## _cr15140

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---

### Executive summary — context, objectives, and program focus
- Political and security uncertainties and an inadequate policy response led to lower growth and emergence of important fiscal and banking vulnerabilities in 2014.
- Establishment of a national unity government and the December 2014 London Conference helped build confidence and reconfirm donor support.
- An independent staff team is preparing an ex post assessment of the Fund’s engagement with Afghanistan since 2006; its report will be sent to the Executive Board separately.
- Discussions were held in Dubai during November 10–25, 2014 and February 18−28, 2015.
- Donors reaffirmed support at the December 2014 London Conference and reconfirmed Tokyo commitments; in March 2015, the U.S. announced a slower withdrawal of its noncombatant troops and reconfirmed its support.
- Authorities requested a new SMP covering April 1, 2015–December 31, 2015 (Letter of Intent dated May 6, 2015).
- SMP aims:
  - Mobilize domestic revenue.
  - Address urgent banking vulnerabilities.
  - Foster continued close engagement with Afghanistan, address vulnerabilities, and help manage risks.
- Successful performance under the SMP would:
  - Support a future request for an IMF financial arrangement.
  - Foster macroeconomic stability and inclusive growth.
  - Inform updating of the Tokyo Mutual Accountability Framework at the 2015 SOM.

### Key findings on 2014 and early 2015 economic performance
- Growth and inflation:
  - Real GDP growth: 1.5 percent in 2014 (down from 3.7 percent in 2013).
  - Inflation: 1.4 percent year-on-year in December 2014; moved into negative territory in Q1 2015, falling to -0.7 percent year-on-year in March 2015.
- External and monetary:
  - Nominal exchange rate depreciation in 2014: 4.1 percent.
  - Gross international reserves: $7.2 billion at end-2014 (7½ months of imports).
  - Reserve money declined by 7.8 percent in Q1 2015.
- Fiscal and treasury:
  - Domestic revenue in 2014: Af 100 billion (below Af 109 billion in 2013 and below 2014 target Af 128.8 billion).
  - Treasury discretionary cash balance eroded in H2 2014; additional donor financing in early 2015 helped clear part of domestic arrears and rebuild cash.
  - Q1 2015 budget recorded a substantial surplus (2 percent of annual GDP higher than projected) due to higher-than-targeted revenue, lower expenditure, and grants exceeding projected levels.
- Financial sector vulnerabilities:
  - Eight of the 15 banks are classified as weak (rated 4 or 5 according to CAMEL methodology).
  - Weak governance and regulatory forbearance early in 2014 led to deterioration in some banks’ positions; corrective measures started in late 2014.
  - Kabul Bank asset recovery: cash recoveries between February 28, 2014 and January 31, 2015 amounted to $4 million bringing total cash recoveries to $179 million; two largest former shareholders were sentenced to repay about $375 million and jail sentences increased from 5 to 15 years each.
- Legal and structural:
  - New AML and CFT laws enacted late June and early July 2014; CFT regulations finalized October 2014.
  - Introduction of a VAT postponed.
  - Banking law in parliament; amendments to the DAB law under review by the ministry of justice.

### Macroeconomic outlook and projections (2015–16 and medium term)
- Short-term projections:
  - Growth projected to recover to 3.5 percent in 2015.
  - Average inflation projected at about 4 percent in 2015.
- Medium-term prospects:
  - Growth projected to increase to 5–6 percent per year in the medium term.
  - Recovery depends on domestic demand, large mining projects, and security conditions.
- External and fiscal stance:
  - Framework envisages protecting competitiveness, with overall budget in broad balance and current account in surplus initially and moving to a deficit over the medium term.
  - Budget and external deficits projected to be financed by donor grants.
- Risks:
  - Downside risks predominate: adverse security developments, inadequate policy implementation, political instability, and donor fatigue.
  - Upside scenarios: political agreement improving security, stronger domestic demand, and early mining projects could yield faster growth.

### SMP policy recommendations and reform priorities
- Fiscal:
  - Mobilize domestic revenue and rebuild the treasury’s cash balance.
  - Contain expenditures, avoid debt accumulation; use operating balance excluding grants as fiscal anchor.
- Monetary and exchange rate:
  - Preserve low inflation.
  - Maintain exchange rate flexibility to protect international reserves and competitiveness; avoid excessive volatility.
  - Reserve money remains the monetary anchor.
- Structural priorities:
  - (i) Revenue mobilization, expenditure control and repayment of arrears.
  - (ii) Financial sector reforms: deal with weak banks, promulgate new banking law, amend central bank law, strengthen supervision, address weaknesses in state banks including New Kabul Bank.
  - (iii) Improving economic governance: strengthen AML/CFT regimes.
- Program design:
  - Nine-month SMP aims to build a track record; successful performance would support a future request for an Extended Credit Facility (ECF) arrangement.

### Program risks and modalities
- Principal risks: adverse security developments, inadequate policy implementation, political instability, donor fatigue.
- Monitoring: SMP monitored via Letter of Intent, MEFP, and TMU covering April 1, 2015–December 31, 2015.

---

### Revenue measures, projections, and contingency
- Domestic revenue projected to increase by 1 percentage point of GDP (to 9.6 percent of GDP).
- Additional 2015 revenue measures projected to raise about Af 10 billion (0.8 percent of GDP):
  - Increase in business receipts tax rate.
  - Higher import tariffs.
  - Introduce a telecommunications tax.
  - Triple the fuel fee collected at customs.
  - Increase overflight fees for Afghanistan’s airspace.
- Improvements in compliance projected to increase revenues by Af 4 billion (0.3 percent of GDP).
- Actions already taken: increased import tariffs and overflight fees projected to yield Af 1.5 billion in 2015.
- Planned measures requiring parliamentary approval (implementation in June 2015) projected to yield Af 8.9 billion in 2015.
- Contingency measures totaling Af 4 billion identified to be deployed if budget execution diverges.
- Medium-term impact:
  - 2015 measures will mobilize extra revenue of over 1 percent of GDP per year in the medium term and mitigate impact of postponing VAT introduction.
  - Strengthening tax administration expected to further build revenue and facilitate VAT introduction.

### Expenditure control, budget execution, and cash management
- SMP target: strict expenditure control and reducing waste.
- Operating spending expected to increase from 19.5 percent of GDP in 2014 to 20.2 percent in 2015 due to moving security-related expenditures on-budget (with grant financing).
- Capacity constraints expected to limit execution of grant-financed outlays.
- Protection of pro-poor spending:
  - Pro-poor spending maintained at 2.6 percent of GDP.
  - Payments to martyrs and disabled (currently 66 percent of total pension spending) to be better targeted while safeguarding health and education spending.
- Operating deficit (excluding grants) projected to decline to 10.5 percent of GDP in 2015 from 11.0 percent in 2014.
- Discretionary development spending will be higher than in 2014.
- Cash management improvements:
  - Link in-year allotments to cash availability; ensure treasury discretionary cash balance does not fall below Af 5 billion during 2015.
  - Weekly cash management committee meetings chaired by the minister of finance.
  - All arrears lawfully incurred in 2014 will be settled.

### Monetary policy, reserves, and exchange rate policy
- Monetary policy aims to preserve low inflation; exchange rate policy to protect international reserves and competitiveness.
- DAB to manage money growth and continue exchange rate flexibility to meet NIR targets.
- Operational improvements: shorter maturity, seven-day, capital notes; plans for reserve requirement averaging and reinvigorating DAB’s standing credit and deposit facilities.
- Monetary program envisages modest accumulation of NIR ($150 million).
- International reserve cover will remain at 7½ months of imports.
- Reserve money growth of 11 percent projected in 2015.
- Authorities will intervene to avoid excessive exchange rate volatility.
- A modest pick-up in money demand anticipated in 2015 as confidence recovers.

### Structural reforms — fiscal, financial sector, and governance (actions and timelines)
- Fiscal and tax administration:
  - Strengthen ARD and ACD capacity.
  - Taxpayer register for Kabul to be updated by end-May 2015 and extended to provinces as feasible.
  - ARD to implement Strategic Plan and establish Risk Analysis and Case Selection Unit by end-May 2015.
  - Review tax arrears records and set time-bound targets for collectible arrears by end-October 2015.
  - Continue donor-supported action plan to strengthen customs administration.
- Public financial management:
  - Improve MTFF, identify recurrent and capital expenditures and output targets.
  - Electronic registration of invoices across ministries and provinces; database for ongoing capital projects.
  - Quarterly reports on financial performance of state-owned enterprises.
  - Cabinet-level quarterly reviews of budget execution; reduce allocations if needed.
- Natural resources fiscal regime:
  - Design regime to attract investment and ensure reasonable government share; IMF CD provided.
- Financial sector actions and timelines:
  - Enforcement actions issued against a vulnerable systemic bank; DAB ready to place bank under conservatorship for noncompliance.
  - Enforcement actions against a vulnerable state-owned bank: prohibited from extending further loans; management replacement; independent external audit of bad debt recoveries; restore capital to required minimum levels by end-2015 (minimum aggregate capital injection of $20 million during 2015 noted in specific plan).
  - Five-year operating strategy for the state-owned bank to be submitted to DAB by end-June 2015 and finalized by end-August 2015; operational break-even required within 18 months (by end-February 2017) or bank to be put into conservatorship followed by liquidation or sale.
  - DAB’s plan to increase CAMEL ratings significantly by end-February 2016.
  - Sale of New Kabul Bank (NKB) to be re-started; NKB reduced losses from $22 million in 2012 to $6 million in 2014 and plans to be profitable by end-2015; privatization to be initiated by end-September 2015.
  - New banking law to be promulgated by June 2015; amendments to central bank legislation to be submitted to parliament by end-December 2015 to operationalize new capitalization framework.
  - FSD to implement five-year strategic plan, approve organizational file by end-September 2015, enhance offsite and onsite supervision, and continue Supervisory Enforcement Committee reviews.
  - Revised banking regulations to be prepared on asset classification and provisioning by end-September 2015 and on related party lending and corporate governance by end-December 2015.
  - Financial market development: prepare sukuk law and implementation plan; promote secondary trading starting with capital notes; foster interbank market; work with Afghan Bankers Association on a “Code of Conduct”.
- Governance, AML/CFT, and anti-corruption:
  - Amendments to the AML Law approved by decree and to be published in the Official Gazette; include proceeds of predicate offenses committed abroad and increases in fines.
  - New regulation on currency reporting to be finalized by end-June 2015.
  - Draft AML and Proceeds of Crime Regulation–Preventive Measures for Financial Institutions to be submitted to DAB’s Supreme Council by end-September 2015.
  - Anti-corruption legislative plans to be submitted to parliament by end-December 2015:
    - Criminalize bribery of foreign public officials, trading in influence, illicit enrichment, bribery and embezzlement in the private sector (in line with UN Convention against Corruption).
    - Amend Article 12 of the Law on Overseeing the Implementation of the Anti-Administrative Corruption Strategy to provide for mandatory publication of asset declarations by public officials.

### Program modalities, monitoring, and timelines
- SMP coverage: April 1 to December 31, 2015 (9 months).
- Monitoring based on quantitative targets and structural benchmarks; performance test dates: June 21, 2015 and December 21, 2015; indicative target for September 22, 2015.
- Actions implemented before SMP approval: enforcement action against a vulnerable systemic bank and implementation of revenue measures not requiring parliamentary approval.
- Structural benchmarks target revenue performance, banking sector vulnerabilities, and AML/CFT framework; conditionality accounts for implementation capacity.

### Staff appraisal and key recommendations
- Staff assessment:
  - Afghanistan maintained macroeconomic stability and is addressing vulnerabilities with donor support and banking sector actions.
  - New administration reduced uncertainties and is committed to macroeconomic stability and reforms for sustainable, inclusive, and gender-balanced growth.
- Key staff recommendations:
  - Implement revenue measures and improve revenue performance; increase efficiency of social and infrastructure spending.
  - DAB should manage money growth carefully and allow exchange rate flexibility to meet NIR targets.
  - Continue enforcement actions and close monitoring of weak banks; use conservatorship if necessary.
  - For the vulnerable state bank: fill management positions with fit and proper bankers swiftly and restore capital to required minimum levels by end-2015; take enforcement action if no operational break-even by early 2017.
  - Sell NKB after profitability measures; if sale not possible, do not merge with another state bank and wind up as soon as the government salary function is transferred to other banks.
  - Timely passage of new banking law and prompt finalization of banking regulations; amendments to DAB law to strengthen independence.
  - Strengthen DAB’s FSD operations and supervisory capacity.
  - Strengthen AML/CFT legal framework and finalize currency reporting regulation.
  - Submit anti-corruption legislation and asset declaration amendment to parliament by end-December 2015.

### Program risks (summary)
- Risks: domestic and regional security conditions, inadequate policy implementation, political instability, unpredictability of aid flows, donor fatigue.
- Risks from revenue measures: delay or partial parliamentary approval could make fiscal targets infeasible.
- Banking risks: regulatory forbearance and delays in enforcement or banking reforms could weaken confidence.
- Donor support timing and size could be affected by stalled reforms.
- Upside risks: successful peace talks, faster domestic demand recovery, and early development of large mining projects.

