## EXECUTIVE SUMMARY (_cr1623)

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---

### Background and main challenges
- Two Fund-supported programs: a Poverty Reduction and Growth Facility (PRGF) arrangement (2006–10) and an Extended Credit Facility (ECF) arrangement (2011–14).
- Afghanistan emerged from decades of conflict that eroded societal order, trust in government, and public institutions’ implementation capacity.
- Aid inflows estimated at around ½ of GDP; international support from more than 50 countries, IFIs, and NGOs.
- Major structural constraints:
  - High and rising civil insecurity; the 2011–12 count of battle-related deaths was second only to Syria.
  - Weak institutions, strong informal/ethnic patronage networks, and pervasive corruption.
  - Large opium sector: historically more than 90 percent of world illicit opiates; using 1/3 of arable land; estimated to directly provide up to 400,000 jobs; opium exports recently estimated at 15 percent of non-opium GDP.

### Program objectives, design, and performance
- Objectives: stabilize the economy; lay foundations for structural reforms; improve public financial management; modernize monetary/financial system; capacity building.
- Notable successes:
  - Fast economic growth supported by aid.
  - Declining inflation and increased international reserves.
  - Completion of debt relief under the Heavily Indebted Poor Countries Initiative.
  - Advances in selected structural reforms, especially in public financial management during the PRGF.
  - Impressive strides toward meeting the Millennium Development Goals, particularly in health.
- Shortcomings and unfinished reforms:
  - Fiscal sustainability not achieved: tax-to-GDP ratio declined and expenditures rose sharply due to rising security and maintenance costs.
  - Fiscal reforms, such as the VAT, remained incomplete.
  - Financial sector reforms and legislative framework and its enforcement remain incomplete.
  - Capacity constraints and insecurity limited reform implementation and private sector confidence.
- Program delivery specifics:
  - PRGF: Arrangement date Jun 26, 2006; expiration Jun 25, 2009; extended Sep 25, 2010; Original Duration 36 months; Actual Duration 51 months; Quota at Approval 161.9 (SDR million); Amount Approved 81.0 (SDR million); Actual Amount Drawn 75.4 (SDR million).
  - ECF: Arrangement date Nov 14, 2011; expiration Nov 13, 2014; Original Duration NA; Extended Duration 36 months; Actual Duration 36 months; Quota at Approval 161.9 (SDR million); Amount Approved 85.0 (SDR million); Actual Amount Drawn 24.0 (SDR million).

### Effects of aid and macroeconomic implications
- Positive effects:
  - Large aid inflows critical to stabilizing Afghanistan and financing rapid growth and social spending.
  - Spending on health, education, and social protection averaged almost 9 percent of GDP (including on- and off-budget expenditures).
- Negative effects and risks:
  - Volatility and unpredictability of aid complicated macroeconomic forecasting and policymaking.
  - Off-budget donor spending supported a better-paid “parallel” civil service, demotivating the regular civil service and weakening program ownership.
  - Economy highly vulnerable to a sudden stop in aid inflows.
  - Aid-related Dutch disease and “voracity” effects manifested given the magnitude of aid.

### Fund engagement and lessons
- Fund experience in conflict situations is mixed; reforms struggle amid insecurity.
- With long-term aid inflows set to decline to a lower level, Fund engagement can at best help manage the transition while maintaining macroeconomic stability.
- Key lessons and policy recommendations:
  - Base macro frameworks on more realistic assumptions of aid flows and security and other expenditures.
  - Consider authorities’ implementation capacity when selecting macro-critical structural reforms.
  - Focus on a limited set of macro-critical reforms feasible given capacity and security constraints.
  - Increase reliance on the Afghan civil service for public service delivery to reduce distortions from off-budget donor parallel systems.
  - Strengthen coordination on policies and capacity-building efforts among donors and the authorities.
  - Acknowledge substantial program risks even under optimistic scenarios, primarily from weak security and governance gaps.

*Source: EXECUTIVE SUMMARY, _cr1623*

---

### The Economics of Large Aid (Box 2, concluded)

### Aid flows and measurement challenges
- Authorities had limited control over aid flows; most security-related aid and much development aid remained off-budget.
- For only 1/10 of disbursed aid in 2011 were the authorities informed of the provincial distribution (GOA, 2012).
- Domestic content estimates:
  - Nonsecurity trust funds and budget support: around 70–80 percent domestic content.
  - International contracts: 10–20 percent domestic content.
  - Resulting overall average domestic content: about 2/5.
- Implication: less than 40 cents of every aid dollar reached the Afghan economy.
- Domestic content of security spending estimated at only 15–25 percent.

### Volatility and unpredictability of aid
- Aid flows were procyclical; disbursements rose and fell with domestic revenues.
- Volatility of aid exceeded that of revenues by about 1/4.
- Pledges and commitments exceeded disbursements by large margins:
  - Pledges exceed disbursements by some 70 percent.
  - Commitments exceed disbursements by some 20 percent (GOA, 2012).
- Methodological note: natural logarithms of the aid- and revenue-to-GDP ratios were de-trended; correlation coefficient between aid and revenues was 0.45.

### Impact on growth, investment, and macro dynamics
- Aid-financed capital accumulation supported high investment and construction:
  - Investment-to-GDP ratio averaged 30 percent during the sample period.
  - Construction grew by 20 percent annually during 2004–13.
- Aid shocks:
  - Positive impact of increasing aid on growth was sizable; negative impact of declining aid was also sizable.
  - When the aid-fueled growth impulse began to ebb in 2012, driving the 2014 aid-to-GDP ratio more than 15 percentage points below the 2010 peak, nonagricultural real GDP growth decelerated to close to 1 percent.
- Dutch disease, voracity, and governance:
  - Real estate prices increased greatly in Kabul and regional centers.
  - NATO forces and donors estimated to employ up to 10 percent of the working population, raising real wages and crowding out private sector and civil service.
  - Donor-paid salaries in the “parallel civil service” reportedly 10 times the highest rate in regular civil service (Sud, 2013).
  - Aid windfalls associated with revenue-side adjustments and incentives to relax revenue mobilization.
  - Massive military and aid spending overwhelmed government capacity and created opportunities for corruption (SIGAR, 2014a, p.13).

### Summary of magnitudes
- Aid inflows averaged more than 50 percent of GDP for the period discussed.
- Aid-financed imports produced trade balance deficits of about 40 percent of GDP; exports stagnated at about 2½ percent of GDP.
- Afghanistan completed HIPC debt relief in 2010 resulting in debt reduction equivalent to US$11 billion in NPV terms.
- Empirical measures:
  - Correlation coefficient between de-trended log aid-to-GDP and revenue-to-GDP ratios: 0.45.
  - Aid volatility exceeded revenue volatility by about 1/4.

*Source: Box 2. The Economics of Large Aid (concluded), _cr1623_

---

### The Domestic Fiscal Gap (Section 13)

### Fiscal gap developments and drivers
- Domestic fiscal gap definition: total on-budget expenditures minus domestic revenues.
- Gap dynamics:
  - Narrowed to about 10 percentage points of GDP in 2010.
  - Expanded to 18 percentage points of GDP in 2014.
- Drivers:
  - Security expenditures contributed almost ¾ of the gap expansion.
  - Remainder due to falling domestic revenues.
  - Larger-than-anticipated on-budget grants closed the gap and kept government debt unchanged at about 5 percent of GDP.

### Revenue decline 2013–14: analysis and uncertainty
- The 2013–14 drop in the revenue-to-GDP ratio poorly understood; main factors:
  - Slower pace of economic activity explains only a minor part; tax revenue buoyancy calculations suggest at most 2  5 of the decline may be related to slower growth of income and imports (Box 5).
  - Security and political uncertainties complicated tax collection.
  - Declining revenues and increasing on-budget grants were likely related: pre-announced aid increases can increase spending and reduce motivation to collect domestic revenue.
- Medium-term fiscal forecasts underestimated these factors.

