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Islamic Republic of Afghanistan: First Review Under the Extended Credit Facility Arrangement, Request for Waiver of Nonobservance of a Performance Criterion, Modification of Performance Criteria, and Rephasing of Disbursements - Informational Annex

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International Monetary Fund
Published Date:
August 2012
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Annex I. Islamic Republic of Afghanistan—Relations with the Fund

(As of May 31, 2012)

I. Membership Status: Joined July 14, 1955; Article XIV.

II. General Resources Account

SDR Million% Quota
Quota161.90100.00
Fund holdings of currency161.92100.01
Reserve position in Fund0.000.00

III. SDR Department

SDR Million% Allocation
Net cumulative allocation155.31100.00
Holdings128.2582.57

IV. Outstanding Purchases and Loans

SDR Million% Quota
ECF Arrangements87.3553.95

V. Latest Financial Arrangements:

TypeDate of

Arrangement
Expiration

Date
Amount Approved

(SDR Million)
Amount Drawn

(SDR Million)
ECFNov 14, 2011Nov 13, 201485.0012.00
ECF1Jun 26, 2006Sep 25, 201081.0075.35

VI. Projected Payments to Fund2

SDR million
20122013201420152016
Principal2.458.2912.8114.5115.07
Charges/Interest0.020.040.210.170.14
Total2.478.3313.0214.6815.21

VII. Implementation of HIPC Initiative:

Enhanced
I. Commitment of HIPC assistanceFramework
Decision point dateJul 2007
Assistance committed by all creditors (US$ million, NPV)3582.40
Of which: IMF assistance (US$ million)--
Completion point dateJan 2010
II. Disbursement of IMF assistance (SDR million)--
Total disbursements--

VIII. Implementation of MDRI Assistance: Not Applicable

Nonfinancial Relations

IX. Exchange Arrangement

Afghanistan is an Article XIV member country. The authorities are implementing a liberal exchange system. Based on information currently available to the staff, no exchange restrictions and multiple currency practices are in place. The authorities have provided documents to Fund staff related to laws and regulations on the exchange regime and have requested technical assistance from the Fund to formalize the current liberal regime. They have been implementing a managed float system with no predetermined path for the exchange rate. On May 31, 2012, the average of the buying and selling exchange rates in cash transactions on the Kabul money exchange market was 50.1950 Afghanis per U.S. dollar.

To conduct monetary policy, the authorities rely on foreign exchange auctions since May 2002, and on short-term capital note auctions since September 2004. The foreign exchange auctions were initially open only to licensed money changers, but since June 2005 they are also open to commercial banks. The capital note auctions are open to commercial banks. Auctions are linked to the overall monetary program and are held on the regular basis.

X. Article IV Consultation

The last Article IV consultation with Afghanistan was discussed by the Executive Board on November 14, 2011. Article IV consultation with Afghanistan are held in accordance with the decision on consultation cycles approved on July 15, 2002.

XI. Safeguards Assessment

An update safeguards assessment of Da Afghanistan Bank (DAB) was finalized in December 2011. It found that while most of the previous safeguards recommendations had been implemented, an effective internal audit mechanism had still not been established and governance oversight was weak. The assessment also made recommendations to address new risks emerging as a result of the Kabul Bank crisis including with respect to central bank autonomy. Since the assessment, some recommendations have been implemented, albeit with delay. In particular, a Memorandum of Understanding on central bank capitalization has been signed and an external auditor has been appointed. The DAB is committed to implementing the remaining safeguards recommendations, with priority assigned to development of the internal audit function (with external support) and strengthening of Audit Committee oversight.

