VZCZCXRO4231
PP RUEHDBU RUEHIK RUEHYG
DE RUEHBUL #0684/01 0620547
ZNR UUUUU ZZH
P 030547Z MAR 07
FM AMEMBASSY KABUL
TO RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY 0332
RUEHC/SECSTATE WASHDC PRIORITY 6484
INFO RUCNAFG/AFGHANISTAN COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RUEHML/AMEMBASSY MANILA 1557
RUEAIIA/CIA WASHINGTON DC
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RHMFIUU/HQ USCENTCOM MACDILL AFB FL
RUEKJCS/JOINT STAFF WASHINGTON DC
RUEKJCS/OSD WASHINGTON DC
RUEKJCS/SECDEF WASHINGTON DC
RUEHGV/USMISSION GENEVA 6688
RUCNDT/USMISSION USUN NEW YORK 3705

UNCLAS SECTION 01 OF 03 KABUL 000684 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EB/IFD/ODF, SCA/FO, AND SCA/A 
TREASURY FOR LMCDONALD, ABAUKOL, AND JCIORCIARI 
NSC FOR AHARRIMAN 
OSD FOR BRZEZINSKI 
 
E.O. 12958: N/A 
TAGS: EAID EFIN PREL AF
SUBJECT: IDA 15 NEGOTIATIONS GOAL - SUSTAIN MULTILATERAL 
DEVELOPMENT BANK FUNDING LEVELS FOR AFGHANISTAN 
 
REF: BERLIN 215 
 
(U) This message contains SENSITIVE BUT UNCLASSIFIED 
information.  It is predecisional and not for release outside 
the U.S. Government.  Please protect accordingly.  Not for 
Internet Distribution. 
 
SUMMARY 
 
1.(SBU)  As mentioned in reftel, Afghanistan could face 
declining assistance from the multilateral development banks 
beginning in FY-08 because Afghanistan's status as a 
"post-conflict" country will begin to phase out over the next 
three years.  While figures are only speculative at this 
time, the decline could be as much as 75%, from $200 million 
in FY-10 to $50 million in FY-11.  Such a decline would not 
be consistent with the reality of Afghanistan's needs and the 
current virulent insurgency in parts of the country.  In 
addition, the World Bank's $400 million London Compact pledge 
for FY-09 and FY-10 could be cut if the IDA-15 replenishment 
negotiations produce insufficient donor contributions.  A 
decline in the World Bank budgets would have serious negative 
consequences for economic development and for the U.S. 
ability to influence economic policy decisions.  U.S. IDA 15 
negotiators should incorporate into their strategy the goal 
of ensuring sufficient donor contributions to lock in the 
World Bank's $400 million London Compact pledge for FY-09 and 
FY-10.  U.S. negotiators should also factor into their 
calculations the very real necessity to sustain this level of 
funding at least through the end of IDA-15 (FY-11).  This 
will require negotiating an extension of "post-conflict" 
status or some other characterization that will provide the 
World Bank with justification to sustain its current higher 
level of funding allocations.  A similar issue will arise in 
ensuring adequate future Asian Development Bank Funding 
levels for Afghanistan.  END SUMMARY. 
 
IDA 15 NEGOTIATIONS AND AFGHANISTAN 
 
2.(U) Replenishment negotiations (IDA 15) for the World 
Bank's International Development Agency and the ADB's Asia 
Development Fund (ADF), the concessional windows of both 
multilateral banks, will soon commence.  IDA replenishments 
are expected to conclude in 2007, while ADF is expected to 
conclude in 2008.  Funding under IDA 14 will expire in FY-08. 
 During the Afghanistan Compact negotiations in London in 
2005, the World Bank pledged $1.2 billion over five years and 
the ADB pledged $1 billion to rank second and third after the 
United States among donors.  The World Bank pledge was 
structured in a three plus two format - $800 million of IDA 
14 money (FY-06, 07, and 08) and $400 million in IDA 15 money 
for FY-09 and 10.  There is a major concern about the 
available funding for the second phase of the 5-year pledge, 
which was heavily caveated by the level of donor 
contributions to IDA 15 and the performance of the Afghan 
government.  According to the World Bank office in Kabul, a 
preliminary assessment of the GOA's performance relative to 
other post-conflict countries is positive.  U.S. negotiators 
should encourage strong donor commitments to IDA 15 as well 
as firm up the Bank's commitment to the $400 million 
allocation for FY-09 and 10. 
 
3.(U) The World Bank's large Afghanistan Compact pledge in 
London was made possible because the Bank placed Afghanistan 
in its special post-conflict status.  According to Bank 
officials, this status will be phased out under current 
procedures at the end of FY-10/11, at which point Afghanistan 
will become a normal IDA country and must compete for funds 
globally.  The IDA competition criteria are based on key 
performance criteria - the quality of economic management, 
structural policies, public sector management and 
institutions(governance), and policies for social inclusion 
and equity.  While Afghanistan looks reasonably good when 
compared to most post-conflict countries, it will need to 
 
KABUL 00000684  002 OF 003 
 
 
improve drastically its record on corruption, governance, and 
public financial management to compete with normal IDA 
countries.  Assuming little change in these areas, the FY-11 
World Bank allocation will fall substantially, to perhaps as 
low as $40-50 million. 
 
