OREANDA-NEWS. The Executive Board of the International Monetary Fund (IMF) today approved a three-year Extended Credit Facility (ECF) arrangement for the Islamic Republic of Afghanistan for SDR 32.38 million (US$44.9 million, or 10 percent of quota) to help raise growth by consolidating progress on the macroeconomic and structural fronts and catalyzing continued support from donors.

Following the Board’s decision, SDR 4.5 million (about US$6.2 million) is available for immediate disbursement; the remaining amount will be phased in over the duration of the program, subject to semi-annual reviews.

Following the Board discussion, Mr. Mitsuhiro Furusawa, Deputy Managing Director and Acting Chair, made the following statement:

“Afghanistan is undergoing a difficult political, security, and economic transition. Against this background, the authorities’ successful completion of the 2015 staff-monitored program has provided the needed track record for a financial arrangement with the Fund. The authorities’ program supported under the Fund’s Extended Credit Facility aims to consolidate recent gains on the macroeconomic and structural fronts, and catalyze donor support. It will focus on institution building, fiscal and financial reforms, and measures to combat corruption. These reforms will help lay the foundation for private sector development, in line with the goal of Afghanistan’s forthcoming National Development Framework.

“On the fiscal side, the program aims to raise revenue and reduce reliance on aid through tax administration and policy reforms; improve the formulation, execution, and reporting of the budget; ensure a pro-growth re-composition of public spending over time; and strengthen commitment controls and cash management.

“The program envisions bolstering financial stability and the central bank’s regulatory and supervisory frameworks to address remaining financial risks, including the need to complete the resolution of the 2010 Kabul Bank crisis.

“The reform agenda also includes strong anti-corruption measures and implementation of further reforms of the AML/CFT framework, which are critical to protecting financial stability, deterring corruption, and exiting the Financial Action Task Force’s monitoring process.

“The program will support a policy mix that aims to preserve macro-financial stability by strengthening fiscal and external balances, keeping inflation low, and maintaining exchange rate flexibility and strong buffers.

“In view of the challenging circumstances, full ownership of the program and buy-in from stakeholders will help mitigate implementation risks and raise the likelihood of program success.”

Recent Developments

Afghanistan is undergoing a challenging political, security, and economic transition. Continued insecurity, political uncertainty, weak institutions and corruption are salient factors preventing robust and inclusive economic growth.

Against this background and following the sizable reduction of the International Security Assistance Force stationed in the country, real GDP growth declined from 11.5 percent in 2007-12 to 1.5 percent in 2013-15 and was 0.8 percent in 2015. While an uptick of growth to 2 percent is projected for 2016, it remains far below the level needed to ensure increased employment and improved living standards. Large fiscal and external deficits continue to be financed by donor aid. Risks, related to uncertain security conditions and potential shortfalls in external support, are tilted to the downside.

The nine-month Staff Monitored Program (SMP) approved in May 2015 was successfully completed in April 2016. The SMP aimed at addressing fiscal and banking vulnerabilities, preserving macroeconomic stability, improving prospects for inclusive growth, and building a track record for a future IMF financial arrangement.

Program Summary

The authorities’ program supported by the ECF sets out a structural reform agenda that focuses on institution building, fiscal and financial reforms, and measures to combat corruption to lay the foundations for scaled up private sector development. The envisaged reforms, which are in the areas of the Fund’s comparative advantage and complementary to reforms supported by donors, dovetail with Afghanistan’s National Development Framework currently being finalized. The program aims to preserve macro-financial stability by implementing prudent fiscal, monetary, and financial policies, and by maintaining external buffers and a flexible exchange rate regime. The program’s major elements are as follows:

Fiscal reforms: On the revenue side, the priorities include strengthening current tax policies and administration, and customs revenue collection control and capacity. On the expenditure side, priorities include improving formulation, execution, and reporting of the budget; ensuring a pro-growth re-composition of public spending while safeguarding social and other priority spending; and strengthening commitment control and allotment processes to better manage cash and improve transparency.

Anti-corruption measures and financial governance: Strong anti-corruption measures are crucial for Afghanistan to build trust and accountability, minimize revenue leakages, and improve the business environment. The authorities have taken steps to improve the anti-corruption framework since 2014, and plan to align the legal framework for anti-corruption with international standards as well as improve enforcement and transparency—notably by strengthening the asset declaration regime and its implementation. The authorities plan to enhance implementation of the Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) framework, in particular the regulation on currency reporting at borders and the fit and proper regulation.

Policies to preserve macro-financial stability : The ECF arrangement will aim to gradually reduce underlying fiscal and external imbalances to prepare for a time when donor aid declines. Buffers—low public debt and ample international reserves—will remain strong to absorb adverse shocks. The budget will increasingly favor development spending to support a recovery in growth, while financial sector policies will aim to strengthen vulnerable and weak banks and reform the state-owned commercial banks. On the latter, the program incorporates measures to complete the resolution of the 2010 Kabul Bank crisis through recapitalizing New Kabul Bank and reducing the central bank’s lender of last resort exposure to Kabul Bank. Monetary policy will continue to be focused on maintaining price stability and a flexible exchange rate regime, while fostering confidence in the domestic currency in the context of high dollarization.