VZCZCXRO3500
PP RUEHIK RUEHPOD RUEHPW RUEHYG
DE RUEHBUL #3277/01 3581259
ZNR UUUUU ZZH
P 231259Z DEC 08
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC PRIORITY 6523
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC 0708
RUCNAFG/AFGHANISTAN COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
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

UNCLAS SECTION 01 OF 04 KABUL 003277 
 
DEPT FOR SCA/FO, SCA/RA, AND SCA/A 
DEPT PASS AID/ANE 
DEPT PASS USTR FOR DELANEY AND DEANGELLIS 
DEPT PASS OPIC FOR ZAHNISER 
DEPT PASS TDA FOR STEIN AND GREENIP 
USOECD FOR ENERGY ATTACHE 
CENTCOM FOR CSTC-A 
NSC FOR JWOOD 
TREASURY FOR LMCDONALD, ABAUKOL, BDAHL, AND MNUGENT 
OSD FOR SHIVERS 
COMMERCE FOR DEES, CHOPPIN, AND FONOVICH 
 
SENSITIVE 
 
SIPDIS 
 
E.O. 12958 N/A 
TAGS: EFIN ECON EAID IMF PGOV AF
SUBJECT: AFGHANISTAN: IMF MISSION GIVES DOWNBEAT ASSESSMENT 
 
SUMMARY 
 
¶1. (SBU) An IMF staff mission has conducted the fifth review of 
Afghan performance under the Poverty Reduction and Growth Fund 
(PRGF) program and found shortcomings.    Their overall message was 
that GIRoA performance under the program, especially its fiscal 
aspects, is slipping and political-level support for it waning. 
Staff also raised concern about the health of the Afghan banking 
system and welcomed continued US assistance to strengthen 
supervisory capacity at the central bank.  The team said it will 
require the GIRoA to fulfill two prior actions relating to fiscal 
performance before it will recommend IMF Board completion of the 
review, tentatively planned for February 2009.  They expect 
implementation of these prior actions will be difficult, so 
postponed completion of the review is a possibility.  End Summary. 
 
GDP GROWTH SLOWS; INFLATION MODERATES 
 
¶2. (SBU) IMF staff forecast growth in real GDP for the Afghan fiscal 
year ending in March 2009 will be 3.0 to 3.5 percent, down from an 
earlier forecast of 7.5 percent and actual growth last year of 11.5 
percent.  The sharp deceleration was due to a double-digit decline 
in agricultural production this year, caused by drought.  Growth in 
non-agricultural output remains robust, estimated at 12 percent. 
Inflation declined from its peak of 40 percent (March 2008 over 
March 2007) to 25 percent now, and Fund staff expect the March 2009 
price level to be about 20 percent over March 2008.  Staff said they 
are not concerned about inflation. 
 
POOR FISCAL PERFORMANCE 
 
¶3. (SBU) IMF staff expressed concern about deteriorating Afghan 
fiscal performance, on both the revenue and spending sides, only a 
small part of which could be attributed to factors outside Afghan 
control.  Both problems are due in large part to a lack of 
government support outside the Ministry of Finance for revenue 
generation and restrained spending.  As a result, the GIRoA will 
have low cash balances at the end of the fiscal year in March, and 
could face arrears on current obligations such as civil service 
salaries unless it increases revenues or cuts expenditures.  In 
fact, it has been raising expenditures without a clear idea where 
the money will come from.  Fund staff said the GIRoA would face a 
deficit in its operating budget including grants for the next two 
years. 
 
¶4. (SBU) Spending.  IMF staff said the GIRoA hopes donors will cover 
the increase in teachers' salaries, equal to some $43 million.  But 
the Ministry of Education did not administer to donors' satisfaction 
a test of basic literacy and numeracy skills meant to weed out 
unqualified teachers, which was a commitment to justify the 
donation.  Indeed, in a meeting on December 15, Finance Minister 
Ahady urged donors to shift funds from development projects (e.g. 
building schools and purchasing text books) to cover higher teacher 
salaries.  Donors were unenthusiastic and complained that the salary 
increase was granted even though unqualified teachers have not been 
let go. 
 
