VZCZCXRO4554
PP RUEHDBU RUEHIK RUEHYG
DE RUEHBUL #0946/01 0831015
ZNR UUUUU ZZH
P 241015Z MAR 07
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC PRIORITY 6992
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC 0400
RUCNAFG/AFGHANISTAN COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RUEHMO/AMEMBASSY MOSCOW 2890
RUEHKU/AMEMBASSY KUWAIT 0402
RUEHSF/AMEMBASSY SOFIA 0022
RUEHJI/AMCONSUL JEDDAH 3349
RUEHRH/AMEMBASSY RIYADH 4257
RUEKJCS/OSD WASHINGTON DC
RUEKJCS/JOINT STAFF WASHINGTON DC
RUEKJCS/SECDEF WASHINGTON DC
RUEABND/DEA HQS WASHINGTON DC
RHMFIUU/HQ USCENTCOM MACDILL AFB FL
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEAIIA/CIA WASHINGTON DC
RHEFDIA/DIA WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUCNDT/USMISSION USUN NEW YORK 3797

UNCLAS SECTION 01 OF 03 KABUL 000946 
 
SIPDIS 
 
DEPT FOR SCA/FO, SCA/RA, AND SCA/A 
CENTCOM FOR CG CFC-A 
NSC FOR AHARRIMAN 
TREASURY PASS TO LMCDONALD, ABAUKOL, AND JCIORCIARI 
OSD FOR BRZEZINZSKI 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958 N/A 
TAGS: EFIN EAID ECON AF
SUBJECT: UPDATE ON AFGHANISTAN DEBT FORGIVENESS AND DEBT 
RESTRUCTURING 
 
REFTEl: KABUL 344 
 
SUMMARY 
 
1.(SBU) Afghanistan and Germany are expected to sign their bilateral 
debt restructuring agreement later in March.  The GOA sent Russia 
comments and suggested edits to the first draft of their bilateral 
debt reduction agreement on or about March 12.  The Afghans hope to 
sign this agreement sometime in April.  Debt arrears to the Kuwait 
Fund for Arab Economic Development prevent it from becoming a donor 
to Afghanistan.  Afghanistan's debt to the Czech Republic appears to 
have been assigned to a private sector actor.   The GOA has not yet 
decided to recognize the new creditor.  The Bulgarians have not 
responded to official GOA communications on the status of this $47 
million debt.  Assuming Afghanistan's second IMF PRGF Review is 
positive, the Russian bilateral is completed, and an IMF debt 
sustainability analysis is completed, Afghanistan could reach HIPC 
"Decision Point" in mid-2007.  END SUMMARY. 
 
BILATERAL DEBT REDUCTION AND RESTRUCTURING 
 
2.(SBU) Following Afghanistan's agreement with the Paris Club (PC) 
and its PC creditors in July 2006, the country has been working on 
completing its Paris Club bilateral agreements with Russia, Germany 
and the United States.  A status update on these three negotiations 
follows. 
 
- U.S.:  The bilateral agreement was signed in September 2006 and it 
entered into force in March 2007. The amount owed was $112 million 
as of March, 2006.  (NOTE -Due to type of debt originally extended, 
immediate reduction in debt amounts not provided). 
 
- Germany:  An agreement was reached on the bilateral agreement 
document, and the GOA expects to sign it in March, 2007.  Germany 
provided the "debt reduction" option to Afghanistan which will mean 
an immediate 67% reduction of the outstanding debt. The amount owed 
is $44.1 million as of March, 2006.  It will be reduced to $14.5 
million upon signing. 
 
- Russia:  The first draft of the bilateral agreement was received 
from Russia on February 20, 2007.  The Afghan authorities completed 
their review and sent their comments and suggested edits to Russia 
on or about March 12.  Russia provided the "debt reduction" option 
to Afghanistan meaning an immediate 67% reduction (in addition to 
the upfront 80% reduction from Russia) when the agreement is signed. 
 The amount owed as of March 2006 was $11.1 billion.  Upon signing 
of the bilateral agreement, this debt will be reduced to 
approximately $731 million.  The GOA hopes to complete negotiations 
with Russia in April. 
 
3.(SBU) Each of the above creditors has agreed to forgive 100% of 
Afghanistan's debt owed to them when Afghanistan successfully 
completes a program under the Heavily Indebted Poor Country (HIPC) 
initiative.  The HIPC initiative is a program sponsored by the IMF 
and the World Bank to provide debt relief to the world's poorest 
countries.  Afghanistan is in the process of trying to qualify for 
the program at this time. 
 
4.(SBU) Afghanistan's three Paris Club creditors have also agreed to 
capitalize the interest that will accrue on the restructured 
indebtedness through March, 2009, in order to lessen the financial 
burden on the country.  The total debt of the three creditors above 
is approximately $11.3 billion as of March 31, 2006, the measurement 
date in the Paris Club agreement. 
 
5.(SBU) In addition to the Paris Club creditors above, Afghanistan 
 
KABUL 00000946  002 OF 003 
 
 
owes six other bilateral creditors approximately $165 million. 
These debts have not been serviced in recent years. In conjunction 
with the Paris Club agreement and Afghanistan's expected entry into 
the HIPC process in 2007, the country plans to approach these 
creditors this year for debt relief and/or debt restructuring to 
comply with its Paris Club agreement.  An update of the status of 
three of the six follows. 
 
