Transcript of a Conference Call on Afghanistan

November 15, 2011

Washington, D.C.
Tuesday, November 15, 2011

MR. ANSPACH: Good day, everybody. Welcome to this teleconference on the IMF's Board approval on Afghanistan's request for an Extended Credit Facility. I am Raphael Anspach with the IMF’s External Relations Department. Joining us today is Mr. Axel Schimmelpfennig. Mr. Schimmelpfennig is the IMF's Mission Chief for Afghanistan and he will be talking about Afghanistan's Extended Credit Facility Program. Before he starts with brief introductory remarks, let me remind you that this call and the press release is under embargo until 9:00 a.m. Washington time. With that I'll hand it over to Axel for brief introductory remarks. Axel?

MR. SCHIMMELPHENNIG: Good morning, everybody. As Raphael said, the Executive Board of the IMF approved yesterday a 3-year loan under the Extended Credit Facility for $133.6 million. There will be disbursements on a semiannual basis as is the case with these loans with the IMF. The first one upon approval of the program will be $18.9 million in the next coming weeks.

The authorities have put forward a broad and ambitious program that tackles the main challenges that they're facing going forward. These include the international troops withdrawal by 2014. Looking further beyond is the expected gradual decline in the very high levels of donor support that Afghanistan is currently enjoying. The program puts into place an economic framework that will help these challenges and the economic impacts of these developments.

In particular, what the program does is to emphasize that the authorities are building on the progress of revenue generation that they've made over the last 5 years. You may recall that in 2005-2006, the revenue-to-GDP ratio was 6.6 percent, and last year in 2010-2011, the Afghan fiscal year, it was just over 11 percent. The Ministry of Finance has done a lot in the revenue administration area to improve the functioning of tax collection and plug a lot of the leakages that were there that have led to this quite strong increase in the revenue ratio. Having said that, at 11 percent, revenue is still on the low side and it only covers about half of operating expenditures so that they still have a long way to go and that's where the program comes in.

It has two pillars right now on the revenue front. One is to continue with these administrative reforms and make sure that the tax-collection system gets better and better, leading to further increases in the revenue-to-GDP ratio. In addition to that, during the program period the authorities are laying the basis for the introduction of a value-added tax in 2014 which is just at the end of the program and that value-added tax is supposed to generate another 2 percentage points of GDP in revenues so that that will move the country forward to be in a better position to on its own cover its operating expenditures and reduce gradually over a much longer period reliance on donor support, though it goes without saying that Afghanistan will need to rely on donor support for a number of years to come.

Another big issue in the program is of course the Kabul Bank crisis and how to manage it. You're probably aware of the steps that the authorities have taken over the last year including first putting Kabul Bank into conservatorship and then putting it into receivership where the interests of the shareholders are completely extinguished. They have started an in-depth forensic audit of Kabul Bank to clearly establish the ultimate beneficiaries of the fraud which will be the basis for ultimate asset recovery in that once you know who has benefited and who has what, you can go after the money. The authorities have also approved a law to reimburse the Central Bank for the cost of the Kabul Bank crisis. It's an 8-year repayment plan. The first payment was due this fiscal year and Parliament approved that expenditure bill in mid-October.

The last step where work is progressing is starting on asset recovery. What the authorities have done to date is to sign agreements, particularly voluntary repayment agreements, with those shareholders who have chosen to cooperate until now, and these agreements spell out how much the person owes, what was the benefit from the fraud at Kabul Bank and what the repayment terms are including maturity of the repayment period. They've signed agreements over $270 million. In addition, Kabul Bank has about $80 million in regular loans that are being serviced on a monthly basis. They have assets that are available for sale of about $153 million. In terms of the cash payment that they received under the repayment agreements, they have received $33 million. In addition to that, they've received about $40 million in regular loan payments from the loans that I was talking about earlier.