XII. Technical Assistance, 2006–12

DepartmentDatesPurpose
FADFebruary 2004–May 2006Treasury advisor
February 21–28, 2006Public financial management (budget and treasury procedures)
March 1–4, 2006Public financial management (budget and treasury procedures)
April 30–May 9, 2006Tax policy
November 14–23, 2006Tax and customs administration
October 23–November 27, 2008Resident public financial management advisor
July 4–16, 2009Organizational structure
December 2–12, 2009Revenue administration
December 6–16, 2009Program budgeting reform
April 3–17, 2010Revenue administration (customs)
April 6–19, 2010Program budgeting reform
June 6–19, 2010Revenue administration (customs)
September 14–27, 2010Tax policy reform
October 16–28, 2010Public financial management (with METAC)
January 22–February 4,2011Customs administration
April 1–13, 2011Customs administration
September 15–22, 2011Program budgeting
January 14–26,2012Revenue administration (value added tax)
January 14–28,2012Customs reform
April 4–14, 2012Public financial management (with METAC)
LEGMay 2–10, 2006Legal framework for monetary and payment systems
May 27–28, 2010Islamic banking law
MCDAugust 29, 2011–presentResident monetary policy and banking advisor
MCMSeptember 2004–April, 2006Training coordinator
January 22–February 5, 2006Monetary policy
April 2006–June 2007Training coordinator (peripatetic)
May 2–11, 2006Monetary policy, foreign reserve management, money markets
November 28–December 10, 2006Monetary policy formulation and implementation
March 19–April 16, 2007Central bank capacity building
March 24–29, 2007Banking supervision
April 17–30, 2007Monetary policy formulation and implementation
November 7–14, 2007Banking supervision
January 13–21, 2008Banking law (with LEG)
August 27–September 11, 2008Monetary policy formulation and implementation
August 2009Monetary operations
June 20–24, 2010Debt/money markets, sukuks (with METAC)
September 2010–presentResident advisor on banking resolution
October 25–November 4, 2010Banking crisis management (with MCD)
February 7–14, 2011Banking crisis management (with MCD)
July 24–27, 2011Islamic finance (sukuk workshop)
October 1–12, 2011Banking supervision
February 11–14, 2012Islamic finance (sukuk)
April 7–12, 2012Banking supervision and regulations
April 15–17, 2012Islamic finance (sukuk)
May 27–30, 2012Islamic finance (sukuk)
June 23–28, 2012Banking supervision and regulations (PLANNED)
STAOctober 31, 2005–January 12, 2006Multisector statistics
March 6–15, 2006Balance of payments statistics
March 8–May 2, 2006Multisector statistics
March 13–22, 2006Monetary and financial statistics
May 24–July 18, 2006Multisector statistics
August 2–16, 2006Balance of payments statistics
August 8–October 3, 2006Multisector statistics
September 22–October 4, 2006Government finance statistics
November 1–December 26, 2006Multisector statistics
November 5–19, 2006Monetary and financial statistics
April 22–May 4, 2007Monetary and financial statistics
July 7–30, 2007National accounts
August 29–September 13, 2007Government finance statistics
September 09–October 05, 2007National accounts
December 02–13, 2007National accounts
April 20–30, 2008Monetary and financial statistics
August 6–27, 2008Balance of payments statistics
October 13–29, 2008National accounts
November 12–December 3, 2008Balance of payments statistics
November 23–December 5, 2008Monetary and financial statistics
August 30–September 9, 2009Monetary and financial statistics
September 27–October 07, 2009Balance of payments statistics
September 18–29, 2010Government finance statistics
September 20-October 1, 2010National accounts statistics
October 23–November 3, 2011Monetary statistics
April 29–May 10, 2012National accounts statistics
METACMay 2006Treasury modernization (resident treasury advisor)
June 8–13, 2006Budget integration
September 2006Banking supervision (training)
November, 2006Price statistics (training)
November 15–22, 2006Tax policy and administration
December 12–19, 2006Budget integration
(Afghanistan is a