### Public finance sustainability and security-related spending
- Planned balance between domestic revenues and operating expenditure postponed repeatedly—from 2009/10 at PRGF request in 2006 to after 2030 in the 2014 Article IV consultation.
- Security-related domestic expenditures:
  - Afghan National Security Forces grew to more than 350,000 in 2014.
  - On- and off-budget security-related costs exceeded 10 percent and 40 percent of GDP during 2010–13, respectively.

### International aid, off-budget spending, and composition
- International aid remained mostly off-budget, largely spent on maintaining security, and fell sharply after 2012.
- Grants peaked at 80 percent of GDP in 2011/12; less than 1  5 were recorded on-budget at the peak, increasing to about 1/4 in 2012/13 and 2013/14.
- Post-2012 aid decline brought grants some 1  3 below the peak level.
- Functional allocation of off-budget grants:
  - About 3/4 to defense and public order.
  - Less than 1  10 to health, education, and social protection.
- Off-budget investment equivalent to 20‒30 percent of GDP, contributing to an unsustainable buildup of public capital.

### Social outcomes and revenue mobilization
- Social indicators:
  - Poverty rate remained around 36 percent in 2011–12, about the same as in 2007–08; inequality increased.
  - Afghanistan outperformed most other fragile states in education and health (impressive gains in elementary school enrollment, especially girls; sharp mortality declines).
- Revenue mobilization:
  - 2006–14 average tax-to-GDP ratio was 7 percent, ½ of the average of other fragile states.
  - During PRGF, tax-to-GDP rose from below 2 percent in 2002 to about 6 percent and then to 9 percent.
  - By 2013 the tax-to-GDP ratio fell by about 2½ percentage points relative to the peak.
  - Taxes on international trade and transactions declined by 1½ percentage points of GDP.
  - Estimated buoyancies (2010–14 sample) interacting with real GDP (excluding agriculture) and real imports explain no more than 2  5 of the actual decline in tax revenue and international trade taxes.

### Unfinished tax and resource reforms
- Two key tax reform measures remained unfinished:
  1. The value added tax (VAT): transformation of the business receipt tax into a broad-based consumption tax was envisaged but blocked.
  2. Reform of the fiscal regime for natural resources: new mining law enacted in 2014, but amendments to the income tax law, oil and gas law, and customs code still pending.

### Capacity development and IMF engagement
- Fund TA delivery in Afghanistan was 1  3 larger than that provided to other fragile states, though the Fund provided only a minor part of overall TA.
- Major areas of Fund TA: public financial management (PFM), revenue collection (FAD), statistics (STA), bank supervision and restructuring (MCM).
- Kabul Bank crisis sharply increased delivery of bank-related TA.
- Evidence of improved capacity in PFM and statistical services exists, but deteriorating security, corruption, and vested interests reversed some gains.

*Source: IMF staff report excerpt — "13.      The domestic fiscal gap"*

---

### Structural Conditionality, Security Constraints, and Program Performance (Section 12 and related)

### Structural conditionality and performance under PRGF and ECF
- PRGF:
  - Annual average of 9.3 structural conditions in the fiscal area; 6 met on time.
  - Fiscal measures—including governance—comprised ¾ of all structural conditions.
  - Afghanistan implemented on average as many conditions as other fragile states.
- ECF:
  - Structural agenda focused on Kabul Bank crisis; almost ¾ of structural conditions linked to financial sector (vs. average of 1  5 in fragile countries).
  - Only 2  5 of structural conditions met on time.
  - Many conditions exceeded Afghanistan’s ownership and implementation capacity; some reforms introduced after program went off-track, many remained outstanding.

### Security constraints and impact on Fund work
- Lack of security curtailed field presence, limiting Fund contacts, TA delivery, and progress monitoring.
- No comparable successful Fund-supported arrangement known in countries with similar security conditions.
- Debt sustainability baseline scenarios predicated on security improvements and modest security costs; alternatives proved too sanguine.
- Six Article IV consultations between 2003 and 2014; three sets of Selected Issues Papers published, last in 2008; three SIPs presented to the IMF Executive Board in 2014 but not published.

### Partnership with international community and aid-related challenges
- Some 4 5 of all aid inflows remained off-budget; donors reported disbursements and commitments with long lags.
- Off-budget donor-provided public services were 2–3 times larger than those provided by the government.
- Rising share of on-budget development aid likely generated perverse incentives against domestic revenue collection.
- Massive aid coupled with weak oversight engendered corruption and rent-seeking.
- The approved amount under the ECF arrangement equivalent to less than 2 percent of 2011 gross international reserves.
- Donor financial commitment to the Afghan National Security Forces set to decline gradually; by 2024 the Afghan government expected to assume full financial responsibility for its own security forces (NATO, 2012).

### Ownership, catalytic effects, and outreach
- Ownership stronger during PRGF than ECF.
- Ownership declined in ECF-supported program: decline in fiscal revenues, repeated delays in key fiscal reforms, handling of Kabul Bank cleanup.
- Fund engagement provided useful signaling to the donor community and helped maintain reform momentum.
- Little evidence that Fund-supported programs attracted foreign direct investment or spurred private sector development; sustained security and political stability needed.

*Source: ISLAMIC REPUBLIC OF AFGHANISTAN, INTERNATIONAL MONETARY FUND (excerpt).*

---

### Kabul Bank Crisis: Causes, Recovery, and Conditionality (Annex summaries)

### Crisis findings and recovery status
- Crisis caused mainly by extensive fraud, nondisclosures, and malefactions of shareholders and management.
- Total loan portfolio at default: US$987 million.
- Recovered to date: more than US$330 million.
- Remaining loans: US$660 million; 20 borrowers owe almost the entire remaining amount.
- Some borrowers promised to pay US$90 million; those loans have been rescheduled.
- Two major shareholders owe around US$530 million; receivership pursuing recovery, including assets in foreign jurisdictions.

### Stakeholders’ views and program role
- IMF-supported programs provided a useful macroeconomic framework facilitating international aid disbursements; IMF funding minor vs. bilateral aid.
- Data weaknesses on donor assistance (most off-budget) hampered understanding of aid’s macroeconomic impact.
- Many stakeholders viewed program design and conditionality as appropriate and sufficiently flexible.
- Coordination among donors, World Bank, Fund, and authorities was weak at the technical level despite political-level improvements after the 2012 Tokyo Mutual Accountability Framework.
- Capacity-building that focused on measurable outputs created a parallel civil service financed off-budget with significantly higher salaries, contributing to distorted wages.

### Structural conditionality related to Kabul Bank (selected actions/status)
- Multiple financial-sector prior actions (PA) and structural benchmarks (SB) under ECF 2011–12 were marked Met, Not met, or Completed with delay. Selected met actions:
  - Issue detailed public statement about events leading to collapse of Kabul Bank and actions taken: PA — Met.
  - Finalize legally binding agreements with cooperating Kabul Bank shareholders for repayment of the full amounts: PA — Met.
  - Put Kabul Bank under receivership and revoke its banking license; split assets and liabilities into a good bank (bridge bank) and remaining estate: PA — Met.
  - Ministry of Finance to issue 8-year bond to capitalize the central bank to cover the cost of Kabul Bank's resolution (US$825 million) and obtain parliamentary approval for a budget appropriation to service the bond: PA — Met.
- Some items were Completed with delay or Not met (e.g., Strengthen the AML/CFT regime — SB Completed with delay; Finalize an 18-month business plan for the bridge bank — PA Not met; Submit VAT law to the Ministry of Justice — SB Met).

*Source: IMF staff report content (Annexes II–III).*

---

### Macroeconomic and Policy Scenario Analysis; Recommendations (Excerpt — paragraph 44 and conclusions)

### Report recommendations on scenarios and outreach
- The Fund should rally donor and domestic support around candid policy scenarios focused on realistic macroeconomic scenarios and risks around sustainable public service delivery.
- Key analytic questions:
  - The policy mix in response to the ebbing bilateral support.
  - Trade-offs between revenue and expenditure adjustment to aid decline.
  - Reasons for tax revenue volatility and how much domestic revenue can be optimally raised.
- Suggested approach:
  - Use policy scenarios grounded in solid research (e.g., Aslam and others (2013); Hogg and others (2013)).
  - Consider reassigning staff to such tasks, with support from functional departments, to facilitate consensus building.
  - Condition greater outreach efforts on security improvements.