---

### Selected macroeconomic and fiscal indicators (preserving source formatting)
- Real GDP (annual percentage change): 2012 14.0; 2013 3.7; 2014 Est. 1.5; 2015 Proj. 3.5.
- Nominal GDP (in billions of Afghanis): 2012 1,034; 2013 1,115; 2014 1,166; 2015 1,250.
- Nominal GDP (in billions of U.S. dollars): 2012 20.3; 2013 20.1; 2014 20.3; 2015 21.5.
- Consumer prices (period average): 2012 6.4; 2013 7.4; 2014 4.6; 2015 3.7.
  - Food: 2012 4.7; 2013 7.6; 2014 7.7; 2015 3.0.
  - Non-food: 2012 8.7; 2013 7.2; 2014 1.3; 2015 3.9.
- Consumer prices (end of period): 2012 5.9; 2013 7.2; 2014 1.4; 2015 5.0.
- Gross domestic investment (percent of GDP): 2012 25.3; 2013 22.6; 2014 20.4; 2015 24.1.
  - Private (percent of GDP): 2012 7.2; 2013 6.6; 2014 5.9; 2015 8.1.
- Gross national savings (percent of GDP): 2012 31.7; 2013 30.1; 2014 26.1; 2015 27.2.
  - Private (percent of GDP): 2012 13.3; 2013 14.8; 2014 13.8; 2015 11.2.
- Fiscal highlights (central government):
  - Domestic revenues and grants (percent of GDP): 2012 25.2; 2013 24.4; 2014 24.0; 2015 27.3.
  - Domestic revenues (percent of GDP): 2012 10.1; 2013 9.8; 2014 8.6; 2015 9.6.
  - Grants (percent of GDP): 2012 15.1; 2013 14.6; 2014 15.4; 2015 17.7.
  - Expenditures (percent of GDP): 2012 25.0; 2013 25.0; 2014 25.8; 2015 27.4.
  - Operating (percent of GDP): 2012 18.2; 2013 17.8; 2014 19.5; 2015 20.2.
  - Development (percent of GDP): 2012 6.8; 2013 7.2; 2014 6.2; 2015 7.2.
  - Operating balance (excluding grants, percent of GDP): 2012 -8.1; 2013 -8.0; 2014 -11.0; 2015 -10.5.
  - Overall balance (including grants, percent of GDP): 2012 0.2; 2013 -0.6; 2014 -1.7; 2015 -0.1.
  - Public debt (percent of GDP, public sector only): 2012 6.3; 2013 6.7; 2014 6.6; 2015 6.3.
- Monetary sector:
  - Reserve money (y/y change, percent): 2012 3.9; 2013 12.4; 2014 13.3; 2015 11.0.
  - Currency in circulation (y/y change, percent): 2012 1.1; 2013 12.5; 2014 16.7; 2015 11.0.
  - Broad money (y/y change, percent): 2012 8.8; 2013 9.4; 2014 3.8; 2015 10.0.
  - Loan dollarization (percent): 2012 75.4; 2013 75.9; 2014 71.1; 2015 71.1.
  - Deposit dollarization (percent): 2012 71.4; 2013 69.0; 2014 63.4; 2015 63.4.
- External sector and reserves:
  - Current account (including official transfers, percent of GDP): 2012 6.3; 2013 7.5; 2014 5.7; 2015 3.1.
  - Current account (excluding official transfers, percent of GDP): 2012 -41.8; 2013 -35.5; 2014 -35.8; 2015 -39.9.
  - Exports of goods (in million U.S. dollars): 2012 640.1; 2013 728.7; 2014 826.0; 2015 948.7.
  - Imports of goods (in million U.S. dollars): 2012 10,053.6; 2013 9,243.9; 2014 8,717.1; 2015 9,377.3.
  - Merchandise trade balance (percent of GDP): 2012 -46.4; 2013 -42.3; 2014 -38.8; 2015 -39.2.
  - Gross international reserves (in millions of U.S. dollars): 2012 6,867; 2013 6,886; 2014 7,248; 2015 7,377.
  - Import coverage of reserves (months): 2012 7.3; 2013 7.8; 2014 7.6; 2015 7.5.

### Selected central government budget levels (in billions of Afghanis)
- Revenues and grants: 2013 Act 271.9; 2014 Est. 280.2; 2015 BudgetProj. 424.9; 2015 Proj. 341.3.
- Domestic revenues: 2013 Act 109.0; 2014 Est. 100.0; 2015 Proj. 120.4.
- Grants to operating budget: 2013 Act 114.7; 2014 Est. 119.1; 2015 Proj. 147.9.
- Total expenditures: 2013 Act 278.9; 2014 Est. 300.5; 2015 Proj. 342.0.
- Operating expenditures: 2013 Act 198.6; 2014 Est. 227.9; 2015 Proj. 252.0.
- Development expenditures: 2013 Act 80.4; 2014 Est. 72.6; 2015 Proj. 90.0.

### Program monitoring — quantitative targets and structural benchmarks (selected)
- Performance test dates: June 21, 2015 and December 21, 2015; indicative target: September 22, 2015.
- Sample quantitative target entries and test-date values (as in source tables):
  - Revenues (floor): 20.8; 24.1; 46.7; 81.6; 120.4
  - Operating budget deficit, excluding grants (indicative target: ceiling): 20.3; 12.9; 55.5; 89.0; 131.6
  - Treasury cash balance (indicative target: floor): 5.0; 13.6; 5.0; 5.0; 5.0
  - International reserves of DAB (floor; in millions of U.S. dollars): 6,694; 38; 331; 108; 75; 112.5; 150
  - Reserve money (ceiling): 225.2; -6.0; -17.6; 2.9; 20.1; 24.8
- Structural benchmarks (selected target dates):
  - Other vulnerable bank to hire independent external party to audit bad debt recoveries for delinquent amounts exceeding $0.5 million: End-June 2015.
  - Promulgate the banking law: End-June 2015.
  - Implement revenue measures requiring parliamentary approval to yield Af 8.9 billion in 2015: End-June 2015.
  - Issue revised AML regulation on currency reporting at the border: End-June 2015.
  - Revise banking regulations on asset classification and provisioning: End-September 2015.
  - ARD to implement risk-based audit case selection and KPIs: End-October 2015.
  - Revise banking regulation on related party lending: End-December 2015.

### Reporting and transparency requirements (selected)
- Program exchange rate (cash rate of December 21, 2014): 58.07 Afghanis per U.S. dollar.
- Gold valuation (December 21, 2014): US$1,196.35 per troy ounce.
- Reporting frequencies and lags (selected):
  - DAB net international reserves: weekly, no later than two weeks after the end of each week.
  - Monetary statistics: monthly and no later than three weeks after the end of the month.
  - Core budget operations and financing: monthly and no later than four weeks after the end of the month (AFMIS reports).
  - External debt data: quarterly and no later than six weeks after the end of the quarter.
  - Monthly CPIs: lag of four weeks after the end of each month.
  - Financial Stability Indicators for each commercial bank: quarterly with a one-month lag.
  - Treasury cash balance: weekly report on the treasury cash balance.
  - Banking sector: monthly CAMEL rating for all banks; monthly income statements and balance sheets for all banks.

---

*Source: IMF staff report — EXECUTIVE SUMMARY, Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding for the Islamic Republic of Afghanistan (May 7, 2015) — excerpts provided in the supplied PDF content.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context and recent developments
- Political and security uncertainties and an inadequate policy response led to lower growth and emergence of important fiscal and banking vulnerabilities in 2014.
- The establishment of a national unity government and the December 2014 London Conference helped build confidence and reconfirmed donor support.
- An independent staff team is preparing an ex post assessment of the Fund’s engagement with Afghanistan since 2006; its report will be sent to the Executive Board separately.
- Discussions were held in Dubai during November 10–25, 2014 and February 18−28, 2015.  
- Donors reaffirmed their support at the December 2014 London Conference and reconfirmed Tokyo commitments; in March 2015, the U.S. announced a slower withdrawal of its noncombatant troops and reconfirmed its support.

### Focus and objectives of the Staff-Monitored Program (SMP)
- Authorities requested a new SMP covering the period April 1, 2015–December 31, 2015 (Letter of Intent dated May 6, 2015).
- SMP aims:
  - Mobilize domestic revenue.
  - Address urgent banking vulnerabilities.
  - Foster continued close engagement with Afghanistan, address vulnerabilities, and help manage risks.
- Successful performance under the SMP would:
  - Support a future request for an IMF financial arrangement.
  - Foster macroeconomic stability and inclusive growth.
  - Inform updating of the Tokyo Mutual Accountability Framework at the 2015 SOM.

### Key findings on 2014 and early 2015 economic performance
- Growth and inflation:
  - Real GDP growth declined to 1.5 percent in 2014 from 3.7 percent in 2013.
  - Inflation declined to 1.4 percent year-on-year in December 2014.
  - Inflation moved into negative territory in the first quarter of 2015, falling to -0.7 percent year-on-year in March 2015.
- External and monetary sector:
  - Exchange rate depreciated slightly against the U.S. dollar; nominal depreciation in 2014 was 4.1 percent.
  - Gross international reserves were $7.2 billion at the end of 2014 or 7½ months of imports.
  - Reserve money declined by 7.8 percent in the first quarter of 2015.
- Fiscal sector and treasury balance:
  - Domestic revenue in 2014 was Af 100 billion (below Af 109 billion collected in 2013 and below the 2014 target of Af 128.8 billion).
  - Operating budget expenditure increased as off-budget security-related spending was moved on budget and due to higher social spending.
  - The treasury’s discretionary cash position was eroded in the second half of 2014; additional donor financing in early 2015 helped clear part of the domestic arrears and rebuild the cash balance.
  - In the first quarter of 2015 the budget recorded a substantial surplus (2 percent of annual GDP higher than projected) due to higher-than-targeted revenue, lower expenditure, and grants exceeding projected levels.
- Financial sector vulnerabilities:
  - Eight of the 15 banks are classified as weak (rated 4 or 5 according to CAMEL methodology).
  - Weak governance and regulatory forbearance early in 2014 led to deterioration in some banks’ financial positions; corrective measures started in late 2014.
  - Kabul Bank asset recovery: between February 28, 2014 and January 31, 2015 cash recoveries amounted to $4 million bringing total cash recoveries to $179 million. Two largest former shareholders were sentenced to repay about $375 million and jail sentences increased from 5 to 15 years each.
- Legal and structural reforms:
  - New anti-money laundering (AML) and countering the financing of terrorism (CFT) laws enacted in late June and early July 2014; CFT regulations finalized in October 2014.
  - Introduction of a VAT was postponed because the tax administration was not in a position to facilitate a successful introduction in the near term.
  - The banking law is in parliament; amendments to the DAB law are being reviewed by the ministry of justice.

### Macroeconomic outlook and projections (2015–16 and medium term)
- Short-term projections:
  - Growth projected to recover to 3.5 percent in 2015.
  - Average inflation projected at about 4 percent in 2015.
- Medium-term prospects:
  - Growth projected to increase to 5–6 percent per year in the medium term.
  - Recovery over the medium term depends on a recovery in domestic demand, large mining projects, and security conditions.
- External and fiscal stance:
  - The framework envisages protecting competitiveness, with the overall budget in broad balance and the current account in surplus initially and moving to a deficit over the medium term.
  - Budget and external deficits are projected to be financed by donor grants.
- Risks to the outlook:
  - Downside risks predominate: adverse security developments, inadequate implementation of economic policies, political instability, and donor fatigue.
  - Large security and development expenditure needs mean dependency on donor financing will continue for an extended period.
  - Upside scenarios: a political agreement improving security, stronger domestic demand, and early development of mining projects could yield faster growth.

### SMP policy recommendations and reform priorities
- Fiscal policy:
  - Focus on mobilizing domestic revenue and rebuilding the treasury’s cash balance.
  - Contain expenditures, avoid debt accumulation, and use operating balance excluding grants as the fiscal anchor.
- Monetary and exchange rate policy:
  - Preserve low inflation.
  - Maintain exchange rate flexibility to protect international reserves and competitiveness, and avoid excessive volatility.
  - Reserve money remains the monetary anchor.
- Structural reforms (priority areas):
  - (i) Revenue mobilization, expenditure control and repayment of arrears.
  - (ii) Financial sector reforms to deal with weak banks, promulgate the new banking law, amend the central bank law, strengthen banking supervision, and address weaknesses in state banks including New Kabul Bank.
  - (iii) Improving economic governance by strengthening AML/CFT regimes.
- Program design and intent:
  - The nine-month SMP aims to build a track record; successful performance would support a future request for an Extended Credit Facility (ECF) arrangement to maintain macroeconomic stability, improve the business environment and economic governance, foster private sector activity, and facilitate broad-based inclusive growth.

### Program risks and modalities
- Principal risks to successful SMP implementation:
  - Adverse security developments delaying recovery in economic confidence and investment.
  - Inadequate policy implementation and political instability.
  - Donor fatigue affecting external financing.
- Program modalities:
  - SMP will be monitored through the authorities’ Letter of Intent, a Memorandum of Economic and Financial Policies, and a Technical Memorandum of Understanding covering the April 1, 2015–December 31, 2015 period.

