VZCZCXRO1769
PP RUEHDBU RUEHPW RUEHSL
DE RUEHBUL #0684/01 0551020
ZNR UUUUU ZZH
P 241020Z FEB 10
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC PRIORITY 5848
INFO RUCNAFG/AFGHANISTAN COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC 0988

UNCLAS SECTION 01 OF 03 KABUL 000684 
 
DEPT FOR SRAP, SCA/FO, SCA/RA, AND SCA/A 
TREASURY FOR NWOLIN, DCOHEN, LMCDONALD, MNUGENT, JCASAL, AKIFAYAT 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN EAID ECON PGOV KCRP AF
 
SUBJECT: TREASURY DEPUTY SECRETARY WOLIN EMPHASIZES IMPORTANCE OF 
SOUND PUBLIC FINANCIAL MANAGEMENT AND GOVERNANCE 
 
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SUMMARY 
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¶1. (SBU) During a February 10-11 visit to Kabul, Treasury Deputy 
Secretary Wolin promoted sound public financial management and 
governance in meetings with senior Afghan officials, including 
Central Bank Governor Fitrat and Finance Minister Zakhilwal and in a 
speech at the American University of Afghanistan.  The Deputy 
Secretary pressed for strong anti-money laundering/ combating 
terrorist finance efforts in meetings with the Central Bank's 
financial intelligence unit FinTRACA, urged more attention to 
sub-national governance with Minister of Rural Rehabilitation and 
Development Mansoori, and discussed anti-corruption with Ashraf 
Ghani, whom President Karzai has asked to play a lead role in 
developing a coherent national strategy in this area.  The Deputy 
Secretary also launched the recently-formed Financial Services 
Advisory Group at a dinner hosted by the Ambassador.  End Summary. 
 
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CENTRAL BANK STRENGTHENS BANKING SUPERVISION 
-------------------------------------------- 
 
¶2. (SBU) In a February 10 meeting with Central Bank Governor Fitrat, 
Treasury Deputy Secretary Wolin discussed banking supervision, 
combating illicit finance, increasing access to finance, monetary 
policy, and joint efforts to grow the Afghan economy.  Wolin 
emphasized the importance of robust banking supervision and 
effective anti-money laundering and combating the financing of 
terrorism (AML/CFT) measures.  Governor Fitrat responded that the 
Banking Supervision Department was relatively new (established in 
2003, with USG support) and that it had been strengthened in recent 
years, with additional staff for on-site supervision (from the 
banking supervision office, financial intelligence unit, and risk 
management office) and that off-site supervision was based on 
monthly data collected from all banks operating in Afghanistan.  The 
Central Bank conducts full scope bank examinations every six months, 
resulting in two full cycles per year, Fitrat stated. 
 
¶3. (SBU) Governor Fitrat asserted that various banks have taken 
steps to lift their CAMEL ratings and address Central Bank concerns 
over poor asset quality.  (Note: "CAMEL ratings" measure a bank's 
capital, assets, management, earnings, and liquidity.  End Note) 
The Central Bank had forced several banks to "make their loans 
current" i.e., not delinquent for more than 30 days.  Fitrat claimed 
that the non-performing loan rate was 0.74, although some financial 
sector observers dispute how the Central Bank calculates this 
figure.  He also said the Central Bank now requires external audits 
of all banks by one of the big four international auditors (KMPG, 
PwC, Deloitte, Ernst & Young) and obliges banks to make audited 
financial reports public.  Fitrat also observed that access to 
credit is improving and that Afghanistan's international ranking in 
the World Bank's Access to Finance 2009 report had risen from 180 to 
¶127. 
 
¶4. (SBU) When Deputy Secretary Wolin pressed for the need to combat 
illicit finance more diligently, Fitrat described improvements 
within FinTRACA, the Central Bank's financial intelligence unit. 
According to Fitrat, the Central Bank has licensed more than five 
hundred foreign exchange dealers and 416 money service providers, 
mainly hawalas, throughout the country.  Hawala licensing is lagging 
in the South and Southeast due to security concerns, he added, but 
vowed to continue efforts to address these deficiencies. 
 
