VZCZCXRO6599
PP RUEHPW
DE RUEHBUL #3334/01 3650725
ZNR UUUUU ZZH
P 300725Z DEC 08
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC PRIORITY 6571
INFO RUEHRC/USDA FAS WASHDC PRIORITY
RUCNAFG/AFGHANISTAN COLLECTIVE
RUEKJCS/OSD WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 02 KABUL 003334 
 
DEPT FOR SCA/FO, SCA/RA, AND SCA/A 
DEPT PASS AID/ASIA BUREAU 
USDA FOR FAS OA/GSM/MILLER 
DEPT PASS USTR FOR GERBER AND KLEIN 
DEPT PASS OPIC FORZAHNISER 
DEPT PASS TDA FOR STEIN AND GREENIP 
CENTCOM FOR CSTC-A, USFOR-A 
NSC FOR JWOOD 
OSD FOR SHIVERS 
COMMERCE FOR DEES, CHOPPIN, AND FONOVICH 
 
SIPDIS 
 
E.O.12958: N/A 
TAGS: EINV EFIN ENRG ETRD ECON AF FAS
SUBJECT: AFGHANISTAN RECONSTRUCTION TRUST FUND (ARTF) 
UPDATE 
 
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SUMMARY 
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¶1.  At the December 17 Quarterly Donors meeting, the 
Afghan government met with donors to discuss the 
Afghanistan Reconstruction Trust Fund (ARTF).  The 
Government of the Islamic Republic of Afghanistan 
(GIRoA) and the ARTF donors approved a proposal to 
reform the Recurrent Cost Window of the ARTF.  The 
proposal, drafted by a working group consisting of the 
Afghan Ministry of Finance and donors that included the 
United States, lays out a gradual decline in automatic 
budget support through the Recurrent Cost Window.  It 
also establishes an off-setting incentive mechanism to 
reward the government for achieving economic reform and 
revenue generation benchmarks to be agreed upon by 
GIRoA and donors during an annual consultation process. 
If these benchmarks are achieved, incentive funds would 
be made available as part of the following yearQs 
Recurrent Cost Window support.  This represents a key 
step in the future evolution of the ARTF from an 
emergency support mechanism to a program development 
fund, and is scheduled to be in place for the upcoming 
1388 budget year (March 2009 Q March 2010).  Formation 
of a technical working group is planned for January 
2009 with a mandate to produce a draft Financing 
Strategy by the next ARTF Quarterly Meeting, in March 
¶2009.  Program-based budgeting is an important step to 
align ARTF funding with the Afghanistan National 
Development Strategy (ANDS) to achieve Millennium 
Development Goals (MDG). 
 
¶2.  Members of the Technical Working Group that formed 
as a result of the ARTF Donors Committee meeting in 
September 2008 to review the findings of the ARTF 
External Evaluation included the Ministry of Finance 
(Budget, Revenue, Fiscal Policy, MinisterQs Office), 
U.S., UK, Italy, Germany, EC and the IMF.  The World 
Bank facilitated the working groupQs discussions 
leading up to the December meeting.  END SUMMARY. 
 
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AFGHANISTAN RECONSTRUCTION TRUST FUND (ARTF) 
-------------------------------------------- 
 
¶3.  The ARTF is a multi-donor trust fund administered 
by the World Bank and funded by 27 donors; mobilizing 
over USD 2.4 billion by the end of solar year 1386 
(March 2008).  During the six years since it was 
established in 2002, the ARTF has been the main source 
of pooled financing for GIRoAQs recurrent budget, but 
has increasingly supported priority investments in the 
GovernmentQs reconstruction program.  At the end of 
solar year 1386, projects covering infrastructure, 
rural development, technical assistance (TA), capacity 
development, and education had a total commitment of 
over US $750 million. 
 