*Source: IMF staff report — EXECUTIVE SUMMARY (May 7, 2015).*

### 18.      Improving revenue performance is a critical objective. Domestic revenue is projected to

### _cr15140 - 18.      Improving revenue performance is a critical objective. Domestic revenue is projected to

### Revenue measures and projections
- Domestic revenue is projected to increase by 1 percentage point of GDP (to 9.6 percent of GDP).
- Additional revenue measures in 2015 are projected to raise about Af 10 billion (0.8 percent of GDP).
  - Measures include: an increase in the business receipts tax rate, higher import tariffs, introducing a telecommunications tax, tripling the fuel fee collected at customs, and increasing overflight fees for using Afghanistan’s airspace.
- Improvements in compliance are projected to increase revenues by Af 4 billion (0.3 percent of GDP).
- Actions already taken: increased import tariffs and overflight fees, projected to yield Af 1.5 billion in 2015.
- Planned measures requiring parliamentary approval (implementation in June 2015) are projected to yield Af 8.9 billion in 2015.
- Contingency measures totaling Af 4 billion have been identified to be deployed swiftly if budget execution diverges from plans.
- Medium-term impact:
  - The 2015 measures will mobilize extra revenue of over 1 percent of GDP per year in the medium term and mitigate the revenue impact of postponing VAT introduction.
  - Strengthening tax administration will further build revenue, improve governance, and facilitate VAT introduction in the medium term.

### Expenditure control, budget execution, and cash management
- SMP target: strict expenditure control and reducing waste.
- Operating spending:
  - Expected to increase from 19.5 percent of GDP in 2014 to 20.2 percent in 2015 due to moving security-related expenditures on-budget (with grant financing).
  - Capacity constraints expected to continue to limit execution of grant-financed budget outlays.
- Protection of pro-poor spending:
  - Pro-poor spending will be maintained at 2.6 percent of GDP, close to its 2014 level.
  - Payments to martyrs and disabled—currently at 66 percent of total pension spending—will be better targeted while safeguarding health and education spending.
- Operating deficit (excluding grants) projected to decline to 10.5 percent of GDP in 2015 from 11.0 percent in 2014.
- Discretionary development spending will be higher than in 2014.
- Improved coordination between the ministry of finance’s budget and treasury departments:
  - Link in-year allotments to cash availability to avoid arrears and ensure treasury’s discretionary cash balance does not fall below Af 5 billion during 2015.
  - Implementation begins with weekly cash management committee meetings chaired by the minister of finance.
  - All arrears lawfully incurred in 2014 will be settled.

### Monetary policy, reserves, and exchange rate policy
- Monetary policy aims to preserve low inflation; exchange rate policy will protect international reserves and strengthen competitiveness.
- DAB will carefully manage money growth with continued exchange rate flexibility to meet net international reserves targets.
- Coordination between ministry of finance and DAB on expected amounts and timing of revenue and external financing will help manage reserve money.
- Operational improvements introduced: shorter maturity, seven-day, capital notes; plans include reserve requirement averaging and reinvigorating DAB’s standing credit and deposit facilities.
- Monetary program envisages a modest accumulation of net international reserves (NIR) ($150 million).
- International reserve cover will remain at 7½ months of imports.
- Authorities will intervene to avoid excessive exchange rate volatility.
- A modest pick-up in money demand is anticipated in 2015 as economic confidence recovers.

### Structural reforms — fiscal, financial sector, and governance
- SMP aims to reinvigorate structural reform: fiscal reforms (revenue mobilization, efficient use of public resources, avoiding cash pressures); financial sector reforms (address vulnerabilities, weak banks, strengthen supervision); economic governance (AML/CFT regime, anti-corruption framework).
- Fiscal reforms and tax administration strengthening:
  - Strengthen ARD and ACD capacity.
  - Taxpayer register for Kabul to be updated by end-May 2015 and extended to provinces as feasible.
  - ARD to implement its Strategic Plan and establish a Risk Analysis and Case Selection Unit by end-May 2015.
  - Review tax arrears records, establish performance indicators for risk-based audits, update audit policies, procedures, and guidelines.
  - Continue donor-supported action plan to strengthen customs administration.
- Public financial management improvements:
  - Improve the medium-term fiscal framework (MTFF), identify recurrent and capital expenditures and output targets.
  - Electronic registration of invoices across all ministries and provinces and a database for ongoing capital projects.
  - Prepare quarterly reports on financial performance of state-owned enterprises and companies, their fiscal impact and risks in the MTFF.
  - Quarterly reviews by a cabinet-level committee of budget execution and prioritization for next quarter; reduce allocations if needed.
- Natural resources fiscal regime: design a sound and robust regime to attract investment and ensure reasonable government share; Fund capacity development assistance provided.
- Financial sector actions and timeline:
  - Enforcement actions issued against a vulnerable systemic bank to ensure losses recorded and capital restored; DAB ready to place bank under conservatorship for noncompliance.
  - Enforcement actions against a vulnerable state-owned bank: prohibited from extending further loans; management to be replaced with fit and proper bankers; independent external audit of bad debt recoveries; restore capital to required minimum levels by end-2015.
  - Five-year operating strategy for the state-owned bank to be submitted to DAB by end-June 2015 and finalized by end-August 2015; if not achieving operational break-even within 18 months (i.e., by end-February 2017), the bank will be put into conservatorship followed by liquidation or sale.
  - DAB’s plan to address weaknesses in other weak banks and increase CAMEL ratings significantly by end-February 2016.
  - Sale of New Kabul Bank (NKB) to be re-started; NKB reduced losses from $22 million in 2012 to $6 million in 2014 and plans to be profitable by end-2015; privatization to be initiated by end-September 2015.
  - New banking law to be promulgated by June 2015; revisions to regulations and circulars to follow. Amendments to central bank legislation to be submitted to parliament by end-December 2015 to make new capitalization framework operational.
  - DAB’s Financial Supervision Department (FSD) will implement its five-year strategic plan (launched July 2013), approve complete organizational file by end-September 2015, enhance offsite and onsite supervision, and continue Supervisory Enforcement Committee reviews.
  - Revised banking regulations to be prepared on (i) asset classification and provisioning by end-September 2015; and (ii) related party lending and corporate governance by end-December 2015.
  - Financial market development: prepare sukuk law and supporting legislative infrastructure and implementation plan; promote secondary trading starting with capital notes; foster interbank market development; work with Afghan Bankers Association on a “Code of Conduct” protocol.

- Governance, AML/CFT, and anti-corruption:
  - Amendments to the AML Law approved by decree and to be published in the Official Gazette; amendments include inclusion of proceeds of predicate offenses committed abroad, increases in fines for legal persons, and specify cumulative application of imprisonment and fines.
  - New regulation on currency reporting to be finalized by end-June 2015.
  - Draft AML and Proceeds of Crime Regulation–Preventive Measures for Financial Institutions to be submitted to DAB’s Supreme Council by end-September 2015.
  - Anti-corruption legislative plans to be submitted to parliament by end-December 2015:
    - Legislation to criminalize bribery of foreign public officials, trading in influence, illicit enrichment, bribery and embezzlement of property in the private sector, in line with the United Nations Convention against Corruption.
    - Amendment to Article 12 of the Law on Overseeing the Implementation of the Anti-Administrative Corruption Strategy to provide for mandatory publication of asset declarations by public officials, to align with Article 154 of the Constitution.

### Program modalities, monitoring, and timelines
- SMP coverage: 9-month period, April 1 to December 31, 2015.
- Monitoring based on quantitative targets and structural benchmarks; performance test dates: June 21, 2015 and December 21, 2015; indicative target for September 22, 2015.
- Actions taken before SMP approval include enforcement action against the vulnerable systemic bank and implementation of revenue measures not requiring parliamentary approval.
- Structural benchmarks target revenue performance, banking sector vulnerabilities, and AML/CFT framework; conditionality accounts for implementation capacity.

### Staff appraisal, policy recommendations, and risks
- Staff assessment:
  - Afghanistan maintained macroeconomic stability and is addressing vulnerabilities that emerged in 2014 with donor support and banking sector actions.
  - The new administration reduced uncertainties and is committed to macroeconomic stability and reforms for sustainable, inclusive, and gender-balanced growth.
- Key staff recommendations and welcomes:
  - Implement revenue measures and improve revenue performance; increase efficiency of social and infrastructure spending.
  - DAB should manage money growth carefully and allow exchange rate flexibility to meet net international reserves targets.
  - Continue implementation of enforcement actions and close monitoring of weak banks; use conservatorship if necessary.
  - For the vulnerable state bank: fill management positions with fit and proper bankers swiftly and restore capital to required minimum levels by end of 2015; take enforcement action if the bank does not achieve operational break-even by early 2017.
  - Sell NKB after profitability measures; if sale not possible, do not merge with another state bank and wind up as soon as the government salary function is transferred to other banks.
  - Timely passage of the new banking law and prompt finalization of banking regulations; amendments to DAB law to strengthen independence.
  - Strengthen DAB’s FSD operations and supervisory capacity.
  - Strengthen AML/CFT legal framework and finalize currency reporting regulation.
  - Submit anti-corruption legislation and asset declaration amendment to parliament by end-December 2015.
- Risks to the SMP:
  - Domestic and regional security conditions, inadequate policy implementation, political instability, unpredictability of aid flows, and donor fatigue.
  - Delay or partial parliamentary approval of revenue measures or inadequate implementation could make fiscal targets infeasible.
  - Regulatory forbearance and delays in enforcement actions and banking reforms could weaken confidence.
  - Stalled reforms could affect donor support timing and size.
  - Upside risks: successful peace talks, faster domestic demand recovery, and early development of large mining projects could raise confidence and economic activity.

*International Monetary Fund — ISLAMIC REPUBLIC OF AFGHANISTAN (excerpts from SMP document).*

### 44.      The authorities recognize the SMP’s implementation risks, but are committed to

### 44.      The authorities recognize the SMP’s implementation risks, but are committed to program objectives.

### Authorities' assessment and commitment
- "The authorities recognize the SMP’s implementation risks, but are committed to program objectives."
- "The authorities have started to stem important banking and fiscal vulnerabilities, agreed to measures that should address fully these vulnerabilities, and implemented some reforms earlier than envisaged."
- "The overall policy package is solid and achievable as it takes into account Afghanistan’s fragility and its limited administrative and institutional capacity."
- "The SMP also provides a path forward with quick wins and pro-reform incentives to support a revival in economic confidence, a pick-up in activity and is an important step toward mitigating fragility."

### Selected macroeconomic indicators and projections (preserving source formatting)
- Real GDP (annual percentage change): 2012 14.0; 2013 3.7; 2014 Est. 1.5; 2015 Proj. 3.5.
- Nominal GDP (in billions of Afghanis): 2012 1,034; 2013 1,115; 2014 1,166; 2015 1,250.
- Nominal GDP (in billions of U.S. dollars): 2012 20.3; 2013 20.1; 2014 20.3; 2015 21.5.
- Consumer prices (period average): 2012 6.4; 2013 7.4; 2014 4.6; 2015 3.7.
  - Food: 2012 4.7; 2013 7.6; 2014 7.7; 2015 3.0.
  - Non-food: 2012 8.7; 2013 7.2; 2014 1.3; 2015 3.9.
- Consumer prices (end of period): 2012 5.9; 2013 7.2; 2014 1.4; 2015 5.0.
- Gross domestic investment (percent of GDP): 2012 25.3; 2013 22.6; 2014 20.4; 2015 24.1.
  - Private (percent of GDP): 2012 7.2; 2013 6.6; 2014 5.9; 2015 8.1.
- Gross national savings (percent of GDP): 2012 31.7; 2013 30.1; 2014 26.1; 2015 27.2.
  - Private (percent of GDP): 2012 13.3; 2013 14.8; 2014 13.8; 2015 11.2.

### Fiscal sector highlights (central government)
- Domestic revenues and grants (percent of GDP): 2012 25.2; 2013 24.4; 2014 24.0; 2015 27.3.
  - Domestic revenues (percent of GDP): 2012 10.1; 2013 9.8; 2014 8.6; 2015 9.6.
  - Grants (percent of GDP): 2012 15.1; 2013 14.6; 2014 15.4; 2015 17.7.
- Expenditures (percent of GDP): 2012 25.0; 2013 25.0; 2014 25.8; 2015 27.4.
  - Operating (percent of GDP): 2012 18.2; 2013 17.8; 2014 19.5; 2015 20.2.
  - Development (percent of GDP): 2012 6.8; 2013 7.2; 2014 6.2; 2015 7.2.
- Operating balance (excluding grants, percent of GDP): 2012 -8.1; 2013 -8.0; 2014 -11.0; 2015 -10.5.
- Overall balance (including grants, percent of GDP): 2012 0.2; 2013 -0.6; 2014 -1.7; 2015 -0.1.
- Public debt (percent of GDP, public sector only): 2012 6.3; 2013 6.7; 2014 6.6; 2015 6.3.

### Monetary sector and central bank indicators
- Reserve money (year-on-year change, percent): 2012 3.9; 2013 12.4; 2014 13.3; 2015 11.0.
- Currency in circulation (year-on-year change, percent): 2012 1.1; 2013 12.5; 2014 16.7; 2015 11.0.
- Broad money (year-on-year change, percent): 2012 8.8; 2013 9.4; 2014 3.8; 2015 10.0.
- Loan dollarization (percent): Mar-09–Mar-15 series reported; e.g., loan dollarization in survey table: 2012 75.4; 2013 75.9; 2014 71.1; 2015 71.1.
- Deposit dollarization (percent): 2012 71.4; 2013 69.0; 2014 63.4; 2015 63.4.