All that taken together, the IMF believes that they've made good progress on addressing the issues that relate to Kabul Bank. Of course, more needs to be done and that again is where the program comes in. They will continue to work on these agreements and once the audit report is ready, they will be able to finalize all of these repayment agreements. They will do a “lessons learned”, study to really understand what happened at Kabul Bank and what are the weaknesses of the system that this exposes. Then of course they will address these weaknesses in the program going forward. In the pipeline right now is reviewing and amending as needed the banking law and also the regulatory framework. They will need to step up supervision. There is a big capacity issue here. There are simply not enough people in Afghanistan with the relevant skills to staff the supervision department and to help out with the work that needs to be done in the receivership, et cetera, so that there are challenges that the authorities will have to continue to deal with as they strengthen supervision. One thing the authorities are doing about it is, for example, to have 10 banks now undergoing in-depth audits to get a good sense of where are these banks standing with respect to the regulatory environment and what is their financial health so that this will be important input into the work of the supervision department.

The authorities hope to put up for sale a new Kabul Bank, a clean bank, a good bank, by mid-2012 which is part of the program. Further down the line they will also work on the anti-money-laundering and combatting the financing of terrorism regime which they have in place but where an earlier report by the IMF has revealed a couple of areas where they can strengthen their framework.

I'll close with this and I'm looking forward to your questions. Thank you very much.

MR. ANSPACH: Thank you very much, Axel. We're ready to take your questions.

Questioner: I wanted to ask you, there had been earlier reports that the IMF was asking for the Afghan prosecutor's office to push criminal charges against some of these bank executives. Was that one of the measures or one of the steps that you wanted to see them take before renewing the credit or was that never the case?

MR. SCHIMMELPFENNIG: The IMF has not asked for that. What the authorities have laid out in their program is that they will apply in full Afghan law in the context of Kabul Bank and to pursue any criminal wrongdoing that may have occurred there. That, we think, is the right strategy to take but this is not part of the conditionality under the program with the authorities. --

Questioner: Has that changed? Will that change?

MR. SCHIMMELPFENNIG: No, that has not changed. That has always been our position.

Questioner: Is there any way to understand how much internal aid had been put on hold while we waited for this new credit program to begin? I know that the British government and I think Norway had stopped contributing, but I'm wondering how much money was in the pipeline on hold because of this.

MR. SCHIMMELPFENNIG: Donors have decided to connect or relate the disbursements under the Afghan Reconstruction Trust Fund to the [authorities’] budget to an IMF program. The money that has not been disbursed yet this fiscal year amounts to $100 million, and donors can now decide if they want to disburse that based on the fact that the authorities have again a new IMF program, but that is a decision up to donors. Indeed, over the last couple of months donors have continued to fund the projects that they have on the ground and they have also disbursed money for specific projects to the government itself. The envelope of donor support to Afghanistan is very large. We estimate that what we call the external budget which includes government-type functions that are financed and operated directly by donors right now is about 30 percent of GDP and all of that activity has continued. What has been held up is the direct disbursement of the ARTF of $100 million.

Questioner: And that would have gotten worse had not gotten finalized. Right? You didn't hit a critical point?

MR. SCHIMMELPHENNIG: The total amount under the ARTF for the budget for this fiscal year is $200 million.

Questioner: I was wondering, there was a disbursement at the end of last year that was held back as these relations grew more strained. Does the new loan include that amount? I want to make sure in case it doesn't. Number two, when you talk about conditionality, obviously the next disbursement, I think you've already mentioned that there have to be some steps taken before the first review before the next tranche can you be released? Can you go through those with us as well? I was wondering whether you think Mr. Shafik thought that actions had lagged in asking again the culprits of fraud at Kabul Bank, but you're sounding a little bit more upbeat that steps have been taken and that progress has been made.

MR. SCHIMMELPFENNIG: I think I got three questions from you. The first one, what you may be referring to is the ARTF support budget last year as far as I understand has been disbursed. There would have been another disbursement under the so-called incentive program, I believe, of $70 million. That would have been earlier this fiscal year I think. That was not disbursed and that is a program for this year that is phased out so that that is money that is lost. In terms of the steps for the next tranche, one very important step that we'll be looking for is finalizing these repayment agreements with the cooperating shareholders. Where people are not cooperating, certainly that Afghan law is being applied as the authorities have stated their intentions. That's a very important one. Then the next one is to come up with an agreement about the appropriate capitalization of the Central Bank between the Ministry of Finance and the Central Bank to ensure that the Central Bank continues to be in a position of implementing monetary policy as an independent Central Bank as is set up in Afghanistan. Those are two key steps. In addition, as I said, there is a lot of work that is going on in introducing the value-added tax. Right now the law is in the final stages of being drafted. Decisions have to be made about what are the parameters of the law including the tax rate, for example, and that is all work that will start over the next 6 months, but of course a lot of that will continue throughout the remainder of the program period.