¶5. (SBU) Additional spending pressure comes from GIRoA purchases of 
imported fuel used to subsidize DABM, the electricity utility, and 
$100 million to buy wheat, which the GIRoA is expected to give away. 
 IMF staff said that there is some evidence the GIRoA recognizes the 
need to rationalize spending, but they do not expect the government 
to take many tough decisions before the 2009 elections. 
 
¶6. (SBU) Revenues.  At the current pace of revenue collection, the 
GIRoA will miss PRGF revenue targets for the third quarter of Solar 
Year 1388 (ends December 21) by roughly 15 percent.  At the time of 
 
KABUL 00003277  002 OF 004 
 
 
the fourth PRGF review, the IMF agreed to reduce the revenue/GDP 
performance target for this fiscal year from 7.5 percent to 7.0 
percent.  Now Fund staff say Afghan performance will fall below even 
the reduced target, and a revised target remains under negotiation 
with the GIRoA. 
 
¶7. (SBU) Staff were also disappointed that customs revenues declined 
in nominal terms in the first seven months of this fiscal year, 
compared with the same period last year, even though inflation and 
the value of imports were up.  (Note: Total revenues increased in 
nominal terms but are still well below the program target.)  Staff 
said corruption in the Fuel and Liquid Gas Enterprise (FLGE), the 
government-owned fuel importer under the Ministry of Commerce and 
Industries, was responsible for a sharp decline in customs revenues 
from the northern border port of Hairatan.  They called for a change 
in FLGE leadership (see para 14).  Since customs revenues make up 40 
percent of total GIRoA revenues, the Fund puts special emphasis on 
the weak performance there. 
 
¶8. (SBU) Taxation of airlines, especially private carrier KamAir, is 
the other big revenue issue.  KamAir alone among private airlines 
has refused to pay taxes in recent months. MOF has been unable to 
win cooperation from the Transport Ministry to ground KamAir, while 
banks have refused to comply with MOF's attempts to garnish KamAir's 
bank accounts.  Reportedly under lobbying from owner Zamirai Kamgar, 
the President has established two committees under his office to 
look into airline taxation issues.  One committee is determining 
whether GIRoA should waive KamAir's back taxes as compensation for 
KamAir's losses from the 2007 Hajj operation.  The other committee 
is studying a proposal to reduce airlines' Business Receipts Tax 
from 20 percent to 10 percent.  IMF staff argue that both committees 
erode the authority of MOF to decide tax policy, and could lead to 
reduced revenue just when GIRoA badly needs cash. 
 
CONCERNS ABOUT AFGHAN BANKS 
 
¶9. (SBU) IMF staff expressed concern about the health of Afghan 
commercial banks and see an urgent need to strengthen the central 
bank's (DAB) supervisory capability.  They cited the collapse last 
month of a small bank, Development Bank of Afghanistan (DBA), which 
resulted from supervisors not seeing problems in time and giving 
owners too many chances to fix them.  Now that it has collapsed, DAB 
supervisors are absorbed in the clean-up and not paying enough 
attention to the health of larger Afghan banks.  Any problems at the 
larger banks would be harder for DAB to handle and have greater 
systemic impact. 
 
¶10. (SBU) Eighty-five percent of Kabul Bank's assets are loans, 
mostly overdrafts without a fixed repayment schedule (it is 
currently in the process of converting overdrafts to fixed-term 
loans).  It would be hard pressed to deal with any panic by its 
500,000 depositors.  At Azizi Bank, a more comfortable 60 percent of 
assets are loans, but the bank's shareholders -- and possibly the 
loan portfolio -- are heavily exposed to problems in the Dubai 
property market.  Both of these banks say they are taking steps to 
improve credit assessment and internal auditing, and DAB has 
increased regulatory requirements since the DBA collapse.  IMF staff 
do not see signs that the Afghan banking system faces a funding 
crisis, as was reported in the international press recently, but 
note that the health of banks is hard to judge because of weakness 
in supervisory capacity. 
 