### External sector and reserves
- Current account (including official transfers, percent of GDP): 2012 6.3; 2013 7.5; 2014 5.7; 2015 3.1.
- Current account (excluding official transfers, percent of GDP): 2012 -41.8; 2013 -35.5; 2014 -35.8; 2015 -39.9.
- Exports of goods (in million U.S. dollars): 2012 640.1; 2013 728.7; 2014 826.0; 2015 948.7.
- Imports of goods (in million U.S. dollars): 2012 10,053.6; 2013 9,243.9; 2014 8,717.1; 2015 9,377.3.
- Merchandise trade balance (in percent of GDP): 2012 -46.4; 2013 -42.3; 2014 -38.8; 2015 -39.2.
- Gross international reserves (in millions of U.S. dollars): 2012 6,867; 2013 6,886; 2014 7,248; 2015 7,377.
- Import coverage of reserves (months): 2012 7.3; 2013 7.8; 2014 7.6; 2015 7.5.

### Fiscal execution and program implementation indicators
- Tabled program monitoring shows specific informal targets and program outcomes (example entries preserved exactly as in source):
  - Revenues (floor): stocks and quarterly figures shown (e.g., "26.1 ... 23.4  ; 56.4 ... 47.7  ; 85.6 ... 70.8  ; 128.8 ... 100.0 ").
  - Operating budget deficit, excluding grants (indicative target: ceiling): examples "18.9 ... 15.2  ; 56.0 ... 48.5  ; 94.5 ... 84.9  ; 142.7 ... 127.9 ".
  - Net credit to government from DAB (ceiling): example entries include "-55.0 -11.0 -6.1 2.4  ; -9.8 5.3 8.0  ; -7.0 19.4 33.7  ; -2.8 34.5 19.3 ".
  - International reserves of DAB (floor; in millions of U.S. dollars): "6,679 25 -60 69  ; 100 -160 337  ; 175 -349 92  ; 250 80 401 ".
  - Reference values for adjustors: "Core budget development spending ... 6.9 6.1 13.1 28.8 6.2 35.0 51.9 1.4 53.3 86.1 -13.5 72.6" and "External financing of the core budget and sale of nonfinancial assets 3/ ... 31.2 1.2 32.4 88.9 -8.9 80.0 147.8 -40.9 106.9 226.1 -44.1 182.0".

### Selected central government budget figures (levels)
- Revenues and grants (in billions of Afghanis): 2013 Act 271.9; 2014 Est. 280.2; 2015 BudgetProj. 424.9; 2015 Proj. 341.3.
- Domestic revenues (in billions of Afghanis): 2013 Act 109.0; 2014 Est. 100.0; 2015 Proj. 120.4.
- Grants to operating budget (in billions of Afghanis): 2013 Act 114.7; 2014 Est. 119.1; 2015 Proj. 147.9.
- Total expenditures (in billions of Afghanis): 2013 Act 278.9; 2014 Est. 300.5; 2015 Proj. 342.0.
- Operating expenditures (in billions of Afghanis): 2013 Act 198.6; 2014 Est. 227.9; 2015 Proj. 252.0.
- Development expenditures (in billions of Afghanis): 2013 Act 80.4; 2014 Est. 72.6; 2015 Proj. 90.0.

### Central bank balance sheet highlights (at current market exchange rates)
- Net foreign assets (in billions of Afghanis): 2012 352.7; Dec. 20 Act 382.5; Dec. 21 Act 409.4; Mar. 20 Est. 412.7; Dec. 21 Proj. 418.3.
- Reserve money (in billions of Afghanis): 2012 176.8; Dec. 20 Act 198.8; Dec. 21 Act 225.2; Dec. 21 Proj. 250.0.
- Currency in circulation (in billions of Afghanis): 2012 150.0; Dec. 20 Act 168.8; Dec. 21 Act 197.0; Dec. 21 Proj. 218.6.
- International reserves, in millions of U.S. dollars (net/gross examples): Net 6,472; Gross 6,867 (2012); Net 6,382; Gross 6,886 (2013); Net 6,694; Gross 7,248 (2014); Net 6,737; Gross 7,377 (2015, projected).

*Source: Islamic Republic of Afghanistan: IMF staff report content as provided in the supplied PDF excerpt.*

### Appendix I. Letter of Intent

### Appendix I. Letter of Intent

### Introduction
- Request: nine-month IMF Staff Monitored Program (SMP) covering April 1, 2015 to December 31, 2015 to pave the way for an IMF financial arrangement.
- Purpose of SMP:
  - Address economic vulnerabilities.
  - Facilitate engagement with the international community and sustain donor support.
  - Preserve macroeconomic stability, improve economic governance, and lay the basis for more private sector activity.
- Related documents: Memorandum of Economic and Financial Policies (MEFP) and Technical Memorandum of Understanding (TMU) for April 1, 2015 to December 31, 2015.

### Recent economic developments — key findings
- Growth and inflation:
  - GDP growth: 1.5 percent in 2014 (down from 3.7 percent in 2013).
  - Nonagricultural output growth: 1.2 percent in 2014 (from 3.7 percent in 2013).
  - Agricultural output growth: 2.7 percent in 2014.
  - Average inflation: around 4½ percent in 2014.
- External and reserves:
  - Gross international reserves: $7.2 billion at end FY 14.
  - Exchange rate: depreciated by 4.1 percent in nominal terms during 2014.
- Fiscal vulnerabilities and treasury:
  - Treasury cash balance: Af 21 billion at beginning of FY 2014; Af 8.7 billion at end of FY 2014.
  - Arrears and unfunded allotments: Af 10 billion at end of FY 14.
  - Operating balance (deficit), excluding grants: 11.0 percent of GDP in 2014.
- Banking sector:
  - Asset quality deteriorated in 2014.
  - 8 out of 15 banks classified as weak (rated 4 or 5 according to CAMEL).
  - Dangerous weaknesses in two banks, including a systemic one.
  - DAB strategy envisages improving CAMEL ratings by February 2016.
- Structural and legal progress:
  - AML and CFT laws passed; CFT Regulations issued in October 2014.
  - New banking law discussed in parliament; DAB law amendments in legislative pipeline.
  - DAB Supreme Council regulation (September 28, 2014) includes legal protection for supervisory staff.
  - Financial intelligence unit (FinTRACA) capacity increased; registration of money service providers expanded.
  - Economic Crimes Task Force (ECTF) formed; advisory memo submitted to Criminal Law Review Working Group in April 2014.
- Kabul Bank asset recovery:
  - Cash recoveries between February 28, 2014 and January 31, 2015: $4 million; total cash recoveries: $179 million.
  - Major domestic assets sold to government for $48.8 million.
  - Discounted interest: $97.8 million.
  - Total outstanding claims: $663 million.
  - Appellate court ordered repayment totaling $374.6 million by two largest former shareholders; jail sentences tripled from 5 to 15 years.
  - Mutual legal assistance requests sent to multiple foreign jurisdictions; enforcement actions assigned to Attorney General’s Office.

### Policy assessment and constraints
- Past policy response insufficient: resulted in lower domestic revenue collection, higher credit to government, slightly higher reserve money and currency in circulation than end-year targets, and emergence of arrears.
- Dependence on donor grants continues to finance the budget and current account.
- VAT introduction delayed due to reduced parliamentary rate (from 10 to 5 percent) and weak tax administration capacity; VAT retained as medium-term objective.
- Contingency measures identified: Af 4 billion available to deploy swiftly if revenue/grants shortfall or expenditure overrun.

### Economic program for 2015 — objectives and main elements
- Objectives:
  - Address fiscal and banking vulnerabilities.
  - Preserve macroeconomic stability.
  - Lift growth through structural reform.
- Policy mix:
  - Fiscal: mobilize domestic revenue, catalyze donor support, settle arrears, maintain treasury cash balance, avoid debt accumulation.
  - Monetary: preserve low inflation and continue exchange rate flexibility; reserve money remains monetary anchor.
  - Structural: (i) fiscal revenue mobilization and strict expenditure control; (ii) financial sector reform; (iii) economic governance reforms.
- Growth and inflation targets:
  - GDP growth target for 2015: 3.5 percent.
  - Average inflation target for 2015: about 4 percent.
- Debt and reserves targets:
  - Debt: less than 10 percent of GDP.
  - International reserves: 7½ months of import cover.
- Fiscal and current account stance:
  - Overall budget: broadly balanced.
  - Current account: in surplus.
  - Operating balance excluding grants remains fiscal anchor.

### Revenue mobilization measures (2015)
- Domestic revenue projected increase: 1 percentage point of GDP (to 9.6 percent of GDP).
- Additional revenue measures in 2015 budget expected to raise Af 10 billion (0.8 percent of GDP):
  - Increase business receipts tax rate.
  - Increase import tariffs.
  - Introduce a telecommunications tax.
  - Triple the fuel fee collected at customs.
  - Increase overflight fees for using Afghanistan’s airspace.
- Composition of projected revenue improvement:
  - Collections increase by Af 4 billion (0.3 percent of GDP) from improved taxpayer compliance and reduced leakages.
  - Already implemented: increased import tariffs and overflight fees projected to yield Af 1.5 billion in 2015.
  - Measures planned by end-June 2015 projected to yield Af 8.9 billion in 2015 and require parliamentary approval.
- Contingency measures: Af 4 billion identified.

### Expenditure control and social priorities
- Operating spending:
  - Expected to increase to 20.2 percent of GDP in 2015 as donor-financed security-related spending is moved on budget.
  - Operating balance (deficit), excluding grants: projected to moderate to 10.5 percent of GDP in 2015.
- Measures to contain nonsecurity spending:
  - Limit increases in wages and pensions.
  - Limit bonuses.
  - Reduce headcount and number of highly paid positions in some ministries.
  - Review targeting of payments to martyrs and disabled (over 66 percent of total pension spending).
  - Strict control of discretionary development spending while ensuring repayment of arrears.
- Pro-poor spending:
  - Pro-poor operating spending in 2015 budget: about Af 32.4 billion (2.6 percent of GDP).
  - Continued improvements in collection and analysis of poverty indicators.

### Financial sector reform and supervision
- Immediate focus:
  - Strengthen financial sector supervision and enforcement.
  - Implement DAB strategy for weak banks; banks submitted action plans with marked improvements in many areas.
  - Strengthen DAB financial supervision department (FSD) through FSD strategic plan launched June 2013.
- Legal/institutional reforms:
  - Amendments to DAB law drafted in consultation with IMF staff to enhance DAB’s independence and operational autonomy; under review by ministry of justice.
  - New banking law amendments discussed in parliament; finance, budget and banking affairs commission incorporated IMF staff suggested amendments.
  - DAB Supreme Council regulation (July 6, 2014) strengthening FIU legal framework in line with FATF standards.

### Structural reforms and governance
- Legislation and institutional actions:
  - AML and CFT laws passed; CFT Regulations issued.
  - Law on sukuk debt instruments being prepared with IMF capacity development.
  - Mining law approved by the lower house.
  - Amendments to companies’ law to strengthen ministry of finance oversight of state owned corporations in legislative pipeline.
- Anti-corruption and asset recovery:
  - Presidential decree (October 1, 2014) to resolve Kabul Bank case and recover stolen assets.
  - Joint Anti-Corruption Monitoring and Evaluation Commission recommendations to be implemented and asset recovery work accelerated.

*Source: Appendix I. Letter of Intent (Kabul, May 6, 2015), Memorandum of Economic and Financial Policies for 2015, Islamic Republic of Afghanistan.*

### 23.      We will improve coordination between budget and treasury departments and maintain

### _cr15140 - 23.      We will improve coordination between budget and treasury departments and maintain

### Cash management and pro-poor spending
- Link in-year allotments to cash availability to ensure government payment obligations remain within projected cash availability and avoid arrears.
- Maintain the treasury’s discretionary cash balance not below Af 5 billion during 2015 (new quarterly indicative target).
- Settle arrears incurred lawfully in 2014.
- Implementation to start with weekly meetings of a cash management committee chaired by the minister of finance.
- Pro-poor spending projected at 2.6 percent of GDP in 2015.

### Monetary policy, money growth, exchange rate, and reserves
- Reserve money will continue to be the monetary anchor.
- Implement a more active policy and improve coordination with the ministry of finance to manage reserve money growth.
- Anticipate a modest pick-up in money demand in 2015 as political and security transition uncertainties subside.
- Reserve money growth of 11 percent is projected in 2015.
- Program envisages a moderate increase in NIR ($150 million).
- International reserve cover will remain at 7½ months of imports.
- Let the Afghani move with market trends and intervene only to avoid excessive exchange rate volatility.

### Structural reforms — overview
- Reinvigorate structural reforms in 2015 across fiscal, financial sector, and economic governance areas.
- Fiscal reforms: improve revenue mobilization, efficient use of public resources, and avoid pressures on the cash balance.
- Financial sector reforms: address immediate banking vulnerabilities, deal with weak banks, and strengthen bank supervision.
- Economic governance reforms: strengthen the AML/CFT regime and legislative and institutional frameworks to combat economic crime.