FISCAL POLICY IMPACT OF THE WORLD BANK PROGRAM 
 
4.(U) World Bank contributions to the Afghan operating budget 
help the Afghans finance recurrent spending priorities while 
staying within IMF budget limits.  A significant proportion 
of World Bank allocations in the past two years has gone to 
support Afghanistan's operating/recurrent cost budget. 
Another $80 million is slated for this purpose in FY-08.  The 
grant or no-interest loan basis for the World Bank 
contributions also assists the government in its efforts to 
keep the budget in balance by eliminating or reducing 
Afghanistan's debt repayment burden.  The loss of World Bank 
budget support in future years could seriously affect Afghan 
government operations, including support for the security 
forces. 
 
MICROECONOMIC IMPACT OF THE WORLD BANK PROGRAM 
 
5.(U) The World Bank is financing development projects across 
the economy and throughout the country.  At the project 
level, perhaps the World Bank's greatest contribution is in 
government capacity building.  All Bank project funding 
passes through the government's development budget, giving 
the finance ministry and the line ministries invaluable 
public financial management experience.  The World Bank 
provides funding for the operation of the Afghanistan 
National Development Strategy secretariat, which manages the 
JCMB/ANDS donor coordination process.  The Bank is also 
supporting the PRSP - Poverty Reduction Strategy Paper 
process.  Other areas in which the Bank is active include: 
health (including Avian Influenza and HIV), public 
administration Reform, rural development, the National 
Solidarity Program, irrigation, horticulture, sub-national 
governance, power (construction of the final leg of the NEPS 
transmission line), and mining/hydrocarbon legislation. 
Obviously, a precipitous decline in budgeting would force the 
World Bank to either substantially reduce its effort across 
this project portfolio or concentrate its effort in a few 
sectors.  Both options would have a negative affect on the 
pace of development. 
 
POLICY IMPACT OF THE WORLD BANK PROGRAM 
 
6.(U) In the JCMB/ANDS donor coordination system, donors 
garner greater influence in the policy and development 
process the more resources they bring to the table.  As 
Afghanistan's second largest donor, the World Bank has used 
its influence in the JCMB to keep the Afghans on track to 
meet their Afganistan Compact objectives, without sacrificing 
key policy requirements.  The Bank's voice in Consultative 
Group and Working Group meetings can be effective in pulling 
together consensus on the way forward - as it is doing on 
energy policy.  The Bank has been decisive in deflecting 
misguided initiatives, whether from Afghans or other donors, 
back onto the track envisioned in London.  The fact that 
donors can alternate leadership on key issues demonstrates 
broad donor support for Afghanistan to the government and to 
the public.  A smaller World Bank budget would imply a 
smaller staff, less ability to lead, less influence, and 
would necessarily place more of the burden on the U.S. to 
lead the development effort here. 
 
ASIAN DEVELOPMENT BANK 
 
7.(U) Likewise, the Asian Development Bank programming is an 
integral component of Afghanistan's development strategy.  In 
2007, the ADB plans to invest $150 million to help complete 
the national highway system and $50 million to further 
 
KABUL 00000684  003 OF 003 
 
 
develop power capacity by linking Afghanistan with Tajikistan 
and Uzbekistan.  ADB activities have focused on the national 
roads, power and gas lines, and natural resource management 
(agriculture, irrigation, and environment) sectors, together 
with some programs on public financial management and public 
administration reform.  The ADB is also providing significant 
capacity building technical assistance to Afghan economic 
ministries. 
 
COMMENT AND ACTION REQUEST 
 
8.(SBU) If we do not act during the IDA 15 negotiations, 
Afghanistan could suffer a precipitous decline in 
concessional project funding from the multilateral 
development banks at a critical juncture in its economic 
development trajectory.  We believe such a decline is likely 
to have negative financial, programmatic, and policy impacts 
on Afghanistan's medium term economic development.  We simply 
cannot afford to lose the World Bank's positive leadership 
and financial contributions.  The key seems to lie with the 
World Bank's post-conflict status designation for 
Afghanistan.  It is not intuitive for the World Bank or the 
Asian Development Bank to substantially reduce its role in a 
situation in which the government is facing an active 
insurgency in some parts of the country.  However, we need to 
take care not to overstate the situation.  A designation of 
Afghanistan as a nation in wide-spread conflict could also 
have a negative impact as it would be difficult for these 
multilateral development banks to maintain a presence here 
under that context (as we have seen in Iraq).  We understand 
there is some talk of using the term "conflict-affected" to 
describe the situation, but we would need to further explore 
the definition and impact of such a designation. 
 
9.(SBU) As the largest shareholder in the multilateral 
development banks, U.S. leadership will be key to developing 
consensus with other shareholders and senior bank management 
on the necessity of sustaining multilateral development bank 
funding levels for Afghanistan beyond the currently 
anticipated end of Afghanistan's World Bank "post-conflict 
status."  U.S. negotiators are requested to include in the 
strategy the twin objectives of ensuring sufficient IDA 15 
contributions to guarantee the World Bank's $400 million 
pledge for FY-09 and 10 and of sustaining those levels of 
funding at least through IDA-15 (which ends in FY-11). 
Similar objectives should be shaped to ensure adequate future 
ADB funding for Afghanistan.  END COMMENT AND ACTION REQUEST. 
NEUMANN