IMF Survey: Afghanistan to Get $133.6 Million IMF Loan
IMF News, November 15, 2011
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- Published: November 15, 2011
Program overview and objectives
- The IMF has approved a $133.6 million loan for Afghanistan to help the country maintain economic stability and begin laying the basis for fiscal sustainability and economic growth.
- The program is a three-year arrangement under the Fund’s Extended Credit Facility.
- The program was endorsed by the IMF’s Executive Board on November 14.
- Major program aims:
- Start addressing corruption, strengthen the banking system, and improve revenue collection.
- Make tangible progress on improving social conditions in one of the world’s poorest countries.
- Strengthen the hand of the economic team to push forward with difficult reform; acknowledge clear risks from vested interests that may oppose reforms.
Kabul Bank crisis and financial sector measures
- Crisis facts:
- Concerns about the soundness of Kabul Bank caused a run in September 2010, leading to the withdrawal of about half of its $1.3 billion in deposits.
- Kabul Bank represented nearly a third of the financial system’s assets.
- Authorities’ actions taken:
- Kabul Bank put under receivership; its license revoked; shareholders’ rights and interests extinguished.
- A bridge bank—New Kabul Bank—established, with a business plan to put it up for sale in 2012.
- A comprehensive audit of Kabul Bank by an independent, internationally recognized firm is under way.
- Program emphasis:
- Effectively manage the Kabul Bank crisis and strengthen the financial sector based on lessons learned.
Restoring stability, governance, and supervision
- Key requirements identified:
- Enforce rule of law in the banking sector to secure economic stability and donor engagement.
- Make faster progress on asset recovery and apply Afghan laws where crimes have been committed.
- Ensure the central bank is free from political interference to safeguard the banking system.
- Legal and regulatory reform priorities:
- Revise existing banking law and regulations to align with the Basel Core Principles and Financial Action Task Force recommendations.
- Strengthen corporate governance, beneficial ownership, capital, large exposures, related parties, enforcement, and bank resolution.
- Governance measures:
- Strengthen governance in the economic and financial sphere.
- Improve government capacity to deal with economic crime and tighten rule of law application in the financial sector.
- Reaffirmed commitment by Afghan authorities to critical anti-corruption and governance reforms.
Fiscal progress and revenue mobilization
- Recent progress:
- Domestic revenue amounts to about 11 percent of GDP, up from about 6½ percent of GDP collected in fiscal year 2005/06.
- Medium-term fiscal targets:
- Authorities intend to increase revenues by another 4 percentage points of GDP over the next five years, including by introducing a value-added tax in 2014.
- Fiscal risks and support needs:
- International troops scheduled to withdraw from the country by 2014, increasing government security spending and removing associated foreign spending.
- Donor support is expected to gradually decline over the medium term, adding to fiscal pressures.
- “The government cannot borrow to cover the financing gap. This would just lead to a fast and unsustainable buildup of debt,” said Axel Schimmelpfennig, IMF mission chief for Afghanistan.
- Continued donor support to the budget will be important for many years.
- Debt relief:
- In early 2010, Afghanistan received $1.6 billion in debt relief from its official creditors under the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative.
Growth potential and risks
- Growth projections and conditions:
- Afghanistan has the potential to grow by around 6 to 7 percent over the medium term, but this assumes a stable security situation and is subject to considerable uncertainty.
- Key risks:
- Economic impact of troop withdrawal and evolution of the security situation; risks are clearly to the downside.
- Agriculture represents about 30 percent of GDP and is subject to weather fluctuations.
- Mining sector opportunities:
- Afghanistan has rich mineral deposits not yet exploited; attracting large foreign investment requires security stabilization and improved legal framework.
- If mines are developed, associated roads and electricity infrastructure could benefit other businesses.
- Need for a strong fiscal regime and robust governance structures to harness benefits from mining.
Policy priorities under the program
- The government aims to achieve the following goals:
- Put Afghanistan on a medium-term path toward fiscal sustainability, including by increased domestic revenue mobilization.
- Contain inflation and ensure adequate central bank capitalization to allow it to follow its mandate.
- Improve governance to enhance the investment climate and lay the foundation for high and inclusive growth.
- Strengthen the financial sector by revising the legal and regulatory framework, including in the area of anti-money laundering, and enhancing supervision and enforcement.
- Achieve maximum recovery of Kabul Bank losses and apply Afghan law, as appropriate, in dealing with financial crimes.
IMF Survey online, November 15, 2011.