### Fiscal reforms and revenue measures
- Additional revenue measures introduced in 2015 and to be introduced by end-June will yield revenue of over 1 percent of GDP per year in the medium term.
  - Measures introduced: increased import tariffs and overflight fees for using Afghanistan’s airspace.
  - Measures to introduce by end-June: increased BRT rate, telecommunications tax, fuel fee, and user fees.
- Strengthen tax administration to raise revenue, improve governance, and facilitate VAT introduction in the medium term.

### Natural resources fiscal regime
- Designing a fiscal regime for the natural resources sector to attract investment and ensure government receives a reasonable share of economic rents.
- IMF CD provided to review the current framework and recommend an effective and transparent fiscal regime in full compliance with the Extractive Industries Transparency Initiative.

### Strengthening tax administration (ARD and ACD)
- Improve taxpayer registry:
  - ARD will establish a reliable and up-to-date taxpayer registry by removing dormant or never-commenced taxpayers.
  - The taxpayer register for Kabul will be updated by end-May 2015 and be extended to the provinces as soon as feasible (security may pose challenges).
- Review and update tax arrears records to distinguish collectible and uncollectible amounts.
  - For collectible amounts, by end-October 2015 ARD will set time-bound targets for collection, prioritized as: (i) amounts owed by taxpayers covered by the Large Taxpayer Office (LTO); (ii) the top 100 debtors; (iii) the largest arrears outside the LTO and top 100 debtors; and (iv) arrears that are less than 12 months old.
- Establish a Risk Analysis and Case Selection Unit by end-May 2015 to implement ARD’s Strategic Plan, develop a data-driven process to identify and prioritize high-risk areas, and allocate audit resources accordingly.
  - Establish key performance indicators and update audit policies, procedures and guidelines by end-October 2015 based on assessments.
- Implement action plan to enhance customs controls; IMF’s Middle East Technical Assistance Center plans to provide ACD CD focusing on valuation issues, tariffs, and mobile verification teams’ performance measurement.

### Public financial management (PFM) enhancements
- Continue to elaborate the medium-term fiscal framework (MTFF), especially for development spending, to improve fiscal reporting and commitment control.
- Improve identification of recurrent and capital expenditures and provide information on output targets alongside ministry appropriations.
- Press for electronic registration of invoices across all ministries and provinces and establish a database for ongoing capital projects with information on expenditure incurred, expenditure planned to complete the project, and the funding source.
- Publish quarterly analytical reports on financial performance of state-owned enterprises and companies and an assessment of their fiscal impact and risks in the MTFF.
- Establish a Cabinet-level committee to conduct quarterly reviews of budget execution; the committee will prioritize the next quarter’s expenditure and propose for Cabinet approval reductions in budget allocations if needed in light of previous quarter’s revenue collection and donor disbursements.

### Financial sector reform — bank-specific actions and supervision
- Actions taken and planned to address banking vulnerabilities:
  - DAB issued enforcement actions for a vulnerable systemic bank to ensure losses are recorded and capital levels restored; DAB will monitor and is ready to place the bank under conservatorship if noncompliant.
  - Enforcement actions against another vulnerable state-owned bank with near 100 percent nonperforming loan ratio, capital dissipation, and fraud; the bank is prohibited from extending further loans.
    - Ensure management positions are filled with fit and proper bankers swiftly.
    - Commit to restore required minimum capital levels by end of 2015 through a minimum aggregate capital injection of $20 million during 2015.
    - Bank will prepare a five-year operating strategy with projected financial statements, key performance objectives, and quarterly reporting to DAB by end-June 2015 and finalized by end-August 2015.
    - An independent external party will be hired to audit bad debt recoveries.
    - If the strategy fails and the bank does not achieve operational break-even within 18 months (i.e., by end-February 2017), the bank will be put into conservatorship followed by liquidation or sale.
  - DAB prepared and started implementing a plan for other weak banks to increase CAMEL ratings significantly by end-February 2016; focus areas: management, capital adequacy, and asset quality, with corrective action for non-improvement.

### New Kabul Bank (NKB) privatization
- NKB losses reduced from $22 million in 2012 to $6 million in 2014; management implementing measures to make NKB profitable by end-2015.
- Plan to initiate NKB’s privatization by end-September 2015 after further loss reduction.

### Legal and supervisory reforms for banking
- Promulgate the new banking law by June 2015 (drafted in consultation with IMF staff) to strengthen corporate governance, capital requirements, large and related parties lending exposures, supervision, and bank resolution provisions.
- Prepare revised regulations and information circulars consistent with the new legislation to be finalized and issued once law is enacted.
- Strengthen DAB’s Financial Supervision Department (FSD):
  - Implement FSD’s five-year strategic plan and new organizational structure.
  - DAB’s supreme council to approve a detailed organizational file for FSD by end-September 2015, including duties, relationships, and job descriptions.
  - Enhance offsite supervision by adopting a new manual and revising offsite reports; prepare a new manual for onsite inspection and training of FSD supervisors.
  - Supervisory Enforcement Committee to continue regular reviews of banks’ compliance with FSD supervisory orders.
  - Revise banking regulations on asset classification and provisioning by end-September 2015.
  - Revise banking regulations on related party lending and corporate governance by end-December 2015 to align with international best practices and the new banking law.
  - Develop a risk-based supervisory framework and establish an automated supervisory reporting system.

### DAB capitalization, transparency, and operations
- Realized revaluation gains have removed DAB’s undercapitalization; a new capitalization framework will ensure it remains capitalized so monetary policy implementation is not affected by capital or income considerations.
- Submit to parliament amendments to the central bank legislation by end-December 2015—drafted in consultation with IMF staff—implementing the memorandum of understanding on the central bank’s capitalization and aligning provisions on netting and allocation of net income with international good practice.
- DAB developing an operations report for parliament (to become part of its Annual Report) to enable parliamentary evaluation and monitoring of DAB’s progress under the DAB Law.
- Resume timely publication of DAB’s audited financial statements.

### Financial market development and monetary operations improvements
- With IMF CD, prepare the sukuk law, a sukuk implementation plan including identification of assets to back sukuk, and necessary capital market and securities issuance legislation and regulations.
- Introduced shorter maturity, seven-day, capital notes; further improvements could include reserve requirement averaging and restarting DAB’s standing deposit and credit facilities.
- Promote secondary trading with existing instruments, starting with capital notes; DAB to work with the Afghan Bankers Association on a “Code of Conduct” for dealers.
- Foster development of the interbank market.

### Improving credit access and legal framework for lending
- Address deficiencies in contracts, collateral, company and insolvency laws to strengthen creditor and debtor rights and address creditors’ rights in corporate insolvencies and household bankruptcies.
- Reform land laws to enable registration of land titles and transfers, and recognition of mortgages and other security interests.

### Economic governance, AML/CFT, and anti-corruption measures
- Amendments to the AML Law: include proceeds of predicate offenses committed abroad; increase fines for legal persons; ensure imprisonment and fines may be applied cumulatively.
- Finalize new regulation on currency reporting at the border by end-June 2015 to monitor cross border transportation of currency and bearer negotiable instruments.
- Starting in September 2015, Customs Administration will publish relevant statistics on an external website: number of declarations, amounts reported and the currency, countries of origin, and number and type of enforcement actions taken.
- Guided by IMF CD, submit to the Supreme Council of the DAB by end-September 2015 the draft AML and Proceeds of Crime Regulation–Preventive Measures for Financial Institutions in line with FATF recommendations 1, 10, 12, 14, and 16.
- Anti-corruption legislative actions by end-December 2015:
  - Submit to parliament legislation to criminalize bribery of foreign public officials, trading in influence, illicit enrichment, bribery and embezzlement of property in the private sector, in line with the United Nations Convention against Corruption (ratified by Afghanistan on August 25, 2008).
  - Submit an amendment to Article 12 of the Law on Overseeing the Implementation of the Anti-Administrative Corruption Strategy to provide for publication of asset declarations made pursuant to Article 154 of the Constitution.

### Program modalities and monitoring
- Monitor the nine-month SMP through December 31, 2015 with quantitative targets and structural benchmarks.
- SMP monitored based on performance through two test dates: June 21, 2015 and December 21, 2015.
- Quantitative variables and benchmarks defined in the Technical Memorandum of Understanding; proposed quantitative targets and structural benchmarks are attached to the memorandum of economic and financial policies in Tables 1 and 3.

*International Monetary Fund — ISLAMIC REPUBLIC OF AFGHANISTAN (excerpts provided from the source content).*

### 40.      Commitments under the Article VIII. During the program period, we will not impose or

### _cr15140 - 40.      Commitments under the Article VIII. During the program period, we will not impose or

### Commitments under Article VIII
- During the program period, the authorities commit that they will not:
  - impose or intensify restrictions on the making of payments and transfers for current international transactions;
  - introduce or modify multiple currency practices;
  - conclude bilateral payments agreements inconsistent with Article VIII;
  - impose or intensify restrictions for balance of payments purposes.

### Quantitative and indicative targets (Program monitoring)
- Quantitative targets and indicative targets are specified cumulatively from the beginning of the fiscal year (see Table 1).
- Selected entries and test-date values (as presented in the source table):
  - Revenues (floor): 20.8; 24.1; 46.7; 81.6; 120.4
  - Operating budget deficit, excluding grants (indicative target: ceiling): 20.3; 12.9; 55.5; 89.0; 131.6
  - Treasury cash balance (indicative target: floor): 5.0; 13.6; 5.0; 5.0; 5.0
  - Net credit to government from DAB (ceiling): -41.6; -1.3; -18.4; -20.2; -4.3; -6.2; -0.6
  - Reserve money (ceiling): 225.2; -6.0; -17.6; 2.9; 20.1; 24.8
  - Currency in circulation (indicative target: ceiling): 197.0; -4.0; -14.2; 6.6; 19.6; 21.7
  - Social and other priority spending (indicative target: floor): 8.1; 8.1; 16.2; 24.3; 32.4
  - International reserves of DAB (floor; in millions of U.S. dollars): 6,694; 38; 331; 108; 75; 112.5; 150
  - Nonconcessional external debt, new (ceiling) 2/: 0.0; 0.0; 0.0
  - Short-term external debt (ceiling) 2/: 0.0; 0.0; 0.0
  - External payments arrears, new (ceiling) 2/: 0.0; 0.0; 0.0
  - Borrowing by public enterprises in need of restructuring—from DAB or state-owned banks, or government-guaranteed (ceiling) 2/: 0.0; 0.0; 0.0
- Reference values and adjustors:
  - Core budget development spending: 8.0; -0.7; 7.3; 25.8; 49.7; 90.0
  - External financing of the core budget and sale of nonfinancial assets 4/: 29.6; 17.0; 46.6; 85.6; 144.8; 222.1
- Notes:
  - The quantitative targets, indicative targets, their adjustors, and program exchange rates will be defined in the Technical Memorandum of Understanding (TMU).
  - Program exchange rates as of December 21, 2014 are used.
  - These quantitative targets apply on a continuous basis.
  - Program performance will be monitored based on the quantitative targets for the test dates in June 21, 2015, and December 21, 2015.
  - Includes operating and development donor assistance, external loans, and sale of non-financial assets.
- Units: (In billions of Afghanis, unless otherwise indicated)

### Structural reforms implemented in early 2015 (Table 2)
- Banking sector actions (implemented/measures and timing):
  - DAB to communicate enforcement actions to the vulnerable systemic bank, including time-bound instructions on:
    - Recording losses on bank’s assets (as required by DAB);
    - Restoring capital levels and ratios to required minimum levels under the banking law by injecting fresh capital by March 2015;
    - If not implemented, implementing enforcement actions under Chapter VII of the Banking Law of Afghanistan.
    - Status: Implemented. Rationale: Address banking vulnerability.
  - Tax policy measures (not requiring parliamentary approval) to yield Af 1.5 billion in 2015 by increasing import tariffs and increasing fees for using Afghanistan’s airspace.
    - Status: Implemented. Rationale: Mobilize Budget Revenue.
  - DAB enforcement actions for another vulnerable bank, including:
    - Recording losses; preparing a five-year operating strategy with projected financial statements and key performance objectives; quarterly reporting; staffing deadlines (CEO and CFO by end-April 2015; Board members by end-June 2015; Chief Operating Officer by end-September 2015); capital injections of $10 million in June 2015, and $5 million each in September and December 2015 to restore capital levels by December 2015.
    - Status: Implemented. Rationale: Address banking vulnerability.
  - Recapitalization of the vulnerable systemic bank to meet prudential requirements or otherwise implement enforcement actions under Chapter VII of the Banking Law.
    - Status: Implemented. Note: Capital position is being verified, may be met. Rationale: Address banking vulnerability.
  - DAB completed an action plan to deal with weak banks in the system (plan completed in December 2014).
    - Status: Implemented. Rationale: Addressing banking vulnerabilities to safeguard financial stability.
  - Amendments to the AML Law (scope and penalties enhancements).
    - Status: Amendments approved and will be enacted when published in the Official Gazette. Rationale: Strengthen regulatory and transparency measures, improve business climate.

