March 31, 2004
1. Let me start by thanking the German authorities for hosting this important conference. It provides a unique opportunity for the Afghan authorities and the international community to reaffirm their commitment to work closely together to secure political and economic stability and create opportunities for the Afghan people to build a better and more prosperous future. The IMF welcomes the opportunity to be part of this effort.
2. The Afghan authorities, with the help of the international community, have made impressive strides toward achieving macroeconomic stability since early 2002. The authorities focused initially on crisis management and establishing or rebuilding key economic institutions and providing basic government services. A central pillar in the authorities' economic strategy has been a strong commitment to implement sound fiscal and monetary policies. The authorities' efforts have clearly yielded results. The economy shows strong signs of recovery, inflation has been brought down to a moderate level, and the exchange rate has been relatively stable. But there is still a long way to go. Despite strong growth, Afghanistan remains among the poorest countries in the world. Alleviating poverty in Afghanistan will require well-targeted social programs and substantial investment to sustain economic growth, to reach the announced goal of a level of per capita GDP of at least US$500 by 2015.
3. Achieving Afghanistan's reconstruction and development goals will continue to require large amounts of external technical and financial assistance in the coming years. A provisional debt sustainability analysis prepared by the IMF staff suggests that Afghanistan's capacity to service external debt remains very limited. That analysis showed that even with high rates of economic growth and modest levels of highly concessional borrowing, forgiveness of bilateral debt will be necessary to ensure sustainability over the medium term. It is clear that Afghanistan will need to rely overwhelmingly on grants.
4. There are a number of risks to successful reconstruction. Providing adequate security throughout the country remains a key priority. It is only in a secure environment that reforms can be undertaken, public services provided, and private economic activity fully resume. Another risk is the resumption of large-scale poppy cultivation and the production of opium. This is having a profound impact on the economy and the whole society. Eradication programs must be intensified, but can only hope to succeed if they go hand in hand with economic development to provide alternative livelihoods for farmers.
IV. The Role of the IMF
5. The IMF has been working closely with the Afghan authorities since the very beginning of the transitional administration. The IMF's first priority has been to provide the authorities with policy advice and technical assistance. Despite the security environment, the Fund has posted a resident representative in Kabul since mid-2002. IMF technical assistance has focused on introducing the new national currency, preparing new central bank and banking laws, improving fiscal management, strengthening revenue policy and administration, and improving the statistical database. In November 2003, the IMF concluded its first Article IV consultation with Afghanistan since 1991.
6. I am very pleased to inform you that we have just reached an agreement with the authorities on a staff-monitored program (SMP), which will provide a detailed framework for economic policies for 2004/05. The main objectives of the SMP are to maintain macroeconomic stability and strengthen Afghanistan's capacity to implement policies, improve the statistical database, and implement the reform agenda. The program is ambitious, but achievable. The authorities, in keeping with their desire to be transparent, have agreed to make the SMP documents public. They will be posted on the IMF website. In this program, the authorities have committed themselves to:
· observing quantitative targets to maintain macroeconomic stability;
· implementing public expenditure management reforms to improve cash management and to ensure that the central government controls the revenue collected by ministries and in the provinces;
· eliminating tax concessions and holidays that have eroded the tax base; without this reform, the 2004/05 and medium-term revenue targets would not be achievable;
· pursuing civil service reform;
· resolving the status of the state-owned banks;
· developing a privatization strategy for the state-owned enterprises;
· introducing Anti-Money Laundering and Combating Financial Terrorism (AML/CFT) legislation; and
· improving monetary and inflation data.
7. The SMP, by allowing the government to develop the necessary institutional and administrative capacity, should pave the way to a more ambitious program and financial assistance under the IMF's Poverty Reduction and Growth Facility, possibly in early 2005. As part of the effort to ensure the success of the SMP, the IMF will increase its technical assistance in Afghanistan, in close coordination with other donors. A key role that the SMP will also play is to provide the economic framework that will facilitate the support of bilateral donors and other multi-national institutions.
8. In conclusion, the authorities deserve to be congratulated on the strides that Afghanistan has made so far in the economic front. The international community has a critical role to play in supporting the ongoing efforts of the Afghan government and the Afghan people. For its part, I can assure you that the IMF will continue to work closely with the authorities and with donors to promote sustainable growth and macroeconomic stability and to develop key economic institutions in Afghanistan.
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