participant

in the

Middle

East

Technical

Assistance

Center)
December 12–22, 2006Budget development
March 10–21, 2007Tax policy and administration
March 11–22, 2007Cash management
March 24–29, 2007Banking supervision
May 19–25, 2007Balance of payments statistics
June 6–19, 2007Accounting
July 1–12, 2007Banking supervision
August 2007Cash management and program budgeting
September 1–12, 2007Banking supervision
November 4–8, 2007Banking supervision
January 5–26, 2008Central bank accounting
March 22–April 2, 2008Banking supervision
June 25–July 7, 2008Budget preparation
August 24–27, 2008Banking supervision
September 14–24, 2008Real sector statistics
December 14–17, 2008Banking supervision
January 25–February 2, 2009Central bank accounting
January 28–February 2, 2009Tax policy and administration
March 7–19, 2009Cash and budget management
February 13–24, 2010Public financial management
May 17–28, 2010Consumer price index
June 20–30, 2010Banking supervision (with MCM)
September 19–30, 2010Customs reform
January 2–11, 2011Financial planning, budget classification
January 10–14, 2011Tax information systems (workshop)
January 14–21, 2012Revenue administration
August 2–4, 2011Consumer price statistics
December 10–19, 2011Consumer price statistics
April 15–26, 2012Consumer price statistics
June 25–28, 2012Balance of payments statistics (PLANNED)

XIII. Resident Representatives

Mr. de Schaetzen; August 2002–June 2005

Mr. Charap; June 2005–June 2008

Mr. Abdallah; June 2008–present

Annex II. Islamic Republic of Afghanistan—Relations with the World Bank and Bank-Fund Collaboration Under the Joint Management Action Plan

(As of May 22, 2012)

1. IDA has committed a total of over US$2.3 billion to Afghanistan since 2002. To date, 30 development and emergency reconstruction projects including 3 development policy grants have been implemented. IDA's active portfolio comprises 19 investment projects with combined net commitment of almost US$1 billion, of which almost 50 percent (US$478 million) has been disbursed.

2. The Bank’s involvement in Afghanistan extends to its role as administrator of the Afghanistan Reconstruction Trust Fund (ARTF). The ARTF has developed into the primary multi-donor funding mechanism, financing the essential running costs of government as well as key investments, including national programs in health, education, rural access, irrigation rehabilitation, microfinance, and the National Solidarity Program. Since early 2002, 33 donors have contributed over US$5.3 billion to this fund, making it the largest contributor to the Afghan budget for both operating costs and development programs.

3. In January 2010, the World Bank's International Development Association (IDA) and the International Monetary Fund (IMF) agreed to support debt relief for Afghanistan. The Boards of both institutions agreed that Afghanistan had taken the necessary steps to reach the completion point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative. This will generate total debt service savings of US$1.6 billion, which include US$1.3 billion from the HIPC Initiative, US$260 million from Paris Club creditors beyond HIPC, and US$38.4 million from the Multilateral Debt Relief Initiative (MDRI).

4. The International Finance Corporation (IFC), the World Bank Group’s private sector development arm, continues to work with its investment partners in Afghanistan. IFC now has an investment portfolio totaling more than US$90 million in six companies. This includes commitments in the financial, telecom, hospitality and healthcare sectors.

5. One of the primary focuses of the Bank's assistance has been to help the government with legal and regulatory reform, establishing fiscal authority, and developing systems and human resources for public financial management and the civil service as a whole. The performance of the Ministry of Finance regarding alignment of budgetary allocations with the country's priority needs, fiscal discipline, cash control, and aggregate transparency has contributed to macroeconomic stability and sustained external donor assistance.

6. In rural development, the National Solidarity Program (NSP) is active in 359 of Afghanistan’s 364 districts and all of Afghanistan’s 34 provinces. This is the Government of Afghanistan’s flagship program aimed at strengthening Afghan communities’ ability to identify, plan, manage and monitor their own development activities. As of May 2012 approximately 29,460 communities have been mobilized, of which 29,351 have elected Community Development Councils (CDCs). 29,294 CDCs have completed their Community Development Plans which have resulted in approximately 62,068 community subprojects being partially or fully financed, of which some 49,023 subprojects have been completed. About 80 percent of the community subprojects involve infrastructure such as irrigation, rural roads, electrification, and drinking water supply, all critical for the recovery of the rural economy, stability, and governance.

7. With support of the World Bank, the Ministry of Public Health nearly tripled the number of health facilities from 148 to 432 since 2003 in 11 provinces. About 85 percent of the population lives in districts, which now have service providers to deliver a basic package of health services. However, 57.4 percent of the population lives within one hour walking distance from a public health facility (AMS 2010). Health service utilization increased among project area populations from a rate of 0.3 consultations per capita annually at the outset to 1.21 per capita by mid 2011. Health care for expectant mothers expanded, with the number of deliveries assisted by trained health workers jumping from 14 percent to 34 percent (AMS2010). The number of pregnant women who received at least one prenatal care visit appears to have more than tripled from 16 percent to 60 between 2003 and 2010.