### Structural benchmarks (Table 3)
- Benchmarks and target dates:
  - Other vulnerable (non-systemic) bank to hire an independent external party by end-June 2015 to audit bad debt recoveries for delinquent amounts exceeding $0.5 million.
    - Date: End-June 2015. Rationale: Address banking vulnerability.
  - Promulgate the banking law.
    - Date: End-June 2015. Rationale: Strengthen financial sector and legal framework for dealing with weak banks.
  - Implement revenue measures proposed in the 2015 budget that require parliamentary approval to yield Af 8.9 billion in 2015.
    - Date: End-June 2015. Rationale: Mobilize budget revenue.
  - Council of Ministers to issue a revised Regulation under Article 7 of the AML Law on currency reporting at the border, in line with FATF recommendation 32, enabling electronic transmission of information from Customs Department to FinTRACA.
    - Date: End-June 2015. Rationale: Strengthen measures to detect and combat economic crime.
  - Revise banking regulations on asset classification and provisioning to include:
    - (i) clear and objective definition for classification categories in line with international standards;
    - (ii) minimum general provision on performing loans including standard loans;
    - (iii) changes in treatment of collateral so it affects adjusted loan exposures rather than upgrade classification except for loans classified as loss;
    - (iv) detailed rules and criteria for writing-off loans;
    - (v) strict measures against noncomplying banks.
    - Date: End-September 2015. Rationale: Align key regulations with international standards and best practices.
  - Afghanistan Revenue Department to implement a data driven risk based audit case selection process; establish KPIs and update audit policies based on performance.
    - Date: End-October 2015. Rationale: Strengthen tax administration and mobilize budget revenue.
  - Revise banking regulation on related party lending to:
    - (i) revise definition of related parties according to international standards;
    - (ii) confirm limit on related party aggregate exposures to a maximum of 15 percent of the bank’s unimpaired capital and reserves;
    - (iii) deduct excess exposures from capital when assessing capital adequacy unless sufficiently collateralized.
    - Date: End-December 2015. Rationale: Align key regulations with international standards and best practices.

### Technical Memorandum of Understanding — valuation and definitions (Attachment II)
- Program exchange rates and valuation:
  - Program exchange rate: 58.07 Afghanis per U.S. dollar (cash rate of December 21, 2014).
  - Gold valuation: US$1,196.35 per troy ounce (price as of December 21, 2014).
  - Exchange Rate Program Rate table (selected entries):
    - U.S. dollars / Canadian dollar 0.861900
    - U.S. dollars / U.A.E. dirham 0.272300
    - U.S. dollars / Egyptian pound 0.139700
    - U.S. dollars / euro 1.222900
    - U.S. dollars / Hong Kong dollar 0.128980
    - U.S. dollars / Indian rupee 0.015783
    - U.S. dollars / Pakistani rupee 0.009940
    - U.S. dollars / Polish zloty 0.286800
    - U.S. dollars / Iranian rial 0.000037
    - U.S. dollars / Saudi Arabian riyal 0.266400
    - U.S. dollars / Russian ruble 0.016800
    - U.S. dollars / Swiss franc 1.016200
    - U.S. dollars / pounds sterling 1.562600
    - U.S. dollars / SDR 1.453550
- Quantitative targets summarized (Section B):
  - Floors: revenue of the central government and net international reserves (NIR).
  - Ceilings: reserve money; net central bank credit to the central government (NCG); contracting and/or guaranteeing new medium- and long-term nonconcessional external debt by the public sector (continuous); short-term external debt owed or guaranteed by the public sector (continuous); accumulation of external payment arrears, excluding interest on preexisting arrears (continuous); lending from state-owned banks or the central bank to, or government guaranteed borrowing by, public enterprises in need of restructuring (continuous).
  - Indicative targets for March and September 2015 include the above variables plus: ceiling on the operating budget deficit of the central government excluding grants; floor on treasury cash balance; and social and other priority spending.
- Key program definitions:
  - Central government composition: Office of the President, ministries and other state administrations and governmental agencies (including the attorney general’s office), the National Assembly, and the judiciary (including the Supreme Court).
  - Reserve money: currency in circulation plus Afghani-denominated commercial bank deposits at the central bank (excluding deposits held at DAB’s branches), including balances maintained by commercial banks in DAB’s overnight facility.
  - Treasury cash balance: total discretionary cash balance at the treasury account in DAB.
  - Rerouting of treasury’s IMF accounts: treated for program purposes as if DAB assumed these positions and established corresponding counterpositions vis-à-vis the treasury.
  - Net central bank credit to the government: central bank’s claims on the government minus government deposits at the DAB (excluding branch deposits). Claims include the “promissory note” amount outstanding of DAB’s claim on a bank in liquidation guaranteed by the ministry of finance.
  - Net international reserves (NIR): reserve assets minus reserve liabilities of the DAB, both expressed in U.S. dollars.
    - Reserve assets: as defined in BPM5; include monetary gold, SDRs, Afghanistan’s reserve position in the IMF, foreign currency cash (excluding branch cash), and deposits abroad; exclude pledged/collateralized assets, claims on residents, non-monetary precious metals, nonconvertible currency assets, illiquid assets, and derivative claims in foreign currencies vis-à-vis domestic currency.
    - Reserve liabilities: short-term foreign exchange liabilities of DAB to nonresidents (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; and arrears on principal or interest payments to commercial banks, suppliers, or official export credit agencies.
  - Revenues of the central government: defined in line with GFSM 2001 on a cash accounting basis, excluding grants. Includes taxes and other compulsory transfers, property income, sales of goods and services, social contributions, interest, fines, penalties and forfeits, and voluntary transfers other than grants. Excludes grants and noncompulsory contributions from foreign governments and international organizations, receipts collected on behalf of noncentral government units, receipts from sale of nonfinancial assets, and transactions in financial assets and liabilities (except interest payments).
    - Revenues recognized on cash basis; official AFMIS reports used for monitoring; exceptional advanced payments treated as if received on the normal due date.
  - Social and other priority spending: sum of pro‑poor spending identified in accordance with the ANDS poverty profile by the Ministry of Education, Ministry of Public Health, and Ministry of Labor, Social Affairs, Martyrs, and Disabled within the central government’s operating budget for a fiscal year.
  - External debt definition: as set out in Executive Board Decision No. 6230-(79/140), revised August 31, 2009 (Decision No. 14416-(09/91)); debt defined as a current contractual liability requiring future payments; includes loans, suppliers’ credits, and leases (present value of lease payments excluding operation/repair/maintenance).
    - Under this definition, arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt.

*Source: Afghan authorities.*

### 14.      Long term and medium term external debt. A ceiling applies, on a continuous basis, to

### _cr15140 - 14.      Long term and medium term external debt. A ceiling applies, on a continuous basis, to

### Long-term and medium-term external debt ceiling
- A continuous ceiling applies to the contracting and guaranteeing by the public sector of new nonconcessional debt with nonresidents with original maturities of one year or more.
- The ceiling applies to debt and commitments contracted or guaranteed for which value has not yet been received.
- Private debt for which official guarantees have been extended and which therefore constitute a contingent liability of the public sector are included.
- Exclusions: refinancing credits and rescheduling operations, credits extended by the IMF, and credits on concessional terms as defined below.
- Consistent with the Public Finance and Expenditure Management (PFEM) Law, the MOF should have sole responsibility for the contracting and guaranteeing of external debt on behalf of the government.

### Definitions and treatment for program purposes
- Government definition: includes the central government (including government departments), as well as official agencies that do not seek profit and whose budgets are issued independent of the annual operational or development budgets.
- Public sector composition: the government as defined above, the DAB, and nonfinancial public enterprises. (Public enterprises defined in paragraph 17.)
- Guarantee of a debt: arises from any explicit legal obligation of the public sector to service a debt in the event of nonpayment by the debtor (involving payments in cash or in kind), or from any implicit legal or contractual obligation of the public sector to finance partially or in full any a shortfall incurred by the debtor.
- Concessional debt definition for program purposes: a debt is concessional if it includes a grant element of at least 60 percent.
  - Grant element calculation: difference between the present value (PV) of debt and its nominal value, expressed as a percentage of the nominal value of the debt.
  - PV calculation: discounting the future stream of payments of debt service due on this debt at the time of contracting using a discount rate of 5.0 percent.
  - The calculation of concessionality will take into account all aspects of the loan agreement, including maturity, grace period, payment schedule, upfront commissions, and management fees.

### Short-term external debt (zero ceiling)
- A zero ceiling applies on a continuous basis to the stock of short-term external debt owed or guaranteed by the public sector with an original maturity of up to and including one year.
- Applies to debt as defined in paragraph 13 of the memorandum.
- Exclusions: rescheduling operations (including the deferral of interest on commercial debt) and normal import-related credits.
- Valuation: 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.

### Nonaccumulation of external payments arrears (continuous quantitative target)
- A continuous quantitative target applies to the nonaccumulation of new external payments arrears on external debt contracted or guaranteed by the central government or the DAB.
- External payment arrears definition: external debt service obligations (principal and interest) falling due after March 20, 2015 and that have not been paid at the time they are due, as specified in contractual agreements.
- Exclusions from the prohibition on new arrears:
  - (i) arrears arising from interest on the stock of arrears outstanding as of March 20, 2015;
  - (ii) external arrears that are subject to debt rescheduling agreements or negotiations.

### Lending to, or guaranteeing borrowing by, public enterprises (zero ceiling)
- A zero ceiling on new lending from state-owned banks or the central bank to, or government guaranteed domestic borrowing by, public enterprises in need of restructuring applies on a continuous basis.
- Clarifications for this quantitative target:
  - (i) “state-owned banks” refers to those banks that are wholly or majority owned by the government (as defined in paragraph 14), including Bank Millie, Bank Pashtany and New Kabul Bank;
  - (ii) “public enterprises in need of restructuring” refers to enterprises that meet either of the following:
    - (a) public enterprises that have not had an audited balance sheet in the past two fiscal years,
    - (b) public enterprises that have been identified by the Ministry of Finance for liquidation, or
    - (c) public enterprises that do not have cabinet-approved restructuring plans;
  - (iii) “public enterprises” refers to enterprises wholly or majority owned by the government, including those covered by the State-Owned Enterprise (Tassady) Law, and all state-owned corporations and any other public entities and government agencies engaged in commercial activities but not covered by the Tassady Law.
- Coverage: any new loans (or financial contributions) extended directly from the central bank or state-owned banks to public enterprises in need of restructuring, and any explicit government guarantees for borrowing undertaken by these public enterprises (including loan agreements and guarantees for which value has not been received).

### Operating budget deficit definition
- Operating budget deficit of the central government excluding grants: defined as revenues of the central government minus operating budget expenditure recorded in AFMIS.

### Adjustors (NIR floor and NCG ceiling)
- The floor on NIR and the ceiling on the NCG are consistent with assumed cumulative core budget development spending from the beginning of the fiscal year:
  - December 21, 2014 — 77.9 (Billion Afghani)
  - March 20, 2015 — 8.0 (Billion Afghani)
  - June 21, 2015 — 25.8 (Billion Afghani)
  - September 22, 2015 — 49.7 (Billion Afghani)
  - December 21, 2015 — 90.0 (Billion Afghani)
- If core budget development spending exceeds these projections, the NIR floor will be adjusted downward and the NCG ceiling will be adjusted upward by the difference between actual (up to the appropriated amount) and projected development spending.
- Assumed cumulative external financing of the core budget and receipts from the sale of nonfinancial assets:
  - December 21, 2014 — 182.2 (Billion Afghani)
  - March 20, 2015 — 29.6 (Billion Afghani)
  - June 21, 2015 — 85.6 (Billion Afghani)
  - September 22, 2015 — 144.8 (Billion Afghani)
  - December 21, 2015 — 222.1 (Billion Afghani)
- Adjustor rules for external financing and asset sales:
  - If external financing and receipts exceed (fall short of) projections, the NIR floor will be adjusted upward (downward) and the NCG ceiling will be adjusted downward (upward) by the difference between actual and projected levels.
  - Overall caps: downward adjustment to the NIR floor is capped at US$500 million; upward adjustment to the NCG ceiling is capped at Af 29 billion.
  - If asset recovery exceeds (falls short of) projections, the NIR floor will be adjusted upward (downward) and the NCG ceiling will be adjusted downward (upward) by the difference between actual recovery and projected level.
- Other adjustors:
  - If the ministry of finance recapitalizes (receives dividend from) DAB, the NCG ceiling will be adjusted upward (downward) by the amount of this recapitalization (dividend).
  - If Afghanistan receives an SDR allocation the NIR floor will be adjusted upwards by the amount of this allocation.
  - If expenditure currently financed directly by donors outside the budget is moved onto the operating budget, the NIR floor will be adjusted downward, and the NCG ceiling and indicative targets for operating budget deficits excluding grants will be adjusted upward by the actual amount, subject to:
    - (i) donor statement indicating decision to stop financing them outside the budget; and
    - (ii) supplementary appropriation approved by parliament.
  - Overall downward adjustment to the NIR floors for on-budgeting donor-financed expenditures is capped at US$300 million.