### Structural conditionality priorities and coordination
- Focus conditionality on:
  - Prioritization of macro-critical fiscal and financial sector measures to maximize ownership.
  - Strengthening legal infrastructure, particularly targeted AML/CFT and anti-corruption measures.
  - Jointly with the World Bank, scale up capacity and project delivery through the regular civil service.
  - Reforms to boost efficiency of public spending and create conditions for private sector productivity improvements.

### Risks and operational recommendations
- High risks identified:
  - Without lasting security, stabilization gains will not be sustained and Fund engagement unlikely to be effective.
  - Political and ethnic fractionalization may counteract reform ownership and a strong central government.
  - Disorderly donor disengagement would be fatal to the aid-dependent economy.
- Mode of Fund engagement and facility choice:
  - Options include an Extended Credit Facility and a Staff-Monitored Program (SMP).
  - Given minimal role of Fund resources and limited ownership, benefits of a longer-term SMP should be considered.
  - An SMP, without heavy front-loaded conditionality, may help build ownership and establish a track record; priority on capacity building and feasible reforms.
- Exit strategy and donor coordination:
  - Fund documents need to present a credible exit strategy from aid dependence.
  - Donor community committed to providing financial support beyond 2017 at a new, yet-to-be-established long-term level; making aid less volatile and more predictable would reduce adverse side effects.
  - It may be useful for some planned aid to be saved and set aside to smooth fiscal expenditures and reduce macroeconomic volatility (Berg and others, 2010).
  - Stronger oversight on strategic objectives and outcomes of capacity development would boost effectiveness and sustainability.
  - Two options for improved coordination: Fund could allocate more functional department staff to the Afghanistan team, or authorities could take on a greater coordinating role similar to Mozambique and Rwanda.

*Source: _cr1623_ — Report excerpts.*

---

### Selected economic indicators (2005–2014, selected rows and values as presented)
- Real GDP (annual percentage change): 2005: 11.8; 2006: 5.4; 2007: 13.3; 2008: 3.9; 2009: 20.6; 2010: 8.4; 2011: 6.5; 2012: 14.0; 2013: 3.7; 2014: 1.5.
- Nominal GDP (in billions of U.S. dollars): 2005: 6.2; 2006: 6.9; 2007: 8.6; 2008: 10.3; 2009: 12.1; 2010: 15.3; 2011: 17.9; 2012: 20.3; 2013: 20.1; 2014: 20.3.
- Consumer prices (period average): 2005: 10.6; 2006: 6.8; 2007: 8.7; 2008: 26.4; 2009: -6.8; 2010: 2.2; 2011: 11.8; 2012: 6.4; 2013: 7.4; 2014: 4.6.
- Gross domestic investment (percent of GDP): 2005: 37.1; 2006: 29.5; 2007: 55.9; 2008: 30.2; 2009: 36.7; 2010: 30.4; 2011: 26.5; 2012: 25.3; 2013: 22.6; 2014: 20.4.
- Domestic revenues (percent of GDP): 2005: 5.6; 2006: 7.3; 2007: 8.1; 2008: 7.2; 2009: 8.5; 2010: 10.9; 2011: 11.0; 2012: 10.1; 2013: 9.8; 2014: 8.6.
- Grants (percent of GDP): 2005: 9.1; 2006: 11.7; 2007: 10.9; 2008: 9.9; 2009: 10.9; 2010: 10.8; 2011: 10.3; 2012: 15.1; 2013: 14.6; 2014: 15.5.
- Expenditures (percent of GDP): 2005: 15.7; 2006: 18.3; 2007: 21.5; 2008: 20.9; 2009: 21.2; 2010: 20.8; 2011: 21.9; 2012: 25.0; 2013: 25.0; 2014: 26.3.
- Operating balance (excluding grants, percent of GDP): 2005: -4.4; 2006: -3.6; 2007: -3.8; 2008: -5.5; 2009: -4.2; 2010: -3.7; 2011: -5.3; 2012: -8.1; 2013: -8.0; 2014: -11.0.
- Overall balance (including grants, percent of GDP): 2005: -1.0; 2006: 0.6; 2007: -2.5; 2008: -3.9; 2009: -1.8; 2010: 0.9; 2011: -0.6; 2012: 0.2; 2013: -0.6; 2014: -2.2.
- Public debt (percent of GDP, public sector only): 2005: 205.9; 2006: 24.1; 2007: 20.4; 2008: 16.9; 2009: 15.4; 2010: 6.8; 2011: 6.2; 2012: 5.9; 2013: 6.3; 2014: 6.5.
- Exports of goods (in billions of U.S. dollars): 2005: 0.24; 2006: 0.24; 2007: 0.35; 2008: 0.49; 2009: 0.46; 2010: 0.55; 2011: 0.51; 2012: 0.64; 2013: 0.73; 2014: 0.83.
- Imports of goods (in billions of U.S. dollars): 2005: 2.93; 2006: 3.66; 2007: 4.67; 2008: 5.65; 2009: 6.59; 2010: 8.53; 2011: 10.16; 2012: 10.05; 2013: 9.24; 2014: 8.53.
- Gross international reserves (in billions of U.S. dollars): 2005: 1.5; 2006: 2.0; 2007: 2.6; 2008: 2.9; 2009: 4.1; 2010: 5.0; 2011: 6.2; 2012: 6.9; 2013: 6.9; 2014: 7.4.
- Import coverage of reserves (months): 2005: 4.2; 2006: 4.3; 2007: 4.8; 2008: 4.4; 2009: 4.9; 2010: 5.0; 2011: 6.0; 2012: 7.3; 2013: 7.9; 2014: 7.6.
- Exchange rate (average, Afghanis per U.S. dollar): 2005: 49.4; 2006: 49.9; 2007: 50.0; 2008: 50.3; 2009: 50.3; 2010: 46.4; 2011: 46.7; 2012: 50.9; 2013: 55.4; 2014: 57.4.
- Real exchange rate (average, percentage change): 2005: 3.5; 2006: 2.4; 2007: 5.6; 2008: 21.0; 2009: -6.6; 2010: 8.9; 2011: 7.7; 2012: -4.3; 2013: -2.7; 2014: 0.9.

Memorandum:
- Nominal GDP, incl. opium (in billions of Afghanis): 2005/06: 328; 2006/07: 375; 2007/08: 519; 2008/09: 541; 2009/10: 633; 2010/11: 747; 2011/12: 896; 2012/13: 1,086; 2013/14: 1,197.
- Quota: SDR 161.9 million.
- Population: approx. 30.6 million.
- Per capita GDP: approx. US$660; 2013.
- Poverty rate: 35.8 percent; 2011.
- Main exports (2013): opium, US$2.0 billion; carpets, US$86.3 million.

*Source: Excerpt from IMF Country Report content provided in the supplied PDF chapter/section.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Background and main challenges
- Two Fund-supported programs: a Poverty Reduction and Growth Facility (PRGF) arrangement (2006–10) and an Extended Credit Facility (ECF) arrangement (2011–14).
- Afghanistan emerged from decades of conflict that eroded societal order, trust in government, and public institutions’ implementation capacity.
- The country received unprecedented international support: aid inflows estimated at around ½ of GDP, and broad political, military, and financial assistance from more than 50 countries, IFIs, and NGOs.
- Major structural constraints:
  - High and rising civil insecurity; the 2011–12 count of battle-related deaths was second only to Syria.
  - Weak institutions, strong informal/ethnic patronage networks, and pervasive corruption.
  - Large opium sector: historically more than 90 percent of world illicit opiates; using 1/3 of arable land; estimated to directly provide up to 400,000 jobs; opium exports recently estimated at 15 percent of non-opium GDP.
- Aid measurement and composition issues:
  - During 2002–13 aid averaged 53 percent and 33 percent of GDP according to IMF staff and OECD estimates, respectively.
  - The share of security-related flows exceeded 50 percent of all foreign assistance, complicating what should be counted as development aid.