¶11. (SBU) The IMF Mission met December 15 together with DAB Governor 
Fitrat, USAID and Treasury to discuss the state of capacity building 
efforts within banking supervision.  The IMF and DAB expressed 
satisfaction with USAID's plans to continue to provide advisors to 
improve the DAB's supervision capacity.  A new salary and incentive 
 
KABUL 00003277  003 OF 004 
 
 
structure is now in place, and should help reduce the high turnover 
the department has experienced.  Governor Fitrat also outlined steps 
that DAB is taking to strengthen banking supervision, including a 
reorganization of the department and the hiring of 15 new 
college-educated bank examiners, bringing the department's total 
staff to 50. 
 
BOTTOM LINE: TOUGH PRIOR ACTIONS REQUIRED 
 
¶12. (SBU) Fund staff said the patience of IMF Board members was 
fraying, as poor Afghan performance postponed the arrival of fiscal 
sustainability.  For this reason, before recommending completion of 
the fifth PRGF review, staff will insist on GIRoA fulfillment of two 
prior actions meant to improve government finances in the fiscal 
year starting next March.  First, the government must apply the 
Business Receipts Tax to imports, either by legislative enactment or 
Presidential decree.  Second, it must implement the MOU between the 
Finance and Commerce ministries on access by Customs officials to 
FLGE fuel depots, to check quantities and reduce corruption. 
 
¶13. (SBU) IMF staff said these steps are required to show GIRoA 
resolve to improve fiscal performance but will be difficult to 
implement.  A prior action for the fourth review was signing the MOU 
on depot access, but nothing beyond signature has been done.  If the 
GIRoA does not fulfill these two prior actions, completion of the 
fifth review will be postponed.  Staff hope that the prior actions 
are completed in late January or early February, allowing the fifth 
review to come before the IMF Board by late February.  Staff said 
that in the event of an extended delay the PRGF could be extended 
for up to one year.  This, in turn, could affect action at 
Afghanistan's HIPC completion point, planned for June 2009.  Staff 
said they did not discuss a possible successor program with the 
GIRoA during this review but would plan to during the sixth (and 
final) review. 
 
¶14. (SBU) According to the IMF and Minister Ahady, Minister of 
Commerce Farhang has pledged cooperation from his ministry in 
implementing the MOU on fuel depots. However, there are reasons to 
doubt that progress will be forthcoming.  The MOU would presumably 
deprive the powerful head of FLGE, Engineer Rozi, from collecting 
payments from fuel importers in exchange for his help in avoiding 
customs duties. It is unclear whether the Minister of Commerce has 
the political weight to constrict the activities of Rozi or remove 
him from power.  The MOU will focus on FLGE activities at the 
Hairaton border crossing with Uzbekistan, the entry point for 
roughly 70 percent of fuel imports into Afghanistan.  (Late breaking 
news: Minister Farhang was impeached by the Parliament on December 
20). 
 
COMMENT 
 
¶15. (SBU) Staff observe weak support from the Palace and other 
ministries for MOF efforts to raise revenues and meet IMF fiscal 
targets.  The ability of GIRoA to keep the IMF program on track will 
depend on the support of President Karzai and the rest of the 
Cabinet for the reforms pursued by Minister Ahady.  In a closed-door 
meeting with the IMF attended by Treasury Attache, Minister Ahady 
acknowledged "the disconnect" within GIRoA on its reform program and 
commitments to the IMF.  Referring to his recently submitted 
resignation letter, Ahady said he agreed to stay on as Finance 
Minister only after receiving a pledge from President Karzai to back 
the revenue collection effort and other reforms.  Ahady says he 
plans to take the IMF commitments to the "president and Cabinet," 
and "tell him to find someone else" for Finance Minister if support 
is not forthcoming. 
 
¶16. As of December 22, Ahady's advisors reported that he is close to 
 
KABUL 00003277  004 OF 004 
 
 
resigning. In addition to the perceived lack of support for economic 
reform and revenue generation, Ahady is frustrated with President 
Karzai's refusal to remove the Deputy Minister of Finance, 
Wahidullah Shahrani, with whom Ahady has had a running feud during 
the last year. 
WOOD