, effective from March 21, 2006.
  - Total cost of these amendments estimated at Af 713 million (0.16 percent of GDP) in 2006/07.
- To keep the programmed operating deficit (excluding grants) unchanged at 2.9 percent of GDP (MEFP; ¶26), these increases are fully offset by reducing other programmed expenditures (principally goods and services, 0.08 percent of GDP) and by using a portion of contingency reserves (0.07 percent of GDP).
- The government commits to:
  - Refrain from additional across-the-board wage increases during the remainder of fiscal year 2006/07.
  - Link future selective increases to the pay and grading reforms envisaged under the program (MEFP; ¶27).
  - At the midyear budget review, consider additional expenditures only if (i) revenue collection exceeds the September 2006 performance criterion and is expected to do so for the remainder of the fiscal year; and (ii) priority is given to unwinding the expenditure offsets identified above.

### IMF staff assessment and policy recommendations
- Staff consider the implications for medium-term sustainability not significant despite a reduced fiscal space for civil service reform and partial use of contingency reserves.
- Staff welcome the government’s commitment to avoid further across-the-board wage increases and stress that this commitment should be strictly adhered to in order to contain medium-term fiscal risks.
- Staff emphasize the need to:
  - Avoid ad hoc decisions that could undermine the quality of non-wage recurrent expenditure.
  - Intensify efforts to strengthen the budget formulation process.
  - Consider increasing expenditure appropriations at the midyear budget review if higher-than-expected revenue collection or savings in other areas materialize.
- Based on these developments, staff continue to support completion of the seventh review under the staff-monitored program and the authorities’ request for a PRGF arrangement.

### Key fiscal figures and references from the core budget (selected highlights as presented)
- Fiscal cost of salary and pension measures: Af 713 million (0.16 percent of GDP) in 2006/07.
- Af 300 monthly basic salary increase for civil servants, effective September 21, 2006.
- Af 100 monthly pension increase for the disabled and martyrs, effective March 21, 2006.
- Operating deficit (excluding grants) target: 2.9 percent of GDP.
- Contingency reserves preserved at over 80 percent of previously programmed level (nearly 0.3 percent of GDP).
- Total wage bill projected to increase by only 2 percent relative to the original budget.

*Prepared by the Middle East and Central Asia Department; Approved by Juan Carlos Di Tata and Carlo Cottarelli; June 13, 2006.*

### 1.      This statement contains information on recent economic developments in the

### _cr06251 - 1.      This statement contains information on recent economic developments in the

### Overview
- The statement contains information on recent economic developments in the Islamic Republic of Afghanistan that became available since the supplement to the staff report was circulated to Executive Directors on June 13, 2006.
- This information does not alter the thrust of the staff appraisal.

### Inflation
- Inflation (year-on-year) declined from 9.5 percent in March 2006 to 7.5 percent in May.
- The slowdown was broad-based.
- The only noticeable exception was a faster increase in transportation costs resulting, in part, from rising oil prices.

### Fiscal developments and budget outcomes (2005/06)
- Preliminary data indicate the operating budget deficit, excluding grants, amounted to 3.7 percent of GDP in 2005/06, in line with program projections.
- Revenue in terms of GDP was 5.2 percent, slightly lower-than-projected and higher than the staff-monitored program floor.
  - The revenue outcome reflected continued underperformance of domestic taxes and fees.
  - Better-than-anticipated customs receipts partly offset the shortfall.
- Operating budget spending was slightly lower-than-programmed, largely due to lower-than-envisaged transfers, salaries, and interest payments.
- Budget development spending exceeded expectations during the fourth quarter; but for 2005/06 as a whole it amounted to only 5.8 percent of GDP, compared with a midyear review projection of 13.8 percent, due to continued weaknesses in implementation capacity.