### Program objectives, design, and performance
- Objectives: stabilize the economy, lay foundations for structural reforms, improve public financial management, monetary/financial system modernization, and capacity building.
- Notable successes:
  - Fast economic growth supported by aid.
  - Declining inflation and increased international reserves.
  - Completion of debt relief under the Heavily Indebted Poor Countries Initiative.
  - Advances in selected structural reforms, especially in public financial management during the PRGF.
  - Impressive strides toward meeting the Millennium Development Goals, particularly in health.
- Shortcomings and unfinished reforms:
  - Fiscal sustainability not achieved: tax-to-GDP ratio declined and expenditures rose sharply due to rising security and maintenance costs.
  - Fiscal reforms, such as the VAT, remained incomplete.
  - Some financial sector reforms and the legislative framework and its enforcement remain incomplete.
  - Capacity constraints and insecurity limited reform implementation and private sector confidence.
- Program delivery specifics (Table summary in source):
  - PRGF: Arrangement date Jun 26, 2006; expiration Jun 25, 2009; extended Sep 25, 2010; Original Duration 36 months; Actual Duration 51 months; Quota at Approval 161.9 (SDR million); Amount Approved 81.0 (SDR million); Actual Amount Drawn 75.4 (SDR million).
  - ECF: Arrangement date Nov 14, 2011; expiration Nov 13, 2014; Original Duration NA; Extended Duration 36 months; Actual Duration 36 months; Quota at Approval 161.9 (SDR million); Amount Approved 85.0 (SDR million); Actual Amount Drawn 24.0 (SDR million).

### Effects of aid and macroeconomic implications
- Positive effects:
  - Large aid inflows played a critical role in stabilizing Afghanistan and financing rapid growth and social spending.
  - Spending on health, education, and social protection averaged almost 9 percent of GDP (including on- and off-budget expenditures).
- Negative effects and risks:
  - Volatility and unpredictability of aid complicated macroeconomic forecasting and policymaking.
  - Significant off-budget donor spending contributed to a better-paid “parallel” civil service, demotivating the regular civil service and weakening program ownership.
  - The economy remained highly vulnerable to a sudden stop in aid inflows.
  - Aid-related Dutch disease and “voracity” effects manifested given the magnitude of aid.

### Fund engagement in a high-risk environment
- Fund experience in conflict situations is mixed: reforms struggle to gain traction and to catalyze private sector-led growth amid insecurity.
- With long-term aid inflows set to decline to a lower level, Fund engagement can at best help manage the transition while maintaining macroeconomic stability.
- Retaining donor support, lowering aid volatility, and improving predictability will be essential.

### Lessons learned and policy recommendations
- Design and macro framework:
  - Base macro frameworks on more realistic assumptions of aid flows and security and other expenditures.
  - Explicitly consider authorities’ implementation capacity when selecting macro-critical structural reforms.
- Implementation and ownership:
  - Focus on a limited set of macro-critical reforms that are feasible given capacity and security constraints.
  - Increase reliance on the Afghan civil service for public service delivery to reduce distortions from off-budget donor parallel systems.
  - Promote ownership of the reform agenda by key stakeholders.
- Coordination and capacity building:
  - Strengthen coordination on policies and capacity-building efforts among donors and the authorities.
- Risk management:
  - Acknowledge substantial program risks even under optimistic scenarios, primarily from weak security and governance gaps.

*Source: EXECUTIVE SUMMARY, _cr1623*

### Box 2. The Economics of Large Aid (concluded)

### Box 2. The Economics of Large Aid (concluded)

### Aid flows and measurement challenges
- Authorities had limited control over aid flows; most security-related aid and much development aid remained off-budget.
- For only 1/10 of disbursed aid in 2011 were the authorities informed of the provincial distribution (GOA, 2012).
- Domestic content estimates varied by instrument:
  - Nonsecurity trust funds and budget support: around 70–80 percent domestic content.
  - International contracts: 10–20 percent domestic content.
  - Resulting overall average domestic content: about 2/5.
- Implication: less than 40 cents of every aid dollar reached the Afghan economy.
- Domestic content of security spending was estimated at only 15–25 percent.

### Volatility and unpredictability of aid
- Aid flows were procyclical: disbursements rose and fell with domestic revenues.
- Despite unusually volatile domestic revenues, volatility of aid was still higher than that of revenues by about 1/4.
- Pledges and commitments exceeded disbursements by large margins:
  - Pledges exceed disbursements by some 70 percent.
  - Commitments exceed disbursements by some 20 percent (GOA, 2012).
- Methodological note used in analysis: natural logarithms of the aid- and revenue-to-GDP ratios were de-trended; correlation coefficient between aid and revenues was 0.45.

### Impact of large aid on growth and investment
- Aid-financed capital accumulation supported high rates of investment and construction:
  - Investment-to-GDP ratio averaged 30 percent during the sample period.
  - Construction grew by 20 percent annually during 2004–13.
- The positive impact of increasing aid on economic growth was sizable; the negative impact of declining aid was also sizable.
- When the aid-fueled growth impulse began to ebb in 2012, driving the 2014 aid-to-GDP ratio more than 15 percentage points below the 2010 peak, nonagricultural real GDP growth decelerated to close to 1 percent.

### Dutch disease, voracity, and governance effects
- Large aid generated Dutch disease effects by increasing prices of nontradable goods and inflating the real wage:
  - Real estate prices increased greatly in Kabul and regional centers.
  - NATO forces and donors were estimated to employ, directly or indirectly, up to 10 percent of the working population, raising the real wage and crowding out the private sector and the civil service (Cordesman, 2013).
  - Donor-paid salaries in the “parallel civil service” were reportedly 10 times the highest rate in regular civil service (Sud, 2013).
- Voracity effect on revenue mobilization:
  - Aid windfalls were associated with revenue-side adjustments; availability of external financing created incentives to relax revenue mobilization efforts.
- Governance and corruption:
  - Massive military and aid spending overwhelmed the government’s ability to absorb it, and weak oversight created opportunities for corruption (SIGAR, 2014a, p.13).
  - Aid was linked to fragmented and parallel delivery systems and weakened governance.

### Summary of economic dynamics and magnitudes
- Aid was a dominant macroeconomic force: aid inflows averaged more than 50 percent of GDP for the period discussed.
- Aid-financed imports produced trade balance deficits of about 40 percent of GDP; exports stagnated at about 2½ percent of GDP.
- Afghanistan completed HIPC debt relief in 2010 that resulted in debt reduction equivalent to US$11 billion in NPV terms.
- Empirical correlation and volatility measures used:
  - Correlation coefficient between de-trended log aid-to-GDP and revenue-to-GDP ratios: 0.45.
  - Aid volatility exceeded revenue volatility by about 1/4.

*Source: Box 2. The Economics of Large Aid (concluded), _cr1623 - Box 2. The Economics of Large Aid (concluded)._

### 13.      The domestic fiscal gap

### 13.      The domestic fiscal gap

### Fiscal gap developments and drivers
- The domestic fiscal gap widened during the ECF arrangement owing to both expenditure and revenue developments.
- After narrowing to about 10 percentage points of GDP in 2010, it expanded to 18 percentage points of GDP in 2014.
- Security expenditures contributed almost ¾ of the gap expansion; the remainder was due to falling domestic revenues.
- Larger-than-anticipated on-budget grants closed the gap and kept government debt unchanged at about 5 percent of GDP.
- Definition: The domestic fiscal gap equals total on-budget expenditures minus domestic revenues.