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SAUDI RIYAL MOVEMENT 
-------------------- 
 
¶5. (SBU) Fitrat highlighted the Central Bank's efforts to track the 
large movement of Saudi Riyals in Afghanistan, which he believes 
originate in Pakistan, and to establish whether this flow is related 
to terrorist financing.  (Note: the Treasury Attach Office brought 
this issue to the Governor's attention in January and has 
followed-up several times.  End Note)  Fitrat stressed that he 
needed more clarity on this issue, which would require cooperation 
from other Afghan ministries working on borders and customs issues 
(particularly Interior and Finance). 
 
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CEILING ON CURRENCY IN CIRCULATION 
---------------------------------- 
 
¶6. (SBU) Governor Fitrat asked for Treasury support in raising 
Afghanistan's currency-in-circulation ceiling (CiC) under the IMF 
program - the Poverty Reduction and Growth Facility (PRGF), which is 
scheduled to expire in June.  The PRGF originally established a 
 
KABUL 00000684  002 OF 003 
 
 
ceiling of 16% year-on-year growth for currency-in-circulation, 
later raised to 22%.  Fitrat argued that this rate was too low given 
real growth of 15% this Afghan calendar year and the deflationary 
pressures facing the country.  The low ceiling for CiC growth has 
resulted in an appreciation of the Afghani, which undermines the 
competitiveness of Afghan exports and contributes in part to the 40% 
fall in exports in the last year.  Fitrat said that the currency 
appreciation represents significant losses on the Central Bank's 
balance sheets (as its holdings of foreign exchange are now worth 
less relative the stronger Afghani), and that the Central Bank is 
losing close to $1 million/day from this.  The IMF ceiling target is 
undermining Afghanistan's economic growth, Fitrat said, and asked 
Deputy Secretary Wolin to take up this issue with IMF headquarters 
in Washington.  (Note: On February 16, the IMF Resident 
Representative told Treasury Attache that Afghan core inflation is 
still high, which necessitates IMF enforcement of the 22% CiC 
ceiling.  The Treasury Attach Office asked the IMF Resident 
Representative to engage the Central Bank as soon as possible on 
this issue.  End Note) 
 
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SUPPORT FOR DEPOSIT INSURANCE FUND 
---------------------------------- 
 
¶7. (SBU) Governor Fitrat raised the issue of creating a deposit 
insurance fund, noting that depositors have been seeking some form 
of guarantee.  Observing that the Central Bank had $21 million of 
the target $30 million deposit insurance fund on hand (with $10 
million contributions from DAB and MOF respectively and $1 million 
from the banks), Fitrat requested donor support for the $9 million 
shortfall.  Deputy Secretary Wolin pointed out that deposit 
insurance schemes in the United States are entirely funded by 
private banks and do not come from public funds.  Fitrat agreed that 
banks should eventually bear the full cost of deposit insurance and 
committed to withdrawing public funds over time, but argued that the 
infusion of public funds is necessary to start up the program and 
build confidence in the banking system. 
 
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STRENGTHENING PUBLIC FINANCIAL MANAGEMENT 
----------------------------------------- 
 
¶8. (SBU) Deputy Secretary Wolin also delivered a speech at the 
American University of Afghanistan to more than 100 students on the 
importance of strengthening public financial management systems to 
reduce opportunities for corruption and increase Afghan government 
capacity to manage development funds.  The American University of 
Afghanistan is Afghanistan's only private, not-for-profit 
institution of higher education and serves as the training ground 
for many of the country's future leaders. 
 
¶9. (SBU) Noting that the Treasury Department plans to send more 
advisors to strengthen Afghanistan's public financial management 
system, Deputy Secretary Wolin also described how advisors have 
already assisted Afghanistan to restructure its debt, streamline its 
budget process, improve its payment system for government employees, 
and stand up a debt management unit at the Ministry of Finance.  He 
argued that stronger public financial management systems would help 
address corruption and ensure resources reach their intended 
beneficiary. 
 
--------------------------------------------- -- 
LAUNCH OF THE FINANCIAL SERVICES ADVISORY GROUP 
--------------------------------------------- -- 
 
¶10. (SBU) Deputy Secretary Wolin emphasized the importance of a 
transparent and credible financial sector to the future of 
Afghanistan during a dinner hosted by Ambassador Eikenberry that 
helped formally launch the Financial Services Advisory Group (FSAG). 
 The FSAG -- which includes U.S., UK, EU, World Bank, and IMF 
participation, along with representatives from the Afghan financial 
sector and government -- will meet regularly to identify emerging 
issues, hear from industry leaders, and develop strategies to 
strengthen the formal financial sector. 
 