### Liquidity, exchange rate, and reserves (first two months of 2006/07)
- Liquidity remained tight as Da Afghanistan Bank (DAB) continued to sell foreign exchange through its regular auctions.
- The exchange rate remained broadly stable, fluctuating within the range Af/$49.5–50.0.
- Currency in circulation declined by 3 percent during the same period.
- A further accumulation of government deposits at the central bank meant the decline in currency in circulation did not translate into a drop of international reserves.
- International reserves remained largely unchanged, at more than $1.6 billion.

### External debt
- Significant progress has been made in reconciling the Russian claims, but some issues are still outstanding.
- Discussions are ongoing.

*This statement contains information on recent economic developments in the Islamic Republic of Afghanistan that has become available since the supplement to the staff report was circulated to Executive Directors on June 13, 2006.*

### 6.      The Finance Department has conducted a safeguards assessment of DAB. The

### 6.      The Finance Department has conducted a safeguards assessment of DAB.

### Safeguards assessment of DAB
- The Finance Department conducted a safeguards assessment of DAB.
- The assessment identified several vulnerabilities and made recommendations to remedy them.
- DAB has agreed to implement the proposed recommendations.
- A full safeguards assessment of DAB is being completed; recommendations regarding vulnerabilities in the external and internal audit mechanisms, the financial reporting framework, and the system of internal controls are already being implemented, or DAB is diligently working on addressing them in an expeditious manner within the capacity constraints.

### IMF Executive Board decision and financing
- The Executive Board approved a three year, SDR 81.0 million (about US$119.1 million) arrangement under the Poverty Reduction and Growth Facility (PRGF) for Afghanistan covering through March 2009.
- Initial disbursement under the PRGF arrangement: SDR 13.2 million (about US$19.4 million).
- Proposed access under the PRGF arrangement: SDR 81 million (50 percent of quota), noted as substantially lower than the norm of 90 percent and close to the historical minimum for first-time users of PRGF resources.
- PRGF loan terms: annual interest rate of 0.5 percent; repayable over 10 years with a 5½-year grace period on principal payments.

### Macroeconomic performance and outlook
- Recent performance under the Staff-Monitored Program (SMP): rapid economic growth, inflation declining to single digit levels, and strengthening international reserves.
- Program medium-term aims:
  - Sustain real GDP growth of about 10 percent a year over the next three years.
  - Reduce inflation to about 5 percent.
  - Further strengthen the country’s external position.
  - Increase budgetary revenue to more than 8 percent of GDP by 2010/11.
- 2006/07 program assumptions:
  - Real GDP growth: 12 percent.
  - Year-on-year inflation: decline to 9 percent.
  - Operating budget deficit targeted to decline to 2.9 percent of GDP, from 3.7 percent in 2005/06.
- Over the next three years, most of the $10.4 billion financing gap is attributable to assumed settlement of external arrears, mainly to Paris Club creditors; the remainder would be covered by PRGF disbursements.

### Fiscal policy and public finances
- 2005/06 revenue: estimated at 5.5 percent of GDP (program target: 5.0 percent of GDP).
- Operating budget deficit (excluding grants) estimated at 3.7 percent of GDP in 2005/06 (program projection: 4.2 percent of GDP).
- Authorities’ priorities:
  - Enhance revenue mobilization, including strengthening the large taxpayers’ office, improving transparency, simplifying procedures, and upgrading administrative capacity.
  - Strengthen enforcement of manpower and appropriation ceilings and move gradually to a new pay and grading system.
  - Absorb fiscal operations previously financed externally by donors into the core budget while noting the risk that reduced external assistance would reduce fiscal space.
  - Improve budget formulation (publication of a less compressed calendar; reorganization of the Budget Department).
  - Increase much-needed development spending as implementation capacity allows.

