Press Release No. 17/476

IMF Executive Board Concludes 2017 Article IV Consultation and Completes the Second Review Under the ECF for the Islamic Republic of Afghanistan

December 8, 2017

• Afghanistan remains committed to implementing structural reforms in pursuit of self-reliance, inclusive growth, and employment opportunities for its rapidly rising population.
• Continued financial sector reforms are critical to ensure a resilient banking system.
• Strong program ownership by the government and continued donor support are vital to the success of the reforms.

On December 8, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with the Islamic Republic of Afghanistan and completed the second review of the arrangement under the Extended Credit Facility (ECF) for Afghanistan. [2]

Since 2002, with financial and security support from the international community, Afghanistan has made important strides in rebuilding its economy. Nonetheless, important challenges remain as the country remains conflict-affected, poor, and aid-dependent. While macroeconomic policies have been broadly successful in maintaining fiscal and external sustainability, over time they need to prepare for lower external support. The authorities should support growth by strengthening institutions, addressing corruption, building up physical and human capital, developing the financial sector, making access to financial services more inclusive, and improving the business climate.

Real GDP grew by 2.4 percent in 2016 thanks to higher agricultural output, up from 1.3 percent in 2015. For 2017, growth is projected at 2.5 percent and at 3 percent for 2018. This is below the rate of growth needed to reduce unemployment, and is contingent on an improvement in confidence, implementation of reforms, and continued strong donor support. Consumer price inflation remains moderate and is expected to average 6 percent in 2018. Afghanistan has made progress in strengthening the country’s anti-corruption framework and its efforts in anti-monetary laundering and counter financing of terrorism (AML/CFT) resulted in the recent exit from the Financial Action Task Force’s (FATF) monitoring process.

Executive Board Assessment [3]

Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities’ commitment to economic transformation in pursuit of their objective of raising inclusive growth, boosting job opportunities for the rapidly rising population, and reducing aid dependency. Directors welcomed the authorities’ steps to rebuilding institutions, maintaining macroeconomic and external stability, strengthening economic buffers, and continuing to implement structural reforms. However, Directors stressed the many obstacles and vulnerabilities to achieving these objectives, including the prolonged conflict, the heavy dependence on aid, and the impact of corruption and political uncertainty. Against this challenging backdrop, they emphasized that continued strong program ownership and steadfast reform efforts remain essential to help mitigate program implementation risks, particularly given the coming electoral cycle.

Directors urged the authorities to maintain low debt levels and ensure debt sustainability, including through the continued limits on new external debt and the elevated concessional borrowing rate. They agreed that the overall budget balance including grants should remain the fiscal anchor, and that the authorities should target a broadly balanced budget. Raising domestic revenue in a fair and sustainable manner remains a priority to meet pressing needs while shifting toward pro poor and pro-growth spending. Fiscal sustainability needs to be underpinned by a strong fiscal reform effort, including enhanced tax administration and the adoption of a VAT by 2021, while avoiding tax concessions.

Directors urged the authorities to improve public financial and investment management to make better use of existing resources and lay the foundation for a gradual scaling up of infrastructure investment. They advised developing and implementing a sound strategy to manage state owned corporations and enterprises—beginning with improving transparency.

Directors welcomed the progress with financial sector reforms for banking system stability, financial inclusion, and economic development. They stressed the importance of continued improvement of regulatory and supervisory frameworks, deposit insurance infrastructure, and crisis preparedness. Directors encouraged the authorities to strengthen the independence of the central bank and implement a sound strategy for the state owned commercial banks. They also welcomed the progress in restoring the central bank’s balance sheet, while encouraging ongoing determined efforts to recover Kabul Bank assets.

While welcoming the authorities’ progress with anti-corruption measures, most notably by criminalizing corruption in line with the United Nations Convention Against Corruption and requiring asset declarations by public officials, Directors urged strong enforcement to boost stakeholders’ confidence. They welcomed the FATF de listing, and encouraged further steps to strengthen the implementation of AML/CFT measures to protect financial stability and to detect and deter corruption and other crimes such as illicit drug production and trafficking.

Directors encouraged continued improvement in the quality and timeliness of economic data for sound economic policy making, with the support of IMF technical assistance.

It is expected that the next Article IV consultation with Islamic Republic of Afghanistan will be held in accordance with the Executive Board decision on consultation cycles for members with Fund arrangements.

With respect to the second review under the ECF arrangement for Afghanistan, all quantitative performance criteria and indicative targets were met. Of the seven structural benchmarks, five were met, and the two that were not met on time, were implemented with delay. The first review under the ECF arrangement was completed in May 2017 (see Press Release No. 17/192). The ECF arrangement for Afghanistan was approved on July 20, 2016 for a total amount equivalent to SDR 32.38 million (see Press Release No. 16/348).

The review completion allows for a disbursement of SDR 4.5 million (about US$6.2 million), bringing total disbursements under the ECF arrangement to SDR 13.5 million (about US$18.6 million). The Executive Board also approved the authorities’ request for modification of two performance criteria approved by the Executive Board in May 2017, reflecting updates to the macroeconomic framework.

Continued strong ownership of the program by the government remains vital to its success. Reforms in the financial sector (turning the page on the Kabul Bank crisis), improved economic governance, and revenue mobilization combined with strengthened public financial management are critical. Sustained reform implementation will continue to be challenging in the context of fragile security and political uncertainty. In this environment, sustained backing by donors remains vital as well. The IMF remains committed to playing its role in the collective international effort to help Afghanistan.

Following the Executive Board’s discussion, Mr. Mitsuhiro Furusawa, First Deputy Managing Director and Acting Chair, said:

“The Government of Afghanistan remains committed to implementing sound macroeconomic policies and structural reforms to boost inclusive growth and employment for the country’s rapidly rising population, and reduce aid dependency. In pursuing these objectives, the authorities are guided by the Afghanistan National Peace and Development Framework and supported by the IMF Extended Credit Facility.

“The difficult security situation has reduced confidence, thwarted investment, and undermined growth and job creation. Poverty remains high, and the country continues to be dependent on external grants for external and fiscal sustainability.

“The authorities’ macroeconomic policy mix, aimed at maintaining fiscal and external stability with low inflation and a flexible exchange rate, is appropriate going forward. These policies can help mitigate the impact of insecurity and political uncertainty.

“Fiscal policy should continue to focus on fair and sustainable domestic revenue mobilization, while resources should shift toward growth-supportive development spending with adequate social safety nets. Public financial and investment management need further strengthening to ensure that resources are put to best use and to prepare for an eventual gradual scaling up of infrastructure investment.

“Further financial sector reforms are critical to ensure a resilient banking system. Key priorities remain overcoming the Kabul Bank crisis legacy, implementing a sound strategy for state-owned commercial banks to reduce fiscal and financial stability risks, and strengthening the independence of the central bank.

“The anti-corruption and AML/CFT agenda has advanced, and strong enforcement of these measures is needed to build confidence.

“Continued strong political will and program ownership by the government remains vital to the success of the reforms. The IMF continues to assist Afghanistan, including through the provision of technical assistance.”