--------------------------------------------- ---------- 
BOOSTING REVENUE COLLECTION, IMPROVING BUDGET EXECUTION, 
AND ADDRESSING CORRUPTION 
--------------------------------------------- ---------- 
 
¶11. (SBU) In a February 11 meeting, Deputy Secretary Wolin discussed 
with Finance Minister Zakhilwal the importance of creating more 
transparent and accountable revenue and customs collection 
procedures, the "clustering concept" designed to better organize key 
ministries under proven reform leaders, increasing budget execution 
rates and effectiveness, and the need for more robust public 
 
KABUL 00000684  003 OF 003 
 
 
financial auditing of expenditures.  Zakhilwal noted that the 
Ministry of Finance had studied how to improve budget execution and 
was targeting the seven line ministries that execute 70% of the 
budget for technical support.  He identified a "lack of capacity" as 
the greatest obstacle to higher budget execution numbers.  Zakhilwal 
also expressed appreciation for Treasury's technical support in the 
areas of budget and debt management, and welcomed the addition of 
additional advisors in the area of internal audit. 
 
¶12. (SBU) Minister Zakhilwal claimed that anti-corruption efforts 
have improved revenue collection, which according to internal 
estimates, will surpass Afs 65 billion this year and represent a 
significant increase year-over-year.  (Note: The IMF target this 
year is Afs 54 billion.  End Note)  Wolin pressed the minister to 
replace ineffective management at state-owned Pashtany Bank, 
prompting Zakhilwal to respond that he would be "surprised" if new 
leadership were not in place in two weeks and cited the need to 
ensure that a "good CEO" replaces the current one. 
 
¶13. (SBU) (Note: On February 13, Deputy Minister of Finance for 
Customs and Revenue Gul Sabit told Treasury Attache that he had been 
confirmed by the shareholders of Pashtany Bank (which is essentially 
the Ministry of Finance) as the new CEO, pending confirmation by the 
Central Bank.  This is a significant breakthrough and a direct 
consequence of Deputy Secretary Wolin's one-on-one conversation with 
Finance Minister Zakhilwal.  The Central Bank later confirmed Sabit 
and he took over as CEO on February 19.  End Note) 
 
 
 
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STRENGTHENING SUB-NATIONAL GOVERNANCE 
------------------------------------- 
 
¶14. (SBU) At another meeting with Finance Minister Zakhilwal and 
Rural Rehabilitation and Development Minister Jarullah Mansoori, 
U.S. participants noted that strengthening sub-national governance 
requires greater efforts to facilitate the flow of information from 
the provinces to the center, while at the same time building greater 
budgeting capacity at the point of execution to manage resources 
flowing down.  To this end, Zakhilwal noted efforts by the Finance 
Ministry to strengthen their internal Treasury Department and to 
bring all mustofiat (Ministry of Finance regional office) heads 
together for more frequent meetings. 
 
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COMMENT 
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¶15. (SBU) Deputy Secretary Wolin's trip highlighted the critical 
need for Afghanistan to improve dramatically key areas of public 
financial management as part of its efforts to ensure long-term 
success.  Achieving our strategic objectives in Afghanistan relies, 
in large part, on the ability of the government to collect an 
increasing percentage of its annual expenditures through revenues 
from customs, minerals, and non-tax fees, etc., to budget 
effectively, and to deliver services on time and in alignment with 
need.  We must remain committed to strengthening the Central Bank 
and promoting a robust and transparent financial sector.  We will 
follow-up on the Deputy Secretary's meetings and aggressively push 
forward these themes. 
 
RICCIARDONE 
 
CLEARANCE PAGE 
 
Drafted by: RSJones, Treasury (x. 8369) 
 
 
Cleared by: 
 
MBoyse, CDDEA    ___ok________ Date:2/23/10 
NMFite, ECON        ok   Date: 2/22/10 
KMeyer, DEA     ok        Date: 2/21/10