### Provision of information to the Fund (reporting requirements)
- The government will provide information to the Fund through the office of the Resident Representative of the IMF in Afghanistan as specified and summarized in reporting tables provided to the Technical Coordination Committee.
- Reporting frequencies and lags (selected items):
  - DAB net international reserves: weekly, no later than two weeks after the end of each week.
  - Monetary statistics (including exchange rates, government accounts with the DAB, currency in circulation, reserve money, monetary survey): monthly and no later than three weeks after the end of the month (six weeks in the case of the monetary survey). The monetary survey will include the balance sheet of the DAB and a consolidated balance sheet of the commercial banking sector.
  - Core budget operations and their financing: monthly and no later than four weeks after the end of the month. Official reports: monthly financial statements from AFMIS. Financing structure (grants and loans separately identified) and expenditure data on a consistent cash basis. Core operating expenditures reported monthly using budget appropriation economic and administrative classification and program and functional classification; core development expenditures reported monthly using budget program classification and economic, administrative and functional classification. All data to compare outturns against the approved budget. Core operating and development revenues and expenditures should also be reported by province monthly.
  - External budget operations and their financing (donor funded spending outside core treasury systems): semiannually (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 budget program classification (and administrative, functional and provincial classification where possible).
  - External debt data: quarterly and no later than six weeks after the end of the quarter. Include:
    - (i) details of new loans contracted or guaranteed during the quarter, including terms of each new loan;
    - (ii) the stock of debt at the end of the quarter, including short-term debt, and medium- and long-term debt;
    - (iii) loan disbursements and debt service payments (interest and amortization) during the quarter;
    - (iv) debt relief received during the quarter;
    - (v) information on all overdue payments on short-term debt, and on medium- and long-term debt, including new external arrears (if any);
    - (vi) total outstanding amount of arrears.
  - National accounts data: annually and no later than three months after the end of the year. Merchandise trade data quarterly and no later than eight weeks after the end of the quarter.
  - Monthly CPIs for Kabul and other major cities (“national” CPI): lag of four weeks after the end of each month.
  - DABS reporting: four-monthly with a three-month lag, financial flows and other key variables aggregated and disaggregated by regional hubs for the preceding 12 months and (in the last four-monthly period of the year) a forecast for the following fiscal year; use agreed template with all lines filled in but excluding disaggregation of losses into technical and nontechnical for regions outside Kabul.
  - Financial Stability Indicators for each commercial bank: quarterly with a one-month lag after the end of each quarter. Indicators to include prudential ratios, capital adequacy ratio, liquidity ratio, portfolio quality indicators (e.g., nonperforming loans, provisions as percentage of classified loans), concentration ratio, related loan ratio, open foreign exchange positions, large loan and deposits statistics, income and expense information such as net income to total assets ratio (ROA), rate of return on capital, net interest margin, and other relevant information. Also monthly balance sheet and income statement for each bank compiled from supervisory submissions, and the Summary Analysis of Condition and Performance of the Banking System.
  - Lending to public enterprises from each commercial bank: quarterly with a one-month lag. Report for each bank:
    - (i) aggregate value of outstanding loans to all public enterprises;
    - (ii) disaggregated value of outstanding loans by public enterprise for each bank’s top 10 borrowers;
    - (iii) indicators of the quality of these loans.
    - (For this requirement, public enterprises refer to those defined in point (iv) in the first bullet of paragraph 17.)
  - Monthly activity and cost reports from the Kabul Bank receiver, including status and financial details of asset recovery.
  - Monthly detailed balance sheet and income statement for New Kabul Bank (with a two weeks lag) and quarterly reports on progress against its business and financial plans (staffing, branches, etc.).
  - Quarterly transactions on the Kabul Bank loan account, Kabul Bank receivership accounts and any other accounts related to the bank or asset recovery.
  - Copies of documents related to asset recovery, such as mutual legal assistance requests (evidence and banking and property information redacted) to foreign jurisdictions, copies of MOUs covering international cooperation with said jurisdictions.
  - Monthly details of discretionary cash balances held in the Ministry’s AFS and U.S. dollar-denominated TSA accounts, and the discretionary development 27232 account; update of the monthly summary report of funds under operating budget, summaries of expenditure for both operating budget and discretionary development budgets, and updated cash projections for the current and following fiscal years.
  - Treasury cash balance: weekly report on the treasury cash balance.
  - Banking sector: Monthly CAMEL rating for all the banks, monthly income statements and balance sheets for all the banks, consolidated IS and BS for all the banks.
  - Copies of documents related to progress on structural benchmarks under the program, such as draft legislation, memoranda of understanding, strategies, implementation plans, transmittal letters, etc.

*Source: IMF staff report excerpt (section 14 and related paragraphs).*

### 26.      The Technical Coordination Committee (TCC) will send to the IMF reports by the end of each

### 26.      The Technical Coordination Committee (TCC) will send to the IMF reports by the end of each

### TCC reporting requirements under the program
- The Technical Coordination Committee (TCC) will send to the IMF reports by the end of each quarter documenting progress in implementing structural benchmarks under the program.
- Reports will include appropriate documentation and explain any deviations relative to the initial reform timetable, specifying expected revised completion date.
- Other details on major economic and social measures taken by the government that are expected to have an impact on program sequencing (such as changes in legislation, regulations, or any other pertinent document) will be sent in a timely manner to IMF staff for consultation or information.

### Relations with the Fund (selected facts and financial figures)
- Membership Status: Joined July 14, 1955; Article XIV.
- General Resources Account:
  - Quota: 161.90 (SDR Million) — 100.00 percent
  - Fund holdings of currency (Exchange Rate): 161.92 (SDR Million) — 100.01 percent
  - Reserve Tranche Position: 0.00 (SDR Million) — 0.00 percent
- SDR Department:
  - Net cumulative allocation: 155.31 (SDR Million) — 100.00 percent
  - Holdings: 99.25 (SDR Million) — 63.90 percent
- Outstanding Purchases and Loans:
  - ECF Arrangements: 69.96 (SDR Million) — 43.21 percent of quota
- Latest Financial Arrangements:
  - ECF Nov 14, 2011–Nov 13, 2014: Amount Approved 85.00 (SDR Million); Amount Drawn 24.00 (SDR Million)
  - ECF Jun 26, 2006–Sep 25, 2010: Amount Approved 81.00 (SDR Million); Amount Drawn 75.35 (SDR Million)  
  - Note: Formerly PRGF.
- Projected Payments to Fund (SDR million; based on existing use of resources and present holdings of SDRs):
  - Forthcoming Principal and Charges/Interest by year:
    - 2015: Principal 8.67; Charges/Interest 0.02; Total 8.69
    - 2016: Principal 15.07; Charges/Interest 0.03; Total 15.10
    - 2017: Principal 15.02; Charges/Interest 0.03; Total 15.05
    - 2018: Principal 11.58; Charges/Interest 0.03; Total 11.61
    - 2019: Principal 7.06; Charges/Interest 0.07; Total 7.13

### Exchange regime and monetary operations
- Afghanistan is an Article XIV member country implementing a liberal exchange system; based on information currently available to the staff, no exchange restrictions and multiple currency practices are in place.
- On April 21, 2015, the average of the buying and selling exchange rates in cash transactions on the Kabul money exchange market was 57.88 Afghanis per U.S. dollar.
- Authorities conduct monetary policy via foreign exchange auctions since May 2002 and capital note auctions since September 2004; auctions are linked to the overall monetary program and are held on a regular basis.
- Article IV consultation: last Article IV consultation discussed by the Executive Board on May 16, 2014.

### Safeguards assessment (Da Afghanistan Bank)
- Initial safeguards assessment completed June 12, 2006; updated March 18, 2008, and December 2011.
- Latest update found: most previous safeguards recommendations implemented, but an effective internal audit mechanism had still not been established and governance oversight was weak.
- Recommendations addressed risks from the Kabul Bank crisis, including central bank autonomy.
- Actions taken or planned:
  - A Memorandum of Understanding on central bank capitalization has been signed.
  - An external auditor has been appointed.
  - Authorities plan to submit amendments to the DAB law to parliament by end-December 2015 to implement the Memorandum of Understanding and make new capitalization framework operational.
  - Priority assigned to development of the internal audit function (with external support) and strengthening of Audit Committee oversight.

### IMF technical assistance (selected missions, 2011–15)
- FAD missions covering PFM Assessment, Customs Administration, Program Budgeting Reform, VAT Introduction, advancing Public Financial Management Reforms, Tax Policy and Administration for Extractive Industries, among others.
- LEG missions: Diagnostic Review of AML/CFT regime; AML/CFT training and workshops (dates include September 21–26, 2013; February 5–6, 2014; April 28–May 2, 2014; November 10–14, 2014; February 9–13, 2015).
- MCD, MCM, METAC, STA missions covering resident monetary policy and banking advisor, banking crisis management, Islamic Finance (sukuk), banking supervision, consumer price statistics, external sector statistics, national accounts statistics, and related TA.
- Afghanistan is a participant in the Middle East Technical Assistance Center (METAC).

### Relations with the World Bank (selected findings and figures)
- World Bank Group’s program governed by the joint Interim Strategy Note (ISN) for FY12–FY14 with themes: (i) building legitimacy and capacity of institutions; (ii) equitable service delivery; (iii) inclusive growth and jobs.
- Since 2002, IDA committed a total of $2.77 billion in grants (83 percent) and credits (17 percent).
- Afghanistan Reconstruction and Trust Fund (ARTF) has generated $7.99 billion from 33 donors and committed $3.61 billion for recurrent costs and $3.79 billion for government investment programs.
- At end of January 2015:
  - Active IDA portfolio totaled $835.98 million.
  - Active ARTF investment portfolio totaled $2.46 billion.
- ARTF and IDA together provide close to $1 billion per year in grant resources (about $150 million from IDA and about $800–US$900 million from the ARTF).
- FY14 World Bank Board approvals:
  - Two new IDA-financed projects and additional financing totaling $106.7 million (including $50 million Development Policy Grant, $50 million Access to Finance, $6.7 million Financial Sector Rapid Response).
  - CASA-1000 regional project approved for total grant and credit financing of $526.5 million; Afghanistan receives $316.5 million as an IDA grant.
- FY14 ARTF approvals:
  - $419.56 million in recurrent cost financing (breakdown includes $125 million recurrent cost baseline financing; $113.70 million Incentive Program; $146.96 million AHP payment and O&M $33.90 million).
  - $580 million for Investment Window financing including specified project allocations ($125 million, $200 million, $40 million, $15 million, $110 million, $90.50 million).

### Implementation of the Joint Management Action Plan on Bank-Fund Collaboration (JMAP)
- Coordination: Country teams from the World Bank and the IMF held formal consultations in June, September, October, December 2014, and March 2015; teams exchanged views on developments, outlook, macroeconomic priorities, and coordination of work programs.
- 2014 key macroeconomic challenges:
  - Political and security uncertainties led to lower economic activity and important vulnerabilities.
  - Fiscal vulnerabilities arose as authorities acquiesced to spending pressures despite a significant revenue shortfall; treasury cash balance eroded with payment arrears and unfunded allotments during second half of 2014.
  - Banking sector vulnerability increased due to lax enforcement, forbearance, and delays in financial sector reforms.
- Critical macroeconomic priorities identified:
  - Sustaining macroeconomic stability:
    - Policies should focus on revenue mobilization, improving effectiveness of public expenditures, containing nonpriority spending, and controlling money growth to manage inflation.
    - Maintain a flexible exchange rate and international reserves to help accommodate shocks.
    - Success depends on continued donor flows as pledged at the 2012 conferences in Chicago and Tokyo, reaffirmed at Wales Summit and December 2014 London Conference.
    - Government delivery on commitments under the Staff-Monitored Program, the ARTF Incentive Program, and the IDA-financed Development Policy Grant is critical for donors’ confidence.
  - Advancing fiscal sustainability and mobilizing domestic revenues:
    - Revenue effort faltered in 2014; emphasize timely implementation of revenue-enhancing measures.
    - Teams agree to cooperate on relevant analysis to understand scope of reforms, especially medium term.
  - Safeguarding the financial sector:
    - Complement macroeconomic policy with prudential measures to safeguard financial stability.
    - Strengthen banking supervision at the central bank, implement the authorities’ plan to deal with weak banks including public banks, and proceed with planned sale of the New Kabul Bank.
  - Strengthening economic governance:
    - High level of corruption and rule of law deficiencies are serious constraints on growth and can destabilize the economy.
  - Improving absorption capacity and government effectiveness:
    - Development expenditure execution rates linger around 50 percent.
    - Increasing on-budget aid (especially transfer on-budget of security expenditures previously managed by donors) challenges absorption capacity.
    - Need to advance public financial management (PFM) reforms, improve civil service capabilities, and lift constraints to service delivery and implementation of public infrastructure projects.

*Prepared by The Middle East and Central Asia Department (In collaboration with other departments, the World Bank, and the Asian Development Bank), May 7, 2015.*

### 3. Prioritizing reforms. Teams agreed that policy recommendations for 2015 should focus on

### 3. Prioritizing reforms

### Policy priorities for 2015
- Teams agreed that policy recommendations for 2015 should focus on revenue mobilization, addressing vulnerabilities in the financial sector, and strengthening AML/CFT framework as well as tackling corruption.

