VZCZCXRO1542
PP RUEHDBU RUEHPW
DE RUEHBUL #2548/01 2170558
ZNY CCCCC ZZH
P 050558Z AUG 07
FM AMEMBASSY KABUL
TO RUEATRS/DEPT OF TREASURY WASH DC PRIORITY
RUEHC/SECSTATE WASHDC PRIORITY 9509
RUEHZG/NATO EU COLLECTIVE
RUEHML/AMEMBASSY MANILA 1596
RUEAIIA/CIA WASHINGTON DC
RUEHGV/USMISSION GENEVA 6729
RUEKJCS/JOINT STAFF WASHINGTON DC
RUCNDT/USMISSION USUN NEW YORK 4193
RUEKJCS/OSD WASHINGTON DC
RHMFISS/HQ USCENTCOM MACDILL AFB FL
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEKJCS/SECDEF WASHINGTON DC
INFO RUCNAFG/AFGHANISTAN COLLECTIVE

C O N F I D E N T I A L SECTION 01 OF 03 KABUL 002548 
 
SIPDIS 
 
NOFORN 
SIPDIS 
 
DEPT FOR EB/IFD/ODF, SCA/FO, AND SCA/A 
DEPT FOR DAS JOHN GASTRIGHT 
DEPT PASS AID/ANE 
DEPT PASS OPIC FOR MOSBACHER AND ZAHNISER 
TREASURY FOR ABAUKOL, MNUGENT, BDAHL 
NSC FOR AHARRIMAN 
OSD FOR SHIVERS 
 
E.O. 12958: DECL: 08/05/2017 
TAGS: TAGS
SUBJECT: AFGHANISTAN - PRIVATE READOUT IMF MISSION 
CONCLUSIONS FROM JULY VISIT 
 
REF: KABUL 1746 AND SECSTATE 82558 
 
Classified By: Classified By: Ambassador William Wood for reasons 
1.4(b)&(d). 
 
(U) The information in this message derives from a private 
readout from the IMF Mission to Afghanistan.  It is for 
internal USG use only.  Please protect accordingly. 
 
SUMMARY 
 
¶1. (C/NF) The recent IMF mission focused on revenue 
targets, ad hoc tariff decisions, banking supervision, and 
progress on the Afghanistan National Development Strategy 
(ANDS).  The IMF continues to raise concerns about 
increased political interference in tax and customs 
collections.  While the Finance Ministry slightly exceeded 
its annual revenue targets in Afghan Fiscal Year 1385 
(March 21-March 20) taking in $575 million, it was behind 
on its 1386 first quarter target by 8-9 percent.  The 
quarterly targets are not as significant as the annual 
target ($715 million for 1386), but this shortfall does 
signal the importance of GOA carefully managing revenue 
collection and developing a simple, transparent tax and 
tariff regime that is easier to implement and enforce. 
 
¶2. (C/NF) The IMF mission visited Kabul in July to conduct 
a staff review of the Government of Afghanistan's (GOA) 
compliance with the performance targets and structural 
benchmarks in the Poverty Reduction and Growth Facility 
(PRGF) arrangement.  This was in advance of the third full 
review of the PRGF in October-November 2007. 
 
END SUMMARY. 
 
ON-GOING REVENUE ISSUES 
 
¶3. (C/NF) The IMF spent substantial time discussing 
concerns about the GOA's ad hoc tariff decisions.  They 
have asked GOA to reverse the 40 percent tariff on bottled 
drinks to its previous 20 percent and to remove the 
discretionary application of the 1 percent tariff on 
certain imported raw materials and intermediate goods. 
This protectionist response could lead to increased 
smuggling, possibly reducing GOA revenues.  An agreement 
was reached between the IMF and GOA to reduce the bottled 
drinks tariff to 20 percent within 18 months and to develop 
a list of products that would receive the 1 percent tariff, 
thus eliminating its discretionary application. 
 