- Kuwait Fund for Arab Economic Development (approximately $19 
million):  The Kuwait Fund has been seeking a restructuring of this 
debt for several years. The Kuwait Fund has indicated verbally to 
the Minister of Finance at the World Bank/IMF annual meetings in 
Singapore (Sept. 2006) that it would provide debt restructuring 
based on the terms that Afghanistan receives as part of the HIPC 
process.  We expect meetings with the Kuwait Fund in the coming 
months to begin this process.  Kuwait has indicated that having this 
debt in arrears is preventing it from providing grant aid to 
Afghanistan. 
 
- Czech Republic (former Czechoslovakia) (approximately $64 
million):  The Czech Republic assigned this debt to a private party 
in Iran in 2002, and it has now been assigned again in 2006 to a 
company in Germany.  The Government of Afghanistan has not 
determined whether to recognize this debt at the present time. In 
October, 2005, Slovakia forgave its share of the amounts owed to the 
former Czechoslovakia ($29.3 million, including principal and 
interest). 
 
- Bulgaria (approximately $47 million): Bulgaria has provided no 
official response to Afghanistan's numerous letters for specific 
debt information. They have been informed that Afghanistan is 
pursuing HIPC status but no information has been forthcoming from 
the Bulgarian authorities.  Bulgaria alleges that about $600,000 of 
its debt is owed to private companies but has provided Afghanistan 
with no specific details on these cases. 
 
6.(SBU)  Afghanistan has recently concluded a loan agreement with 
the Saudi Fund for Development.  It will not be subject to Paris 
Club/HIPC debt relief as it was only signed and funded within the 
last 12 months. 
 
MULTILATERAL DEBT 
 
7.(SBU) Afghanistan's main multilateral creditors are the World Bank 
and the Asian Development Bank. Arrears to these entities were paid 
(via a grant from a donor) in 2002, and they have been active 
lenders (and grant providers) to the country in recent years.  The 
amount owed to these two multilateral lenders is approximately $630 
million as of December 2006.  The World Bank is expected to provide 
flow relief (i.e., suspension of debt service payments) on 
qualifying loans upon Afghanistan's attaining Decision Point in the 
HIPC process and 100% forgiveness on these same loans when 
Completion Point under HIPC is reached. 
 
8.(SBU) While Afghanistan is expecting the Asian Development Bank to 
provide some debt relief, the extent of the relief is not known at 
this time. 
 
9.(SBU) An amount of approximately $2 million is owed to the OPEC 
Fund for International Development, and this debt has not been 
serviced in recent years. 
 
10.(SBU) Afghanistan also has two loan commitments from the Islamic 
Development Bank, but no disbursements have been made.  They will 
not be subject to debt relief under HIPC. 
 
 
KABUL 00000946  003 OF 003 
 
 
RECENT EVENTS 
 
11.(SBU) IMF and World Bank missions recently visited Kabul (late 
January-early February) to work with the debt management unit of the 
Ministry of Finance on reconciliation and verification of its 
bilateral and multilateral debts.  With the data gathered by the 
missions, a debt sustainability analysis will be prepared which 
should demonstrate Afghanistan's eligibility for the HIPC program. 
The GOA is looking for the IMF and World Bank to declare that 
Afghanistan is "HIPC eligible" in April 2007. Preliminary 
discussions and negotiations were also held on HIPC "triggers" or 
benchmarks, and it is expected that the negotiations on the 
benchmarks will be finalized in March. These benchmarks will have to 
be achieved in the coming years in order for Afghanistan to achieve 
"Completion Point" under HIPC.  The earliest estimate of reaching 
"Completion Point" is mid-2009, other things being equal. 
 
12.(SBU) The second review under the IMF's Poverty Reduction and 
Growth Facility (PRGF) will take place in late April.  After this 
mission, another debt sustainability analysis will be conducted 
(based on updated debt and export numbers).  The GOA expects this 
analysis to form the basis of a mid-2007 IMF and World Bank 
notification that Afghanistan has reached its HIPC "Decision Point." 
 After being granted HIPC Decision Point status, the World Bank 
should suspend some required debt service payments.  Afghanistan 
must continue to maintain satisfactory performance under its PRGF 
program with the IMF in order to stay on track to reach the HIPC 
"Completion Point." 
 
COMMENT 
 
13.(SBU) Overall, the process for bilateral and multilateral debt 
relief is going well. Completion of bilateral negotiations with 
Russia should put Afghanistan in position for a favorable IMF/World 
Bank notification that Afghanistan has reached its HIPC "Decision 
Point."  This will have important positive affects on the country's 
cash flow situation and could help with its credit rating.   The key 
will be the GOA's meeting its IMF PRGF program benchmarks.  We 
understand that the GOA believes it is in fairly good shape, so a 
HIPC "Decision Point" announcement in mid-2007 is not out of the 
question.  END COMMENT. 
 
 
NEUMANN