### Revenue decline, 2013–14: analysis and uncertainty
- The 2013–14 drop in the revenue-to-GDP ratio is poorly understood and traced to three main factors:
  - Slower pace of economic activity—real GDP and imports—explains only a minor part of the revenue decline. Calculations of tax revenue buoyancy suggest that at most 2  5 of the decline may be related to slower growth of income and imports (Box 5), with the remainder attributable to noncyclical factors.
  - Security and political uncertainties complicated tax collection.
  - Declining revenues and increasing on-budget grants were likely related: pre-announced aid increases can increase spending and reduce motivation to collect domestic revenue.
- The impact of the above factors on revenue projections was underestimated and medium-term fiscal forecasts were mostly off mark.

### Public finance sustainability and security-related spending
- The public finance sustainability objective was pushed farther into the future:
  - Planned balance between domestic revenues and operating expenditure was postponed repeatedly—from 2009/10 at PRGF request in 2006 to after 2030 in the 2014 Article IV consultation (Table 2).
- Security-related domestic expenditures were high and rising, jeopardizing fiscal sustainability and entrenching aid dependency:
  - Afghan National Security Forces grew to more than 350,000 in 2014.
  - On- and off-budget security-related costs exceeded 10 percent and 40 percent of GDP during 2010–13, respectively.

### International aid, off-budget spending, and composition
- International aid remained mostly off-budget, was largely spent on maintaining security, and fell sharply after 2012.
- Grants peaked at 80 percent of GDP in 2011/12; less than 1  5 were recorded on-budget at the peak, increasing to about 1/4 in 2012/13 and 2013/14.
- The post-2012 aid decline brought grants some 1  3 below the peak level, affecting all off-budget spending.
- Functional allocation of off-budget grants:
  - About 3/4 of off-budget grants were allocated to defense and public order.
  - Less than 1  10 to health, education, and social protection.
- Off-budget investment was equivalent to 20‒30 percent of GDP, contributing to an unsustainable buildup of public capital; at present levels, Afghanistan’s capital stock cannot be maintained with domestic resources.

### Social outcomes and program objectives
- The PRGF arrangement’s social objectives were limited; the ECF arrangement strengthened social focus somewhat by including a floor on pro-poor spending.
- Progress on social indicators was mixed:
  - Poverty rate remained around 36 percent in 2011–12, about the same as in 2007–08, and inequality increased.
  - Poverty incidence was particularly high in rural areas due to high dependency ratios, low female labor force participation, and low agricultural labor productivity.
  - Afghanistan outperformed most other fragile states in education and health sectors (e.g., impressive gains in elementary school enrollment, especially girls; sharp mortality declines), but sustained efforts are needed to meet MDGs.

### Revenue mobilization: performance and unfinished reforms (Box 5)
- Tax collection remained weak and was a key objective of Fund-supported programs:
  - 2006–14 average tax-to-GDP ratio was 7 percent, which was ½ of the average of other fragile states and fell short of the security forces’ wage bill.
- During the PRGF arrangement:
  - Tax-to-GDP rose from below 2 percent in 2002 to about 6 percent and then to 9 percent during the PRGF arrangement; strong GDP growth and tax base broadening/enforcement contributed.
- Subsequent decline in revenue-to-GDP:
  - By 2013 the tax-to-GDP ratio fell by about 2½ percentage points relative to the peak.
  - Taxes on international trade and transactions declined by 1½ percentage points of GDP.
  - Simple estimates of revenue buoyancy indicate the role of economic and import growth was minimal; estimated buoyancies (2010–14 sample) when interacted with real GDP (excluding agriculture) and real imports explain no more than 2  5 of the actual decline in tax revenue and international trade taxes; the residual is attributable to a shift away from high-tariff imports and significantly lower collection efforts.
- Two key tax reform measures remained unfinished:
  1. The value added tax (VAT): transformation of the business receipt tax into a broad-based consumption tax was envisaged but blocked by vested interests and limited capacity.
  2. Reform of the fiscal regime for natural resources: a new mining law was enacted in 2014, but amendments to the income tax law, oil and gas law, and customs code were still pending.

### Capacity development and IMF engagement
- Donors and the Afghan government disagreed on the effectiveness and alignment of capacity development; multitude of providers complicated assessment.
- The Fund focused on core competencies and “quick wins”:
  - Fund technical assistance (TA) delivery in Afghanistan was 1  3 larger than that provided to other fragile states (Table 4), though the Fund provided only a minor part of overall TA.
  - Major areas of Fund TA: public financial management (PFM), revenue collection (FAD), statistics (STA), and bank supervision and restructuring (MCM).
  - Kabul Bank crisis sharply increased delivery of bank-related TA; Fund staff played a coordinating role and provided resident advisors.
- Evidence of improved capacity in PFM and statistical services exists, but deteriorating security, corruption (e.g., Kabul Bank), and vested interests reversed some gains and imperiled effectiveness.
- Fund training:
  - IMF Institute organized five stand-alone courses for Afghan officials; Afghanistan received more IMF Institute training than other fragile states despite security/travel limits.

### Conditionality, program outcomes, and outstanding reforms
- Both programs fell short of stated goals, but macroeconomic stability was maintained and some key reforms advanced.
- Outstanding reforms include:
  - Improvements to the revenue collection mechanism.
  - Introduction of a VAT.
  - Privatization of New Kabul Bank.
  - Decisive improvements to central bank supervisory capacity.
- Program conditionality and performance:
  - Both arrangements had a slightly higher number of QPCs than usual; ECF also included a floor on social spending.
  - For completed reviews, Afghanistan’s performance was in line with other fragile, low-income economies.
  - Quantitative performance was stronger during the PRGF arrangement than during completed ECF reviews; the PRGF aimed to increase fiscal revenues from 5½ percent to more than 8 percent of GDP by FY 2010/11 and eventual outcome was about 11 percent of GDP.
  - The ECF-supported program went off-track after the first review in part owing to missed fiscal revenue QPCs.

*Source: IMF staff report excerpt — "13.      The domestic fiscal gap"*

### 12.0 Most QPC and IT were met. IMF Board approved

### 12.0 Most QPC and IT were met. IMF Board approved

### Structural conditionality and performance under PRGF and ECF
- PRGF arrangement:
  - Annual average of 9.3 structural conditions in the fiscal area, of which 6 were met on time.
  - Structural conditionality concentrated on macro-critical areas: institution building, improvements in revenue collection and fiscal transparency, central bank modernization, and public enterprise reform.
  - Fiscal measures—including governance—comprised ¾ of all structural conditions (Annex III).
  - Afghanistan implemented on average as many conditions as other fragile states; some unmet conditions related to enterprise restructuring and transparency.
  - Banking-related benchmarks were met and subsequent Fund documents noted progress in targeted areas.
- ECF arrangement:
  - The structural agenda focused on resolution of the Kabul Bank crisis; almost ¾ of structural conditions were linked to the financial sector, as compared to an average of 1  5  in fragile countries.
  - A number of prior actions were directed toward orderly resolution of the Kabul Bank crisis; additional measures aimed at improving bank governance and strengthening legislation related to bank supervision and regulation.
  - Introduction of Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) provisions was closely linked to financial stability; the September 2012 benchmark was missed, partly owing to a tight deadline for introduction.
  - Overall performance was mixed; with only 2  5  of structural conditions met on time.
  - Many conditions seem to have exceeded Afghanistan’s ownership and implementation capacity and underestimated the impact of protracted political and security uncertainties during the 2012–14 transition; some reforms were introduced after the program went off-track, many remained outstanding.

### Security constraints and impact on Fund work
- Security developments:
  - Lack of security emerged over time as a key constraint to engagement; field presence curtailed, limiting Fund contacts, technical assistance delivery, and progress monitoring.
  - No comparable successful Fund-supported arrangement is known in countries with similar security conditions (no Resident Representative, limited country visits).
- Implications for macro frameworks and projections:
  - Debt sustainability baseline scenarios were predicated on security improvements and modest security costs; alternative scenarios proved too sanguine as actual aid fluctuations exceeded them.
  - International community underestimated the task and cost of rebuilding Afghanistan, especially Afghan National Security Forces.
- Outreach and analytical work:
  - Security constraints and staff workload reduced engagement with broader government, civil society, and NGOs.
  - Six Article IV consultations took place between 2003 and 2014 and three sets of Selected Issues Papers (SIP) were published, the last in 2008. Three SIPs were presented to the IMF Executive Board in 2014 but were not published.