8. The demand for basic and higher education has continuously exceeded expectations and supply capacity. There are now 7.2 million children enrolled in schools, with nearly 40 percent being girls, compared to a little more than one million in 2001, with no girls. The Second Education Quality Improvement Project EQUIP, Strengthening Higher Education Project SHEP and the Afghanistan Skills Development Projects ASDP of the World Bank are geared towards providing equitable access to quality education and improving relevance of learning and skills of youth. Demand for education will continue to rise during the post transition decade.

9. Since the implementation of an Automated System for Customs Data, the collection of transit fees in major transit corridors in Afghanistan has improved and customs revenues have increased significantly over the past years. To date, customs processes have been automated at major Inland Customs Depots, including at the Kabul Airport which receives approximately 55 percent of all the country's customs declarations.

10. The Bank is helping to build the capacity of the government to exercise strong oversight of the minerals and hydrocarbons sectors. Private sector investment has been facilitated through the successful tender of the Aynak copper and Hajigak ore deposit. If these and other likely deposits are developed, foreign direct investment in the sector could amount to some US$10–20 billion over the next decade.

11. Looking forward, the Bank’s indicative lending envelope for 2012–13 is approximately US$260 million. Resources will be primarily channeled to private and financial sector development as well as proven national programs in education and rural livelihood (including agriculture), where demands remain vast, to sustain and accelerate progress made so far. These areas constitute significant platforms for improving livelihoods and building government credibility.

12. Supporting sound national programs under the leadership of the government is the most effective use of international aid. The Bank will engage in areas where there is evidence: (i) that a strong, reform-minded, leadership is in place; (ii) where it can help leverage the support of other members of the international donor community; and (iii) where opportunities exist to develop operational frameworks for future programs. In this context, the Government has requested that the Bank play an enhanced role in working with them to determine the vision, design, and framework of their national programs.

13. Bank-Fund collaboration on macroeconomic issues proceeded according to the October 2011 memorandum under the Joint Management Action Plan. Both institutions worked closely on strengthening the banking sector and its supervision, as well as on issues related to Afghanistan’s transition to more self-reliance, debt sustainability, fiscal sustainability and the macroeconomic framework in general. Inter alia, in support of Fund conditionality the Bank financed audits of ten weak banks and began implementation of the project to improvement the payments system. Table 1 below lists the Bank’s and Fund’s planned activities in the area of joint interest for June 2012–May 2013.

Table 1.Afghanistan: Bank’s and Fund’s Planned Activities in the Area of Joint Interest, June 2012–May 2013
ProductsPreparations/Mission Timing1Delivery1
FundFirst Review under the ECFMay 2012June/July 2012
Second Review under the ECFOctober 2012December 2012
Third Review under the ECFFebruary 2013March 2013
Areas of Technical Assistance:
Banking restructuring, financial sector supervision (three long-term resident advisor), revenue administration, customs and border management, tax policy, public financial management, foreign exchange regulation, AML/CFT, banking law, treasury securities, statistics (national accounts, prices, government finance, monetary, balance of payments, GDDS)
BankDevelopment Policy Grant INovember 2011 – September 2012September 2012
Financial Sector Strengthening Project, SupervisionNovember 2011 – August 2012October 2011
ARTF IP Program (SY 1391), Preparation of MoUNovember 2011 – June 2012June 2012
Study: Long Term Sources Economic GrowthNovember 2011 – August 2012August 2012
ESW: Sub-National FinanceAugust 2012 – September 2013September 2013
DPG support to management of mineral revenuesJanuary 2012 – September 2013February 2013
Economic MonitoringContinuousSeptember 2012 and April 2013
JointFinancial Sector Assessment ProgramTBDTBD
Dialogue on mineral revenue and expenditure managementContinuous
Dialogue on the transition processContinuous
Strengthening of the banking sectorContinuous
Strengthening of customsContinuous
Improving payment systemsContinuous

Timing is tentative.