In terms of lagging progress, what Ms. Shafik is referring to, I believe, is that the authorities had a very quick start in managing the crisis, in particular in extending that full deposit guarantee to ensure that the collapse of the largest bank in their country did not threaten the stability of the overall financial system. Progress slowed a bit in part because this was a fraud of an unprecedented scale for a country such as Afghanistan so that it took a while to understand what it was that the government was up against and how to deal with it. Of course, there are also -- obstacles in dealing with the crisis that the economic team had to overcome and that took time, but they did overcome them. The strategy from very early on, which was agreed by all the people who were advising them and the authorities together, is now at a stage where it is being implemented.

Questioner: I'm a little confused about how much in aid could be released right now. Is the World Bank's trust fund $100 million?

MR. SCHIMMELPFENNIG: From the ARTF, yes, $100 million. The ARTF has about $50 million each quarter. We're half into the fiscal year so the amounts for the first two quarters could now be disbursed.

Questioner: So that's $100 million.

MR. SCHIMMELPFENNIG: Yes. And going forward, there are another two quarters in the fiscal years each with $50 million.

Questioner: And that would be released by the end of the year I guess.

MR. SCHIMMELPHENNIG: I would need to get back to you on that. I'm not sure whether it's released at the beginning of the quarter or at the end. My sense is at the beginning of the quarter. But as I said, I don't know the exact release date and that's also something that the ARTF decides on its own.

Questioner: I was wondering whether you might give us a bit of a flavor of the negotiations over the last few months. We've obviously been tracking this for some time now and there were times when it really seemed like getting a deal would be very tough. What were the real key sticking points that held things up and who gave way in the end? Was it you or them?

MR. SCHIMMELPFENNIG: The authorities are dealing with very difficult issues and agreeing on a strategy and then implementing it is something that takes a lot of political capital as well for the economic team to convince everybody else in the government. As I said, the strategy was agreed pretty early on based on good practices across the world, input from experts but also from the input from the authorities on the ground who of course understand the Afghan environment much better. I think what ultimately helped focus people's minds is the approaching Bonn Conference. Everybody wanted to have a program in place before the conference so that Kabul Bank and the negotiations about a program wouldn’t take center stage at this very important conference, which everybody hopes will be a forum to discuss the two medium-term challenges that I'd alluded earlier, the troop withdrawal and the gradual decline of donor support or, put it differently, the path of donor support over the medium term. Sometimes deadlines help focus minds and I think that that is what this deadline did. But also the authorities had done a lot of convincing and a lot of consensus building within the government, which as I said took a time, took a lot of political capital especially from the Ministry of Finance. But eventually they got the consensus in the summer to start with a forensic audit of Kabul Bank and to pick up speed again on trying to get voluntary repayment agreements with the shareholders and that eventually allowed us then to come together and say now the progress that you've made on the agreed strategy that we have is sufficient to move forward with the program.

Questioner: May I ask you what do you think was the most painful thing for the Afghan to swallow that you were asking for?

MR. SCHIMMELPFENNIG: That's really a question for the Afghan side what they felt was most difficult. I think it's not really a question of what anybody was asking for, but it's the question that you have the largest bank in the country and it turns out that this was a Ponzi scheme. The cost right now to the government is around $825 million. That's something that the government needs to deal with and the government needs to come up with a strategy to get that cost down and ensure that such a fraud does not happen again in the country. That requires some difficult decisions, it sometimes requires a bit of time to build political consensus but it's something that needs to be done.

Questioner: I think you just answered part of my question: the total that you want to seek from Kabul Bank is you said 825 million. Is that correct?