### Partnership with the international community and aid-related challenges
- Aid data and predictability:
  - Some 4

5  of all aid inflows remained off-budget; donors reported disbursements and commitments with long lags.
  - Predictability of aid disbursements was unusually poor, constraining Fund staff in key aid assumptions and macroeconomic projections.
  - Little is known about regional allocation and impact of off-budget donor spending, including impact of foreign troop presence.
- Aid-created challenges:
  - Off-budget, donor-provided public services were 2–3 times larger than those provided by the government, complicating authorities’ ownership of projects.
  - A considerable portion of aid-financed capacity building was contracted outside the country, limiting aid’s visibility.
  - Rising share of on-budget development aid likely generated perverse incentives against domestic revenue collection efforts.
  - Massive changes in the aid-to-GDP ratio amplified macroeconomic volatility.
  - Long-term aid inflows remained subject to political negotiations, complicating technical discussions of a sustainable public investment program.
  - Massive aid coupled with weak oversight engendered corruption and rent-seeking.
- Donor conferences and timelines:
  - Scale and intensity of donor involvement built pressure on the Fund to stay engaged while limiting its leverage vis-à-vis the authorities; donor conference timelines sometimes pressured program design and authorities’ ownership.
  - Fund leverage increased during 2013–14 when the program was off track and donor pressure declined.

### Capacity building, financial supervision, and Kabul Bank
- Capacity building outcomes:
  - Fund-focused capacity building delivered early gains in revenue collection and PFM implementation during the PRGF arrangement, but gains were not sustained during the ECF arrangement.
  - Progress toward a broad-based indirect taxation system and a modern system of mineral taxation stalled.
  - Prolonged lead-up to 2014 elections and the drawn-out formation of a new administration reduced authorities’ resolve to proceed with reforms.
- Financial sector supervision:
  - Inadequately coordinated TA in financial supervision, combined with political interference during the PRGF, failed to address emerging banking risks (hasty licensing, weak supervision, forbearance).
  - Multi-donor capacity-building response to the 2007 Fund staff warning was neither sufficiently coordinated nor adequately backed by the authorities.
  - Highly politicized attention to Kabul Bank diverted focus from financial sector regulation and supervision.
  - The ECF arrangement introduced extensive financial sector conditionality related to Kabul Bank and TA-supported supervision and AML/CFT efforts; new AML and CFT laws were enacted only in mid-2014.
  - Financial sector remained underdeveloped and its regulation weak; bank supervisors received minimal political backing.

### Ownership, program catalytic effects, and outreach
- Ownership:
  - Program ownership was stronger during the PRGF arrangement than the ECF arrangement.
  - Ownership declined in the ECF-supported program, evidenced by decline in fiscal revenues, repeated delays in key fiscal reforms, and handling of the Kabul Bank cleanup.
  - Factors diluting ownership included weak public institutions, governance and security; aid management problems; fallout between donors and the Karzai government over Kabul Bank; and donor disbursements continuing while the ECF-supported program was off track, creating moral hazard.
- Catalytic effects:
  - Fund engagement provided useful signaling to the donor community and helped maintain reform momentum.
  - The Fund’s coordinating role became more challenging as field presence declined; after January 2014 coordination had to be done from headquarters.
  - Little evidence that Fund-supported programs attracted foreign direct investment or spurred private sector development; sustained security and political stability needed to catalyze private sector activity.

### Lessons learned and policy challenges going forward
- Realistic assessment of implementation capacity given insecurity:
  - Given rising insecurity, authorities’ ability to implement a Fund-supported program should be assessed realistically; without security improvements a Fund-supported program is unlikely to catalyze investor confidence and private sector-led growth needed for long-term goals.
  - Progress on security may require bold political actions (e.g., reconciliation with the Taliban, satisfying minority ambitions).
  - Further security deterioration may entrench a vicious circle of weaker institutions, underdevelopment, and internal conflict.
- Mode of Fund engagement and facility choice:
  - The Fund does not have a facility designed for multi-decade engagement in a challenging security situation; available options include an Extended Credit Facility and a Staff-Monitored Program (SMP).
  - Given minimal role of Fund resources in Afghanistan and limited ownership, benefits of a longer-term SMP should be considered.
  - Regardless of facility choice, link program targets with credible long-term development objectives; balance program ambitions and authorities’ buy-in and implementation capacity.
- Opportunity with new administration (President Ghani and Chief Executive Abdullah):
  - An SMP, without heavy front-loaded conditionality, may help build ownership and establish a track record; priority on capacity building and reforms with most traction.
  - Appropriately ambitious targets and a record of reform implementation would allow authorities to demonstrate ownership before progressing to a Fund-supported arrangement.
  - Any long-run development path, particularly fiscal, must be realistic and respect security and political reality; greater research and outreach needed to reach agreement on desirable policies.
- Exit strategy from aid dependence and donor coordination:
  - Fund documents need to present a credible exit strategy from aid dependence.
  - Donor community committed to providing financial support beyond 2017 at a new, yet-to-be-established long-term level; making aid less volatile and more predictable would reduce adverse side effects.
  - It may be useful for some planned aid to be saved and set aside to smooth fiscal expenditures and reduce macroeconomic volatility (Berg and others, 2010).
  - Stronger oversight on strategic objectives and outcomes of capacity development would boost effectiveness and sustainability; more robust donor coordination may be needed.
  - Two basic options for improved coordination: Fund could allocate more functional department staff to the Afghanistan team (requiring additional Fund resources), or authorities could take on a greater coordinating role similar to Mozambique and Rwanda (likely to strengthen ownership and address aid-management conflict of interest).
- Additional numeric and documentary notes:
  - The approved amount under the ECF arrangement was equivalent to less than 2 percent of 2011 gross international reserves.
  - Donor financial commitment to the Afghan National Security Forces—as confirmed at the 2012 Chicago summit—is set to decline gradually, and by 2024 the Afghan government is expected to assume full financial responsibility for its own security forces (NATO, 2012).

*Source: ISLAMIC REPUBLIC OF AFGHANISTAN, INTERNATIONAL MONETARY FUND (excerpt).*

### 44.      This report sees scope for the Fund to rally donor and domestic support around candid

### _cr1623 - 44.      This report sees scope for the Fund to rally donor and domestic support around candid

### Macroeconomic and policy scenario analysis
- Report recommendation:
  - The Fund should rally donor and domestic support around candid policy scenarios focused on realistic macroeconomic scenarios and risks around sustainable public service delivery.
- Key analytic questions to be addressed in scenarios:
  - The policy mix in response to the ebbing bilateral support.
  - Trade-offs between revenue and expenditure adjustment to aid decline.
  - Reasons for tax revenue volatility and how much domestic revenue can be optimally raised.
- Suggested approach:
  - Use policy scenarios grounded in solid research of the type presented in Aslam and others (2013) or Hogg and others (2013).
  - Consider reassigning staff to such tasks, preferably with support from functional departments, to facilitate consensus building on macroeconomic and structural issues.
  - Condition greater outreach efforts on security improvements.

### Structural conditionality and coordination with donors
- Report recommendation: structural conditionality should be focused and coordinated with donor capacity-building efforts.
- Priority elements to focus conditionality on:
  - Prioritization of macro-critical fiscal and financial sector measures to maximize ownership.
  - Strengthening the legal infrastructure, in particular targeted AML/CFT and anti-corruption measures to improve governance and promote financial stability.
  - Jointly with the World Bank, scaling up of capacity and project delivery through the regular civil service.
  - Reforms to boost the efficiency of public spending and create conditions for private sector productivity improvements.