Timing is tentative.

Annex III. Islamic Republic of Afghanistan—Relations with the Asian Development Bank

(As of May 22, 2012)

1. A new Country Partnership Strategy (CPS) covering the 2009–2013 period was endorsed by ADB's Board of Directors on March 5, 2009. The new CPS is fully aligned with the Afghanistan National Development Strategy (ANDS), with ADB's investments contributing to Afghanistan's further economic development. The new CPS continues ADB's narrow focus on Afghanistan's energy, transport, and agriculture and irrigation sectors, including sector governance and further institutional and human capacity development.

2. As of end-December 2011 the Asian Development Bank had provided US$2.7 billion to Afghanistan's reconstruction through approved Asian Development Fund (ADF) loan- and grant-financed projects, technical assistance, ADB administered Japan’s Fund for Poverty Reduction (JFPR), and ADB private sector investments. Since 2007, all of ADB's public sector assistance has been provided on a 100 percent grant basis. At the June 2008 International Conference in Support of Afghanistan, ADB pledged an additional US$1.3 billion over the 2008–2013 period, making ADB Afghanistan's fourth largest donor to Afghanistan (after the United States, Japan, and the European Union).

3. Since November 2008, ADB has approved four multi-tranche financing facility (MFF) projects as follows, a US$570 million energy sector MFF and a US$400 million transport sector MFF (November 2008); a US$805 million transport sector MFF (October 2011), a US$300 million water resources management sector MFF (October 2009); and a railway project of US$165 million (October 2009). With the approval of these MFFs and the railway project, the bulk of ADB's anticipated assistance over the 2008–2013 period will be fully “earmarked,” although with some flexibility depending on changes in the Government’s priorities.

4. Since ADB operations in Afghanistan resumed in 2002, there have been 11 public sector loans in total US$722.2 million and 19 grants in total US$1580.1 million covering 23 investment projects. This involved ADF funding resources using loan or combined loan and grant funding, and since 2007 all projects have used only ADF grant-financing. In addition, there have been 10 Japan JFPR projects, 8 standalone projects, and 2 combined with loan projects totaling US$110.0 million. Also, there have been 5 donor cofinancing grants from Japan’s JFPR, Kuwait Fund, CIDA (2), and United Kingdom amounting to US$76.7 million. ADB's private sector operations in Afghanistan began in 2004. By end of 2011, cumulative approvals for seven private sector projects have amounted to US$206.1 million, including support for Afghanistan International Bank, Roshan Telecommunications, and the Afghanistan Investment Guarantee Facility.

5. ADB has been actively engaged in providing analytical and advisory technical assistance (TA) services to the Government, with total TA amounting to some US$66.9 million as of the end 2011. Increasingly, TA is included as integral parts of ADB's grant-based investment projects, with focus on public financial management, procurement, and anti-corruption as well as institutional and human capacity development. ADB has also been providing ongoing TA support to the Ministry of Finance.

6. In November 2010, ADB approved the ADB-managed Afghanistan Infrastructure Trust Fund (AITF) to pool donor resources to cofinance and complement ADB-assisted infrastructure projects. AITF promotes infrastructure development by allowing donors to leverage ADB’s technical expertise, fiduciary arrangements, and local capacity. To date, ADB has received cash flows amounting to US$58 million from Japan and United Kingdom, with US$33 million committed during 2011. Japan approved a further US$50 million contribution to AITF in March 2012. ADB is also discussing the prospect of AITF contributions with the Australia, E.U., Germany, India, United States, and other interested partners. It is hoped that US$1 billion could be raised for AITF to support the transition process.

7. ADB is a member of the Afghanistan Compact/ANDS Joint Coordination Management Board (JCMB) and also is a member of the Afghanistan Reconstruction Trust Fund Management Committee. ADB plays an active part in other donor coordination activities, including the JCMB Social and Economic Development Standing Committee, the Ministry of Finance's High Level Committee on Aid Effectiveness, and the Inter-Ministerial Committee on Energy.

1

Formerly PRGF.

2

Forthcoming; based on existing use of resources and present holdings of SDRs.

3

Net Present Value (NPV) at the decision point under the enhanced framework.

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