¶4. (C/NF) However, the IMF said there were clear signals in 
their meeting with President Karzai that more ad hoc 
protectionist tariffs will be introduced.  According to the 
IMF mission chief, Finance Minister Ahadi argued against 
such tariff measures in the meeting with the President but 
Dr. Nadiri, the President's Senior Economic Advisor, argued 
for them.  It seems the President has been swayed toward 
the protectionist position.  Based upon the President's 
previous decision to support the two ad hoc tariff measures 
and his comments in that meeting, this is going to be an 
on-going struggle for the IMF and international donors who 
do not support such protectionist measures.  GOA's 
rationale for such decisions is the need to help domestic 
producers, but this is more of a simple, quick fix for such 
producers who would likely benefit more from improvements 
in the overall investment climate (e.g., provision of 
reliable and inexpensive electricity). 
 
¶5. (C/NF) There remains continued concern about political 
influences in tax policy and collection, and pressures from 
outside the Ministry of Finance (MOF) by investigative 
 
KABUL 00002548  002 OF 003 
 
 
agencies that have led to a substantial loss of staff from 
MOF's Large Taxpayers Office (LTO).  The office is down to 
12 staff from 35.  The deputy director of the LTO is now 
back at work (after having been suspended for several 
months) and MOF is moving staff from other divisions to 
help with revenue collection, but two on-going 
investigations continue (one by the Attorney General's 
Office and the other by the General Administration Against 
Corruption, the GIACC). 
 
¶6. (C/NF) The IMF mission chief spoke frankly with Finance 
Minister Ahadi about the overall situation.  Having come 
from his first meeting with the President, the mission 
chief expressed a greater understanding of range of 
opinions on economic and tax policy.  The IMF mission chief 
also raised these concerns with Ambassador Wood in a 
separate bilateral meeting. 
 
FISCAL SUSTAINABILITY CHALLENGES 
 
¶7. (C/NF) Of course, the revenue situation impacts the 
ability of GOA to meet its international commitment to 
cover its recurrent expenses.  GOA has already acknowledged 
that it expects to be delayed in meeting this commitment to 
cover 58% of recurrent expenses with revenue by two years 
until 2012-2013, which will be compounded if revenue 
problems continue at the same time as expenditure pressures 
increase. (NOTE:  On this IMF trip, the GOA did not raise 
new expenditures pressures with the IMF, but they are 
expected to do so around the time of the GOA's mid-fiscal 
year budget review in October when the mission is next in 
Kabul.) 
 
BANKING SUPERVISION 
 
¶8. (C/NF) The IMF view is that banking supervision has not 
kept up with the growth of the commercial banking sector. 
In meetings with the Da Afghanistan Bank's (DaB) First 
Deputy Governor, the IMF was advised that DaB plans to 
increase staff on bank supervision and will prepare a plan 
to address gaps in the area. 
 
ANDS DEVELOPMENT 
 
¶9. (C/NF) The mission was pleased that MOF plans to take 
the lead on the costing of the budget impact of sector 
strategies in order to estimate the costs of the overall 
ANDS.  Consistent with the development of Poverty Reduction 
Strategy Papers in other countries, the IMF has advised the 
Ministry that a partial costing of the ANDS covering major 
expenditures will be acceptable in the short term. 
 
HIPC INITIATIVE PROGRESS 
 
¶10. (SBU/NF) In early July, the World Bank and IMF Boards 
approved the HIPC triggers for Afghanistan and granted HIPC 
Decision Point status, making the country eligible for 
multilateral debt relief.  A partially costed ANDS has to 
be successfully implemented for 1 year to reach HIPC 
Completion Point and GOA has to continue to achieve the 
reforms under the IMF PRGF and achieve all HIPC triggers or 
benchmarks.  GOA hopes to achieve Completion Point around 
March 2009. 
 
¶11. (SBU/NF) Under the Paris Club agreement, GOA has signed 
bilateral debt agreements with the U.S. and Germany and is 
expected to sign a bilateral agreement with Russia this 
month. 
 
COMMENT 
 
 
KABUL 00002548  003 OF 003 
 
 
¶12. (C) Post will continue to closely follow the revenue 
situation, and encourage GOA at all levels that such ad hoc 
tariff decisions are not advisable.  Per SECSTATE 82558, 
Embassy staff has raised these tariff concerns with 
officials from the Ministries of Finance and Commerce. 
 
END COMMENT. 
DELL