### Risks to a Fund-supported program
- Identified high risks:
  - Without lasting security the stabilization gains will not be sustained and Fund engagement is unlikely to be effective.
  - Political and ethnic fractionalization of the Afghan society may counteract attempts at reform ownership and a strong central government.
  - Disorderly donor disengagement would deal a fatal blow to the aid-dependent economy.

### Views of the authorities (summary)
- Authorities welcomed the opportunity to comment and generally agreed with recommendations regarding a potential successor arrangement and the need to maximize program ownership.
- Authorities' criticisms and observations:
  - The Fund occasionally envisioned faster reforms than feasible given Afghanistan’s legal infrastructure and political environment; the Fund was sometimes inflexible when faced with missed or delayed conditions.
  - Disagreed with the EPA assessment of the Kabul Bank crisis, arguing it was mostly the result of Kabul Bank managers resorting to misreporting and difficult-to-detect fraud.
- Authorities’ assessments:
  - Both Fund-supported programs helped stabilize the economy and address urgent institution-building tasks.
  - Fund-supported programs were essential in garnering donor support and attracting sustained aid inflows, although program interruptions negatively affected aid flows.
  - Fast-paced reforms created the necessary legal infrastructure and institutions and contributed to impressive economic growth; however, the Fund occasionally overestimated post-conflict implementation capacity.
  - Success of a future Fund-supported arrangement depends on improved ownership of the reform program; greater and early consultation with authorities on program design and conditionality could help improve ownership.
  - Coordination with and between donors will remain essential for aid predictability.

### Selected economic indicators, 2005–14 (selected rows and values as presented)
- Real GDP (annual percentage change):
  - 2005: 11.8
  - 2006: 5.4
  - 2007: 13.3
  - 2008: 3.9
  - 2009: 20.6
  - 2010: 8.4
  - 2011: 6.5
  - 2012: 14.0
  - 2013: 3.7
  - 2014: 1.5
- Nominal GDP (in billions of U.S. dollars):
  - 2005: 6.2
  - 2006: 6.9
  - 2007: 8.6
  - 2008: 10.3
  - 2009: 12.1
  - 2010: 15.3
  - 2011: 17.9
  - 2012: 20.3
  - 2013: 20.1
  - 2014: 20.3
- Consumer prices (period average):
  - 2005: 10.6
  - 2006: 6.8
  - 2007: 8.7
  - 2008: 26.4
  - 2009: -6.8
  - 2010: 2.2
  - 2011: 11.8
  - 2012: 6.4
  - 2013: 7.4
  - 2014: 4.6
- Consumer prices (end of period):
  - 2005: 10.6
  - 2006: 4.3
  - 2007: 16.1
  - 2008: 18.8
  - 2009: -9.8
  - 2010: 10.2
  - 2011: 9.3
  - 2012: 5.9
  - 2013: 7.2
  - 2014: 1.4
- Gross domestic investment (percent of GDP):
  - 2005: 37.1
  - 2006: 29.5
  - 2007: 55.9
  - 2008: 30.2
  - 2009: 36.7
  - 2010: 30.4
  - 2011: 26.5
  - 2012: 25.3
  - 2013: 22.6
  - 2014: 20.4
- Gross national savings (percent of GDP):
  - 2005: 54.5
  - 2006: 31.5
  - 2007: 96.4
  - 2008: 32.9
  - 2009: 49.7
  - 2010: 38.7
  - 2011: 32.9
  - 2012: 31.7
  - 2013: 30.1
  - 2014: 27.3
- Domestic revenues and grants (percent of GDP):
  - 2005: 14.7
  - 2006: 18.9
  - 2007: 19.0
  - 2008: 17.0
  - 2009: 19.4
  - 2010: 21.7
  - 2011: 21.3
  - 2012: 25.2
  - 2013: 24.4
  - 2014: 24.1
- Domestic revenues (percent of GDP):
  - 2005: 5.6
  - 2006: 7.3
  - 2007: 8.1
  - 2008: 7.2
  - 2009: 8.5
  - 2010: 10.9
  - 2011: 11.0
  - 2012: 10.1
  - 2013: 9.8
  - 2014: 8.6
- Grants (percent of GDP):
  - 2005: 9.1
  - 2006: 11.7
  - 2007: 10.9
  - 2008: 9.9
  - 2009: 10.9
  - 2010: 10.8
  - 2011: 10.3
  - 2012: 15.1
  - 2013: 14.6
  - 2014: 15.5
- Expenditures (percent of GDP):
  - 2005: 15.7
  - 2006: 18.3
  - 2007: 21.5
  - 2008: 20.9
  - 2009: 21.2
  - 2010: 20.8
  - 2011: 21.9
  - 2012: 25.0
  - 2013: 25.0
  - 2014: 26.3
- Operating balance (excluding grants, percent of GDP):
  - 2005: -4.4
  - 2006: -3.6
  - 2007: -3.8
  - 2008: -5.5
  - 2009: -4.2
  - 2010: -3.7
  - 2011: -5.3
  - 2012: -8.1
  - 2013: -8.0
  - 2014: -11.0
- Overall balance (including grants, percent of GDP):
  - 2005: -1.0
  - 2006: 0.6
  - 2007: -2.5
  - 2008: -3.9
  - 2009: -1.8
  - 2010: 0.9
  - 2011: -0.6
  - 2012: 0.2
  - 2013: -0.6
  - 2014: -2.2
- Public debt (percent of GDP, public sector only):
  - 2005: 205.9
  - 2006: 24.1
  - 2007: 20.4
  - 2008: 16.9
  - 2009: 15.4
  - 2010: 6.8
  - 2011: 6.2
  - 2012: 5.9
  - 2013: 6.3
  - 2014: 6.5
- Reserve money (annual percentage change):
  - 2005: 19.5
  - 2006: 16.6
  - 2007: 24.5
  - 2008: 38.5
  - 2009: 26.4
  - 2010: 26.1
  - 2011: 21.9
  - 2012: 3.9
  - 2013: 12.4
  - 2014: 13.3
- Currency in circulation (annual percentage change):
  - 2005: 18.2
  - 2006: 10.5
  - 2007: 23.5
  - 2008: 24.4
  - 2009: 23.4
  - 2010: 36.7
  - 2011: 20.8
  - 2012: 1.1
  - 2013: 12.5
  - 2014: 16.7
- Exports of goods (in billions of U.S. dollars):
  - 2005: 0.24
  - 2006: 0.24
  - 2007: 0.35
  - 2008: 0.49
  - 2009: 0.46
  - 2010: 0.55
  - 2011: 0.51
  - 2012: 0.64
  - 2013: 0.73
  - 2014: 0.83
- Imports of goods (in billions of U.S. dollars):
  - 2005: 2.93
  - 2006: 3.66
  - 2007: 4.67
  - 2008: 5.65
  - 2009: 6.59
  - 2010: 8.53
  - 2011: 10.16
  - 2012: 10.05
  - 2013: 9.24
  - 2014: 8.53
- Merchandise trade balance (in billions of U.S. dollars):
  - 2005: -43.6
  - 2006: -49.4
  - 2007: -50.5
  - 2008: -50.2
  - 2009: -50.8
  - 2010: -52.1
  - 2011: -53.9
  - 2012: -46.4
  - 2013: -42.3
  - 2014: -37.9
- Current account balance excluding official transfers (percent of GDP):
  - 2005: -39.7
  - 2006: -43.8
  - 2007: -42.8
  - 2008: -47.5
  - 2009: -46.5
  - 2010: -43.1
  - 2011: -44.6
  - 2012: -41.8
  - 2013: -35.5
  - 2014: -34.7
- Current account balance including official transfers (percent of GDP):
  - 2005: 17.5
  - 2006: 2.0
  - 2007: 40.5
  - 2008: 2.7
  - 2009: 13.1
  - 2010: 8.3
  - 2011: 6.4
  - 2012: 6.3
  - 2013: 7.5
  - 2014: 6.9
- Foreign direct investment (in billions of U.S. dollars):
  - 2005: 4.4
  - 2006: 3.1
  - 2007: 2.2
  - 2008: 1.6
  - 2009: 0.6
  - 2010: 1.4
  - 2011: 0.8
  - 2012: 0.7
  - 2013: 0.3
  - 2014: 0.6
- Gross international reserves (in billions of U.S. dollars):
  - 2005: 1.5
  - 2006: 2.0
  - 2007: 2.6
  - 2008: 2.9
  - 2009: 4.1
  - 2010: 5.0
  - 2011: 6.2
  - 2012: 6.9
  - 2013: 6.9
  - 2014: 7.4
- Import coverage of reserves (months of next year's import of goods and services):
  - 2005: 4.2
  - 2006: 4.3
  - 2007: 4.8
  - 2008: 4.4
  - 2009: 4.9
  - 2010: 5.0
  - 2011: 6.0
  - 2012: 7.3
  - 2013: 7.9
  - 2014: 7.6
- Exchange rate (average, Afghanis per U.S. dollar):
  - 2005: 49.4
  - 2006: 49.9
  - 2007: 50.0
  - 2008: 50.3
  - 2009: 50.3
  - 2010: 46.4
  - 2011: 46.7
  - 2012: 50.9
  - 2013: 55.4
  - 2014: 57.4
- Real exchange rate (average, percentage change, CPI-based, vis-a-vis the U.S. dollar):
  - 2005: 3.5
  - 2006: 2.4
  - 2007: 5.6
  - 2008: 21.0
  - 2009: -6.6
  - 2010: 8.9
  - 2011: 7.7
  - 2012: -4.3
  - 2013: -2.7
  - 2014: 0.9