### Monetary and exchange rate policies
- Authorities’ overriding objective: contain inflation.
- Monetary policy stance: tightened significantly starting in the fourth quarter of 2005/06 in response to inflation and incipient depreciation pressures.
- Outcomes:
  - Currency in circulation grew at a rate well below the program target, sufficient to achieve the inflation target.
  - DAB stands ready to tighten monetary policy further if necessary within the present managed float system.
- Institutional and operational reforms at DAB:
  - Development of analytical capacity, modernization of instruments, and improvement of monetary statistics.
  - Publication of interest rates on capital note auctions.
  - Enforcement and remuneration of reserve requirements.
  - Foreign exchange auction reforms: participants allowed to sell and buy dollars and to enter multiple bids.
  - Progress in restructuring state-owned banks: new Board of Directors at Bank Millie; team appointed to oversee liquidation of the three former state-owned banks.

### Structural reforms and governance
- Authorities intend to pursue structural reform forcefully to improve the investment climate and competitiveness.
- Planned measures:
  - Address corruption and improve security.
  - Harmonize and simplify investment regulations to lower cost of doing business.
  - Implement divestiture strategies for SOEs and government agencies involved in commercial activities.
  - Regulate and reform the judicial system; preparatory work for laws to enhance governance, property rights, and competition.
  - Maintain a transparent and liberal trade regime; rationalize tariff structure and avoid protectionist measures.

### External debt and debt relief
- Including current estimates of Russian claims, Afghanistan’s external debt is estimated at nearly 150 percent of GDP.
- Expected measures:
  - Upfront cancellation of Russian claims and Paris Club flow rescheduling to provide significant relief.
  - Continued progress under the PRGF arrangement to build a track record toward eligibility for debt relief under the enhanced-HIPC Initiative.
- Ministry of Finance given sole responsibility for all borrowing and loan guarantees on behalf of the government to enhance debt management.

### Interim Afghanistan National Development Strategy (I-ANDS) and statistical capacity
- I-ANDS provides a foundation for developing full ANDS/PRSP; emphasizes:
  - Improving incomes in rural areas; developing infrastructure (transport, power, water); enhancing natural resource management; building institutional and human capacity; strengthening social protection.
  - Commitment to achieving the Millennium Development Goals.
- Consultative process for I-ANDS: more than 400 consultative meetings with stakeholders; meetings were public with minutes posted on the ANDS website where available.
- Measures to integrate I-ANDS into budget processes include strengthening monitoring capacities, avoiding duplication of functions across agencies, and institutionalizing information flows into decision-making and budget preparation.
- Statistics program:
  - Statistics master plan launched in September 2004 to produce official statistics in line with international standards.
  - IMF STA indicated that Afghanistan will imminently become a participant in the General Data Dissemination Standards (GDDS).

### Principal risks and vulnerabilities
- Security situation and weak government control over provinces.
- Significant capacity constraints in implementation.
- Persistent opium-related activities.
- Expenditure pressures.
- Uncertainties about donor assistance and the channeling of external assistance largely outside government financial management systems.
- Vulnerabilities identified in DAB’s external and internal audit mechanisms, financial reporting framework, and system of internal controls (being addressed as noted above).

### Selected numeric highlights and targets
- PRGF arrangement: SDR 81.0 million (about US$119.1 million).
- Initial PRGF disbursement: SDR 13.2 million (about US$19.4 million).
- Proposed PRGF access: SDR 81 million (50 percent of quota).
- PRGF loan terms: annual interest rate of 0.5 percent; repayable over 10 years with a 5½-year grace period on principal payments.
- Program GDP growth target (medium-term): about 10 percent a year.
- 2006/07 real GDP growth assumption: 12 percent.
- Medium-term inflation target: about 5 percent.
- 2006/07 year-on-year inflation assumption: 9 percent.
- Budgetary revenue target by 2010/11: more than 8 percent of GDP.
- 2005/06 revenue estimate: 5.5 percent of GDP (program target: 5.0 percent of GDP).
- 2005/06 operating budget deficit (excluding grants): estimated at 3.7 percent of GDP (program projection: 4.2 percent).
- Operating budget deficit target for 2006/07: 2.9 percent of GDP.
- Financing gap over the program period: $10.4 billion.
- External debt estimate (including Russian claims): nearly 150 percent of GDP.

*IMF Press Release No. 06/144; June 26, 2006.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06251.pdf_