### World Bank program and ARTF support
- The Bank’s work program is guided by the Interim Strategy Note (ISN) approved by the Bank’s Board in March 2012 and spanning 2012–14; the ISN envisages continued support to institutions and processes associated with transparent economic and financial management and community-level governance, especially through the National Solidarity Program.
- In 2014 and continuing into 2015, the Bank supported the government with technical assistance in customs reforms, mineral resource management, and economic statistics.
- Under the ARTF, the Bank’s team is preparing a new Incentive Program (IP) to provide funds for achievements in:
  - revenue mobilization,
  - strengthening of PFM systems,
  - investment climate improvements,
  - custom reforms.
- Since January 2013, the IP has also supported the government's operation and maintenance expenditures; this support will continue during 2015 with financing amounting to up to $300 million.
- A Development Policy Grant Series ($100 million, half of which was disbursed in August 2013) focusing on strengthening sources of economic growth and fiscal revenues is currently under implementation.

### Fund work program and planned assistance (priorities and activities)
- The Fund’s work program focuses on close engagement following the ECF-supported economic program expiration.
- The first ECF program review was completed in June 2012; subsequent reviews were delayed.
- In late 2013, the authorities and the Fund agreed informal quantitative targets and structural measures for 2014 aimed at maintaining macroeconomic stability and structural reform momentum; performance in 2014 under the agreed quantitative framework was mixed.
- The Fund focused efforts on helping authorities advance legislation including AML and CFT laws, and provided advice on monetary policy and banking supervision.
- Technical assistance provided on VAT implementation, external sector statistics and AML/CFT issues.
- In 2015 the Fund plans to help the authorities with:
  - revenue mobilization,
  - further strengthening banking supervision,
  - improving economic governance,
  - advancing structural reforms,
  - central bank capitalization framework,
  - new banking law,
  - developing a fiscal regime for natural resources,
  - improving macroeconomic statistics.
- The Fund will continue close engagement to ensure stability of the macroeconomic framework and lay the ground for sustainable inclusive growth.

### Bank and Fund planned activities in areas of joint interest (October 2012–December 2015) — selected entries and timing (timing is tentative)
- Fund:
  - Staff Monitored Program (SMP, new agreement): Preparations/Mission February 2015; Delivery April 2015.
  - Article IV Consultation and First Review under the SMP: Preparations/Mission August 2015; Delivery October 2015.
  - Second review under the SMP: Preparations/Mission December 2015; Delivery February 2016.
- Areas of Technical Assistance (Fund): Banking restructuring, financial sector supervision, revenue administration, customs and border management, tax policy, public financial management, AML/CFT, banking law, sukuk, statistics (national accounts, prices, government finance, monetary, balance of payments, GDDS).
- Bank:
  - Development Policy Grant: Preparations/Mission May – September 2015; Delivery October 2015.
  - Financial Sector Rapid Response Project, Supervision: Preparations/Mission November 2011– November 2016; Delivery October 2013.
  - ARTF IP Program (2015–2017), Preparation of MoU: Preparations/Mission April 2015 – June 2015; Delivery June 2015.
  - Study: Fiscal Revenue Review: Preparations/Mission April 2015 – June 2015; Delivery June 2015.
  - Study: Financial Sector Review: Preparations/Mission May – November 2015; Delivery November 2015.
  - Economic Monitoring: Continuous.
- Joint:
  - AML/CFT follow-up: Continuous.
  - Dialogue on revenue mobilization: Preparations/Mission April 2015 – June 2015.
  - Dialogue on macro-fiscal stability: Continuous.
  - Strengthening of the banking sector: Continuous.

*ISLAMIC REPUBLIC OF AFGHANISTAN — INTERNATIONAL MONETARY FUND*

### Relations with the Asian Development Bank (ADB) — key points and figures
- Afghanistan is a founding member of ADB (established in 1966). ADB resumed partnership with Afghanistan in 2001 after a hiatus from 1980 to 2001.
- Current ADB operations are based on the Country Operational Business Plan (COBP), 2015–2017, aligned with NPPs and government priorities in infrastructure.
- By end-December 2014, ADB’s total assistance comprising grants and loans reached $4.03 billion, of which $3.8 billion for the public sector, and $198.1 million for the private sector.
- As of December 31, 2014, total cumulative lending stood at $920.28 million consisting of sovereign ($722.18 million) and nonsovereign ($198.10) loans.
- Since 2007, ADB has provided assistance for the public sector on a 100 percent grants basis; grants make more than 70 percent of ADB’s overall assistance to Afghanistan.
- In the July 2012 Tokyo Conference, ADB committed another $1.2 billion to support Afghanistan through 2016.
- As of December 31, 2014, cumulative direct value-added official co-financing since 2002 amounted to $76.7 million for six investment projects and $10.5 million for 11 TA projects.
- ADB managed the Afghanistan Infrastructure Trust Fund (AITF); as of December 31, 2014, total amount received was $300.92 million from Japan (Embassy of Japan, $123.0 million), United States (USAID, $105.0 million out of a total commitment of $180.3 million), and United Kingdom (DFID, $72.92 million).
- Transport sector: As of December 31, 2014, ADB provided $2.1 billion to construct or upgrade over 1,500 km of regional and national roads and to rehabilitate four regional airports; all four are fully operational, usage more than doubled, travel times decreased by more than half as a result of ADB-assisted projects completed in 2014.
- Railway: ADB funded the first ever railway line between Uzbekistan and Afghanistan, fully operational in 2012; about 7.5 million tons of goods have been transported to date.
- Energy sector: ADB invested around $921.31 million in Afghanistan’s energy sector, and committed an additional $950 million; ADB-assisted projects have added 590 km of transmission lines, providing electricity to more than 5 million people. Ongoing projects will generate an additional 4.5 megawatts of power, add 500 km of transmission lines, and provide 100,000 new power connections.
- Natural resources/agriculture: In 2014, total investment reached $600 million to rehabilitate and establish new irrigation and agricultural infrastructure; around 140,000 hectares of irrigated land have been rehabilitated and upgraded.
- Private sector operations: As of end-2014, cumulative approvals in 6 projects amounted to $198.1 million. Total outstanding balances and undisbursed commitments to private sector projects amounted to $9.3 million, representing 0.1 percent of ADB’s total nonsovereign portfolio as of December 31, 2014.
- Notable private sector project: Roshan Cellular Telecommunications Project — ADB provided direct loans totaling $70 million for Phase 1 and 2, a direct loan of $60 million for Phase 3 in 2008; in 2012 the project received an award for Excellence in Fragile States Engagement from the U.S. Treasury.
- ADB invested $2.6 million in Afghanistan International Bank (AIB), establishing the first private commercial bank in the post-Taliban regime.
- ADB participates actively in donor coordination bodies: JCMB, ARTF Management Committee, JCMB Social and Economic Development Standing Committee, Ministry of Finance's High Level Committee on Aid Effectiveness, Inter-Ministerial Committee on Energy, and is a member of the core donor group (5+3).

*ISLAMIC REPUBLIC OF AFGHANISTAN — INTERNATIONAL MONETARY FUND*

### Statistical issues (As of March 19, 2015)

I. Assessment of Data Adequacy for Surveillance
- Data provision has some shortcomings, but is broadly adequate for surveillance. Key shortcomings are in national accounts and in the external sector mainly due to organizational weaknesses and difficult security situation.

National Accounts
- Compilation broadly follows the System of National Accounts 1993 (1993 SNA).
- GDP is compiled by the production and expenditure approaches.
- Key expenditure aggregates (household consumption, gross fixed capital formation, imports and exports) are available; changes in inventories are derived residually.
- Coverage of economic activities is limited due to data gaps.
- Foreign trade data should be improved in coverage, concepts, and timeliness.
- The 2002–03 base year is more than 10 years old and needs to be updated.

Price Statistics
- The Central Statistics Organization (CSO) compiles and publishes monthly consumer price indices for the nation, Kabul, and nine other major cities.
- CSO undertook a major CPI overhaul including:
  - implementation of full, five-digit Classification of Individual Consumption by Purpose (COICOP);
  - update of consumer basket weights using data from a recent household survey (previous weights dated back to 1987);
  - expansion of coverage from six to ten cities/provinces (out of 34).
- Scope for additional improvement: further expanding coverage, upgrading IT systems and communication channels with remote provinces, strengthening quality control and field supervision of price collectors, hiring and training more staff.

Government Finance Statistics
- Fiscal data compiled for central and general government on cash basis based on Government Finance Statistics Manual 2001 (GFSM 2001).
- Timeliness and quality of central and general government core budget data have been improving, particularly after roll out and connectivity of Afghanistan Financial Management Information System (AFMIS) to all central government line ministries and agencies in Kabul and all provincial offices.
- With IMF support, the Ministry of Finance is implementing GFSM 2001, with annual data for both above and below the line transactions being reported.
- Authorities are reporting monthly GFS data to the IMF for the central government core budget and the ministry is working on expanding coverage of monthly and quarterly GFS data to general government.

Monetary and Financial Statistics
- Da Afghanistan Bank (DAB) reports the Standardized Report Forms (SRFs) 1SR for DAB, 2SR for the other depository corporations (ODCs), and 5SR for monetary aggregates for publication in IMF's International Financial Statistics (IFS) on a monthly basis with a lag of one month.

Financial Sector Surveillance
- Afghanistan reports 11 of the 12 core financial soundness indicators (FSIs) and 9 of the 13 encouraged FSIs for deposit takers, and 2 FSIs for real estate markets on a quarterly basis for posting on the IMF’s FSI website.

External Sector Statistics
- Balance of payments statistics are compiled according to the fifth edition of the Balance of Payments Manual.
- Data quality has improved and was accepted in 2013 for publication in the IMF’s Balance of Payments Statistics Yearbook and International Financial Statistics.
- METAC TA missions assisted DAB in improving international accounts compilation, most recent during November 3–7, 2014.
- Remaining weaknesses: foreign trade, estimation of informal trade transactions, collection and classification of data on current and capital transfers, direct investment survey implementation.
- Compilation of external debt arrears and reserve assets, and consistency across external sector datasets and with monetary and financial statistics need further improvement.
- With METAC support, DAB has started compiling international investment position (IIP) statistics.

II. Data Standards and Quality
- Afghanistan has been a GDDS participant since June 2006, but its metadata has not been updated since then.
- No data ROSC has been published.

III. Reporting to STA
- Authorities are reporting data for the Fund’s International Financial Statistics, Government Finance Statistics Yearbook, and the Balance of Payments Statistics Yearbook.

*ISLAMIC REPUBLIC OF AFGHANISTAN — INTERNATIONAL MONETARY FUND*

### Afghanistan: Table of Common Indicators Required for Surveillance (As of April 20, 2015) — selected rows
- Exchange Rates: Date of latest observation Mar. 2015; Date received Apr. 20, 2015; Frequency of Data D; Frequency of Reporting D; Frequency of publication D.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities1: Date of latest observation Mar. 2015; Date received Apr. 5, 2015; Frequency of Data M; Frequency of Reporting M; Frequency of publication M.
- Reserve/Base Money: Date of latest observation Mar. 2015; Date received Apr. 5, 2015; Frequency of Data M; Frequency of Reporting M; Frequency of publication M.
- Broad Money: Date of latest observation Feb. 2015; Date received Mar. 14, 2015; Frequency of Data M; Frequency of Reporting M; Frequency of publication M.
- Central Bank Balance Sheet: Date of latest observation Feb. 2015; Date received Apr. 5, 2015; Frequency of Data M; Frequency of Reporting M; Frequency of publication M.
- Consolidated Balance Sheet of the Banking System: Date of latest observation Jan. 2015; Date received Jan. 14, 2015; Frequency of Data M; Frequency of Reporting M; Frequency of publication M.
- Interest Rates2: Date of latest observation Mar. 2015; Date received Mar. 19, 2015; Frequency of Data D; Frequency of Reporting M; Frequency of publication M.
- Consumer Price Index: Date of latest observation Mar. 2015; Date received Apr. 20, 2015; Frequency of Data M; Frequency of Reporting M; Frequency of publication M.
- Revenue, Expenditure, Balance and Composition of Financing – General Government4: --  --  --  --  --.
- Revenue, Expenditure, Balance and Composition of Financing– Central Government: Date of latest observation Mar. 2015; Date received Apr. 5, 2015; Frequency of Data M; Frequency of Reporting M; Frequency of publication M.
- Stocks of Central Government and Central Government-Guaranteed Debt: Date of latest observation 2014Q1; Date received Feb. 28, 2015; Frequency of Data Q; Frequency of Reporting Q; Frequency of publication Q.
- External Current Account Balance: Date of latest observation 2014Q3; Date received Mar. 15, 2015; Frequency of Data Q; Frequency of Reporting A; Frequency of publication A.
- Exports and Imports of Goods and Services: Date of latest observation 2014Q2; Date received Nov. 13, 2014; Frequency of Data Q; Frequency of Reporting Q; Frequency of publication Q.
- GDP/GNP: Date of latest observation 2013/14; Date received Jul. 31, 2014; Frequency of Data A; Frequency of Reporting A; Frequency of publication A.
- Gross External Debt: Date of latest observation 2014Q4; Date received Feb. 17, 2015; Frequency of Data Q; Frequency of Reporting Q; Frequency of publication Q.
- International Investment Position: Date of latest observation 2012Q4; Date received Mar. 10, 2014; Frequency of Data A; Frequency of Reporting A; Frequency of publication A.

1 Any reserve assets that are pledged of otherwise encumbered are specified separately.
2 Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.
3 Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A); Not Available (NA).
4 The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

*ISLAMIC REPUBLIC OF AFGHANISTAN — INTERNATIONAL MONETARY FUND*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15140.pdf_