### Memorandum and additional data points (as presented)
- Nominal GDP, incl. opium (in billions of Afghanis) (selected years):
  - 2005/06: 328
  - 2006/07: 375
  - 2007/08: 519
  - 2008/09: 541
  - 2009/10: 633
  - 2010/11: 747
  - 2011/12: 896
  - 2012/13: 1,086
  - 2013/14: 1,197
- Of which: Opium (in billions of Afghanis) (fragmented entries as presented):
  - 162 383  8181740  25  35
- Real GDP, incl. opium (annual percentage change) (selected entries as presented):
  - 9.9 9.2 16.1 2.3 17.2 3.2 8.7 10.9 6.5...
- Price (in U.S. dollars per kilogram) (selected entries as presented):
  - 1019 4867048128180163163...
- Quota: SDR 161.9 million
- Population: approx. 30.6 million
- Per capita GDP: approx. US$660; 2013
- Poverty rate: 35.8 percent; 2011
- Main exports: opium, US$2.0 billion; carpets, US$86.3 million; 2013

*Source: Excerpt from IMF Country Report content provided in the supplied PDF chapter/section.*

### 4. The Kabul Bank crisis happened mainly due to extensive fraud, nondisclosures, and

### _cr1623 - 4. The Kabul Bank crisis happened mainly due to extensive fraud, nondisclosures, and

### Kabul Bank crisis: findings
- Crisis caused mainly by extensive fraud, nondisclosures, and malefactions of shareholders and management.
- Onsite examinations by Da Afghanistan Bank uncovered serious regulatory violations.
- Kabul Bank management resorted to extensive fraud and misreporting to avoid further regulatory actions.
- No evidence that inaction by banking supervision allowed unsound practices; rather, supervision detected violations but management concealed them.

### Recovery of Kabul Bank assets (status and figures)
- Total loan portfolio at default: US$987 million.
- Recovered to date: more than US$330 million.
- Remaining loans: US$660 million (finalized list of borrowers; 20 borrowers owe almost the entire remaining amount).
- Some borrowers recently promised to pay US$90 million; those loans have been rescheduled.
- Two major shareholders owe around US$530 million; Kabul Bank Receivership, in coordination with other legal authorities, is working to recover this amount.
- Some assets are located in foreign jurisdictions and are being pursued through legal and diplomatic channels.

### Stakeholders' views — overview and program role
- IMF-supported programs provided a useful macroeconomic framework that facilitated international aid disbursements; IMF funding played a minor role compared with large-scale bilateral aid.
- Data weaknesses on donor assistance (most off-budget) hampered understanding of aid’s macroeconomic impact.
- The need to meet donor conference timelines adversely affected the strength of program conditionality, program ownership, and performance.

### Program design and conditionality (stakeholder assessments)
- Most stakeholders viewed IMF program design and conditionality as appropriate and sufficiently flexible.
- Many stakeholders saw limited progress in specific areas as reflecting lack of program ownership and moral hazard rather than missing conditionality.
- In hindsight, some stakeholders considered that the PRGF arrangement placed insufficient emphasis on banking sector issues, contributing to inadequate surveillance and conditionality in that area.
- After the Kabul Bank crisis, key shareholders demanded strong conditions linked to Kabul Bank asset recovery and money laundering issues; progress remained disappointing despite stronger conditionality.

### Coordination, capacity building, and engagement
- Coordination among donors, the World Bank, the Fund, and authorities was weak at the technical level despite political-level improvements after the 2012 Tokyo Mutual Accountability Framework (TMAF).
- Capacity-building efforts targeted the right institutions but were neither sufficiently coordinated across donors nor comprehensive for program priorities; quality was assessed poor in areas with multiple providers.
- Security deterioration made Fund staff engagement difficult; missions since September 2013 occurred in third-country locations, limiting outreach and coordination.
- Capacity-building that focused on measurable outputs created a parallel civil service financed off-budget with significantly higher salaries, contributing to distorted wages and neglect of the regular civil service.

### Challenges for future Fund-supported programs (stakeholder perspectives)
- Achieving sustainable economic growth seen as difficult due to security and corruption constraints; most officials acknowledged these areas fall outside the Fund’s remit.
- Stakeholders desired a stronger local Fund presence to boost capacity building and improve coordination, but recognized security challenges.
- Stakeholders expected reduction in aid inflows to be inevitable and sought predictable handling given high aid dependency and fiscal sustainability needs.
- With high salaries concentrated in the parallel civil service and a large stock of public capital, authorities may face difficulty delivering services and maintaining infrastructure amid declining donor funds.

### Structural conditionality — notable actions and statuses
- Under the ECF Arrangement 2011–12, multiple financial-sector prior actions (PA) and structural benchmarks (SB) related to Kabul Bank and broader banking reform were marked as Met, Not met, or Completed with delay. Selected entries:
  - Issue detailed public statement about events leading to collapse of Kabul Bank and actions taken: PA — Met.
  - Finalize legally binding agreements with cooperating Kabul Bank shareholders for repayment of the full amounts: PA — Met.
  - Formulate and announce strategy to enforce Afghan laws in relation to any financial crimes committed at Kabul Bank: PA — Met.
  - Complete inception report for audits of Kabul Bank and Azizi Bank: PA — Met.
  - Issue supervisory orders to selected banks with timetables for compliance and sanctions: PA — Met.
  - Enforce conflict-of-interest regulations by removing shareholders from serving as Chairman and CEO of the bank they own: PA — Met.
  - Put Kabul Bank under receivership and revoke its banking license; split assets and liabilities into a good bank (bridge bank) and remaining estate: PA — Met.
  - Ministry of Finance to issue 8-year bond to capitalize the central bank to cover the cost of Kabul Bank's resolution (US$825 million) and obtain parliamentary approval for a budget appropriation to service the bond: PA — Met.
  - Some items were Completed with delay or Not met (examples include: Strengthen the AML/CFT regime — SB Completed with delay; Finalize an 18-month business plan for the bridge bank — PA Not met; Submit VAT law to the Ministry of Justice — SB Met).

*Source: IMF staff report content (Annexes II–III) on the Kabul Bank crisis, recovery efforts, stakeholders’ views, and structural conditionality.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr1623.pdf_