MR. SCHIMMELPFENNIG: $825 million is right now the immediate fiscal cost which is reimbursing the Central Bank for the lender-of-last-resort facility that it provided right at the collapse at the bank to safeguard the integrity of the financial system. Work is still ongoing and the audit that I mentioned will have final numbers. Right now the authorities think that the assets that they're trying to recover are to the tune of $935 million. As the auditors go through the books page by page, they sometimes find new little avenues of fraud so that it may well be that once the audit report is available, that number is higher, but that would be the total amount that ideally one would like to see recovered. Of course, in bank failures and in fraud cases like this, it's very rare that you actually do recover the full amount. We don't have an estimate of what the number is that they eventually will recover. What we take comfort in is that the Minister of Finance and the Central Bank are determined to achieve maximum asset recovery. This will be a long process. If you look at other countries and other experiences, asset recovery can take up to 10 years and more because it's not only that you need to recovery assets within Afghanistan, they're also outside of Afghanistan in which case you need to seek legal assistance from other governments.

Questioner: You've said you've got voluntary repayment agreements with cooperative shareholders representing about $270 million. Is that the total of losses that they represent or is that what you expect to get from them? And the $33 million you mentioned is I guess a part of that. Are the Afghan authorities looking to get $270 million or are they looking to get a part of that?

MR. SCHIMMELPFENNIG: The $270 million is the amount of the agreed-upon repayment. Of the agreements that have been signed so far, as I said, once the audit report is final, maybe some of these agreements will also be revisited if it turns out that the true amount that somebody benefited from Kabul Bank is higher or I don't want to preempt the audit, it could also be that it's lower. Right now that's what shareholders or related parties have acknowledged that, yes, this how much I took from Kabul Bank and I'm willing to repay that.

Questioner: Finally, going back to something you just said a moment ago on the 10 years, for donors and for the IMF, is there a pace of recovery that needs to be kept up? Is this something that could disappear over a few years or is there something in terms of your disbursement of tranches of loans that you will hold them to in terms of the pace of recovery efforts?

MR. SCHIMMELPFENNIG: What the authorities are looking for and we support fully is to achieve recovery as quickly as possible. Having said that, each agreement has its own repayment schedule and I think I mentioned earlier they range from an immediate payment in some cases to I think up to 9 years depending on the projected cash flow of the party. The government will monitor this very closely. We will be interested in seeing progress on that. Fund support is not tied to any specific number on this.

Questioner: A few months back there was some concern on Azizi Bank which is a second bank which might be at risk. I wondered if you had anything further to say on that and how much risk may remain in the system after the kinds of actions that have recently been taken?

MR. SCHIMMELPFENNIG: There were concerns about Azizi Bank earlier this year and what the supervision department then did was do an in-depth study of the bank to see what the issues are. What that report revealed is that Azizi had a couple of large exposures both in terms of individual borrowers but also in terms of sectors that from a risk-management perspective was higher than what you would want to see. Also it was established that the large shareholder of Azizi Bank was himself the chairman of the board which in Afghanistan violates the conflict-of-interest regulation so that he had to step down and actually did that since. In terms of the vulnerabilities, the bank and the Central Bank have then agreed on increasing the capitalization of Azizi Bank to be sure that you have a sufficiently high cushion given the larger vulnerabilities than what you would want to have. Azizi Bank will increase its capital by $10 million this year. About half of that has been paid up already and another $10 million next year which will put it in a stronger position given the vulnerabilities on its balance sheet. At the same time, as for some of these large exposures, the underlying projects are being completed and at that stage the loans will be re-paid and the exposure will come down automatically so that that's where Azizi Bank stands. I mentioned earlier that there are a couple of audits for the 10 banks in Afghanistan ongoing. Azizi Bank is one of the banks where an in-depth audit is being done. That will at some stage provide further light on the situation. Where we stand right now is that we have this report from the supervision department that flags the large exposures and then there's a strategy to increase capitalization to deal with that.

MR. ANSPACH: With that, thank you very much for participating in this teleconference. Again the embargo is at 9:00 a.m.

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