Afghan women await arrival of heads of state for the inauguration of the Salma Hydroelectric Dam in Afghanistan. Improving infrastructure is a top priority for the Afghan government, says IMF (photo: Aref Karimi/AFP/Getty Images)

IMF Loan for Afghanistan to Support Growth, Catalyze Donor Aid

July 28, 2016

  • Security challenges, political uncertainty pose risks to economic growth
  • Reform program to focus on institution building, private sector development
  • Government, donors committed to close engagement with IMF

The IMF has approved a $45 million loan to Afghanistan to support a reform program aimed at curbing corruption, reforming the banking sector, and laying the foundation for private sector development. 

The financing package covers three years under the IMF’s Extended Credit Facility, and follows the Staff-Monitored Program that was successfully completed in April 2016.

Growth has collapsed in recent years as international troops withdrew, dropping from an average of 11½ percent in 2007–12 to 1½ percent in 2013–15. The objective of the reform program is to support sound macroeconomic policies and to help set the stage for a resumption of growth, while catalyzing continued support from the donor community.

IMF News recently met with Christoph Duenwald, mission chief for Afghanistan, to discuss the program’s key goals and how they will support Afghanistan’s National Development Framework, the government’s forthcoming plan to promote sustainable growth and reduce aid dependency.

IMF News: Why does Afghanistan need financial assistance from the IMF?

Duenwald: The loan from the IMF is actually quite small, because Afghanistan does not have an immediate balance of payments need once we account for the very sizeable donor grants. The reason for the authorities’ interest in an IMF arrangement is to catalyze greater donor support, but also to help them stay on track and build on progress made on the economic front, where the authorities have been successful in running low budget deficits, keeping inflation down, and implementing structural reforms.

IMF News: What are the top priorities that the authorities hope to achieve with this new program and how will it help the country?

Duenwald: The new program—the Extended Credit Facility—is very much embedded in the much larger reform effort, the Afghanistan National Development Framework, which is currently under preparation and is like a blueprint for reforms going forward. Here, the key priorities are to bring in additional revenues to create space for infrastructure development, strengthen the country’s budget processes, reform the banking system, to promote financial inclusion, and take measures to deal with corruption.

Both the National Development Framework and within that, the robust set of reforms under this program, should lay the basis for private sector development—which would help create jobs and more inclusive growth.

IMF News: How has Afghanistan’s economy been affected by political uncertainty and rising insecurity, and will this hinder the program’s implementation?

Duenwald: As in any other country, political uncertainty and insecurity has certainly undermined confidence, which hurts private sector activity. Prior to 2011, the Afghan economy was—to a significant extent—propped up by the large presence of foreign troops. Starting in 2012, the withdrawal of international troops led to a sharp decline in in-country military spending, and significant job losses. All the risks that both the Afghan government and the international community highlighted about that troop withdrawal actually did materialize in the form of much lower growth, so much so that last year, growth was only 0.8 percent.

Weak economic activity coupled with heightened political uncertainty can feed insecurity, and can hinder progress in implementing reforms. However, the government along with international partners are working to help the authorities stay on track as demonstrated by the authority’s good performance under the 2015 Staff-Monitored Program.

IMF News: Can you talk about the role that the donor community will play throughout this program?

Duenwald: Donors have played a critical advisory and financial role over the past many years, and we have consulted them in designing the program together with the authorities. As I said earlier, the financial assistance from the IMF is quite small—$45 million—but this is contingent on donors continuing to cover the large fiscal and external gaps that Afghanistan has.

There are two important international meetings this year where assistance for Afghanistan is discussed. One, in Warsaw on the sidelines of the NATO summit, has already taken place and donors confirmed their continued security assistance for Afghanistan. The second takes place at the beginning of October, in Brussels, and will discuss the civilian assistance.

IMF News: What are the authorities doing to address corruption and strengthen institutions?

Duenwald: Combatting corruption is very high on the government’s agenda as they work to improve their anti-corruption framework. For example, the authorities have established a national procurement authority that is strengthening the procurement process; set up a high council for good governance, justice and anti-corruption chaired by the president himself; and published asset declarations by top-ranking officials for 2015. These examples illustrate just how much the authorities have moved on this front, and how important curbing corruption is to them.

Because perceptions of corruption and actual corruption are very harmful to economic activity, the new program includes measures to strengthen the legal framework with anti-corruption practices—such as criminalizing corruption in line with United Nations conventions, and strengthening the regime for asset declarations for officials. Strong implementation and enforcement will be needed to see tangible results, which we anticipate will take place gradually given the political uncertainty, heightened insecurity, and lack of capacity. Despite these challenging circumstances, reducing corruption is still a very important focus for the authorities and for us as well.

IMF News: What is the Afghan government doing to boost regional integration?

Duenwald: Regional integration and enhanced connectivity is another important objective for the government. There are several initiatives underway, and I will name a few here, but the benefits will likely come with a long lag. Afghanistan is set to join the World Trade Organization on July 29, 2016—a milestone toward greater integration in the global economy and the opportunities this presents. Regionally, construction of the Turkmenistan-Afghanistan-Pakistan-India natural gas pipeline began last year which will yield substantial transit fees once complete. There are also advanced plans for a regional electricity project, CASA-1000, which will enable electricity trade between the Kyrgyz Republic, Tajikistan, Afghanistan, and Pakistan.