¶4.  For solar year 1387 (March 2008 Q March 2009), 
donors pledged US $670 million, bringing the six-year 
total to over US $3 billion.  The main ARTF donors are 
the United Kingdom, Canada, United States, European 
Commission, Netherlands, Norway, and Germany. Iran, 
India and Arab states are also members of the ARTF. 
 
¶5.  Afghanistan is subject to exogenous shocks. Large 
volumes of off-budget assistance (i.e. the External 
Budget) mean unpredictability for the future 
requirements of the core operating budget (including 
implications of external budget investment on the 
future core operating expenditures). Insecurity, 
national elections, and public administration reform 
also create new and uncertain pressures on 
expenditures.  Therefore, any overall and rapid decline 
in ARTF Recurrent Cost (RC) support would aggravate 
AfghanistanQs fiscal position, especially in the short- 
term. 
 
KABUL 00003334  002 OF 002 
 
 
 
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NEW ARTF RECURRENT COST WINDOW PROGRAM 
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¶6.  Donors and GIRoA approved a new ARTF Recurrent Cost 
Window mechanism that has the following objectives: 1) 
predictable ARTF RC funding over the medium-term, 
improving aid effectiveness; 2) support for GIRoAQs 
core policy reforms, including domestic revenue 
generation; 3) strengthening the ARTF as a platform for 
policy dialogue between donors and Government; and 4) 
clearer strategic objectives for the ARTF RC Window. 
 
¶7.  Starting in solar year 1388 (March 2009 Q March 
2010), ARTF RC allocations each year would be twofold; 
the first part would consist of a sum of a baseline 
guaranteed amount of annual support.  The baseline 
component will phase out over a set period Q thereby 
establishing a predictable exit strategy from automatic 
ARTF support to the operating budget.  This exit 
strategy is to prevent the ARTF from creating perverse 
revenue generation incentives.  The share of ARTF RC 
support that is linked to the governmentQs core reform 
program will increase over time.  Importantly, this 
allows for a potential ARTF RC window of approximately 
US $270 million for the next three years, an amount 
that is consistent with GIRoAQs Mid-term Fiscal 
Framework (MTFF) in the ANDS. 
 
¶8.  The second component of the ARTF RC allocations 
would be a policy and performance based initiative 
scheme; a multi-year, whole-of-government program to 
support GIRoAQs core reform program.  Although specific 
benchmarks for Solar Year 1388 and the details of the 
revenue matching grant program are still being 
finalized, GIRoA and the donors approved common themes 
in three areas: revenue generation, public sector 
governance, and private sector development.  For 
example, an overall precondition for the incentive 
component is GIRoA remaining on track with the Poverty 
Reduction Growth Facility (PRGF) program and improved 
audit of core budget expenditures.  At least some 
benchmarks will likely reinforce measures that GIRoA 
has committed to under the IMF program.  As the scheme 
proceeds, it is expected that policy discussions will 
include more line ministries and reflect structural 
benchmarks that target cross-government reforms. 
 
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NEXT STEPS 
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¶9.  The World BankQs 2008 independent external 
evaluation of the ARTF also recommended that it develop 
a Financing Strategy in order to maximize the 
predictability, efficiency and transparency of ARTF 
resource allocation.  Such a Financing Strategy would 
establish the principles by which investment funds are 
allocated.  Objectives of the Financing Strategy would 
be to: 1) increase budget predictability and aid 
effectiveness; 2) increase alignment of ARTF resources 
with government priorities and programs; 3) maintain & 
strengthen donor support for ARTF as a mechanism; 4) 
increase transparency of ARTF decision-making with 
regards to resource allocation; and 5) increase the 
intra-year flexibility of ARTF cash management by 
reducing preferencing at the project level.  A 
technical working group will convene in January 2009 to 
finalize benchmarks for solar year 1388, and settle on 
the exact workings of the revenue matching grant 
program.  It also has a mandate to produce a draft 
Financing Strategy by the next ARTF Quarterly Meeting 
in March 2009. 
 
 
Wood