VZCZCXRO8543
PP RUEHDBU RUEHIK RUEHPOD RUEHPW RUEHYG
DE RUEHBUL #0317/01 0421344
ZNR UUUUU ZZH
P 111344Z FEB 09
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC PRIORITY 7334
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC 0727
RUCNAFG/AFGHANISTAN COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RUEABND/DEA HQS WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 03 KABUL 000317 
 
DEPT FOR SCA/FO, SCA/RA, AND SCA/A 
DEPT PASS AID/ANE 
DEPT PASS USTR FOR DELANEY AND DEANGELIS 
DEPT PASS OPIC 
DEPT PASS TDA FOR STEIN AND GREENIP 
USOECD FOR ENERGY ATTACHE 
CENTCOM FOR CSTC-A 
NSC FOR JWOOD 
TREASURY FOR MHIRSON, ABAUKOL, BDAHL, AND MNUGENT 
OSD FOR SHIVERS 
COMMERCE FOR DEES, CHOPPIN, AND FONOVICH 
 
SENSITIVE 
 
SIPDIS 
 
E.O. 12958 N/A 
TAGS: EFIN ECON EAID PREL IMF AF
SUBJECT: IMF AND AFGHANISTAN AGREE ON TERMS FOR COMPLETING THE FIFTH 
REVIEW; BALL IN AFGHANS' COURT 
 
REF: A) State 7480  B) 08 Kabul 3277 
 
¶1. (SBU) Summary.  IMF staff have reached agreement with the Afghan 
government and central bank on the terms for recommending Board 
completion of the delayed fifth review under the PRGF program.  The 
revised revenue target for the fiscal year ending March 21 is $800 
million.  The government must fulfill three prior actions related to 
fiscal policy before staff will seek Board approval.  If it does so 
by March 21, the Board can complete the review by late April, and 
Afghanistan's IMF program will be back on track.  If it does not 
meet these conditions by June, this program would be irreparably off 
track, and the Fund would not negotiate a new program until after 
presidential elections in August.  In that event, HIPC debt relief 
would be delayed, and World Bank budget support could be suspended. 
IMF staff forecast a recovery in economic growth in 2009-10 but 
remain very concerned about Afghan fiscal performance.  The ball is 
now in the Afghans' court to rescue this IMF program through 
structural reforms and fiscal discipline. 
 
¶2. (SBU) IMF staff have reached ad ref agreement with the Afghan 
Ministry of Finance and central bank on the terms for recommending 
Board completion of the delayed fifth review under the PRGF program. 
 Staff said they remain concerned about slippage in Afghan fiscal 
performance that necessitated revision of some program targets.  But 
they noted that revenue collection had improved in December-January, 
compared with the rest of this fiscal year.  Key parameters are as 
follows. 
 
KEY PARAMETERS 
 
¶3. (SBU) Revenue targets.  The revised domestic revenue target for 
FY 2008-09 (ending March 21) is Afs 40 billion ($800 million), down 
from the original program target of AFs 44.5 billion.  The agreed FY 
2009-10 target is Afs 51 billion, a 28 percent increase on the 
revised 2008-09 target.  IMF staff called both targets "ambitious 
but realistic." 
 
¶4. (SBU) Prior actions.  The GIRoA must meet three prior actions 
before staff will recommend completion of the review: 1) it must 
prepare audited financial statements for electric utility DABM for 
2006-07 and 2007-08; 2) it (or Parliament) must pass tax law 
amendments to impose the business receipts tax (BRT) on imports 
(Note: the lower house has passed these and they are now with the 
upper house); and 3) it must implement the MOU between the Finance 
and Commerce ministries on Customs access to the FLGE fuel import 
depot at Hairatan.  IMF staff said (on February 2) MOF had assured 
them the GIRoA intends to implement the MOU in its current form 
"next week."  They said they had no information about earlier 
indications from MOF that MOCI wanted to renegotiate the MOU. 
(Note: MOF Deputy Minister Sabit told USG visitors February 10 that 
the issue had gone to the President, who supported MOF's position 
that the MOU should be implemented in its current form and not be 
renegotiated.)  Fund staff said they also hope Customs will extend 
its control at Hairatan to include the privately-owned fuel depots, 
though this is not included in the MOU. 
 
¶5. (SBU) Other benchmarks.  For the sixth review, the GIRoA must 
verify that it is collecting BRT on imports.  Other structural 
benchmarks will be added for a seventh review to be added to the 
program (see below) and will be decided on at the time of the sixth 
review. 
 
¶6. (SBU) Economic growth.  IMF staff expect real GDP growth in 
2008-09 of 3.4 percent, unchanged from their December forecast.  The 
sharp deceleration compared with last year is due to a 21 percent 
drop in agricultural production, in turn caused by last winter's 
drought.  For 2009-10 the Fund forecasts 9.0 percent growth, up from 
their December forecast of 7.7 percent.  Staff expect 17 percent 
growth in agriculture next year based on recent winter precipitation 
rates near Afghanistan's historical average.  They said the GIRoA 
forecasts real GDP growth of 12 percent for 2009-10, but the Fund is 
taking a more conservative approach for now. 
 
¶7. (SBU) Revenues/GDP.  The new revenue targets and GDP forecasts 
 
KABUL 00000317  002 OF 003 
 
 
imply operating revenue/GDP targets of 6.6 percent for 2008-09 
(compared to an original program target of 7.0 percent) and 7.3 
percent for 2009-10.  These ratios remain among the lowest in the 
world. 
 
¶8. (SBU) Monetary policy.  Fund staff said the central bank will 
meet the 2008-09 target for growth in currency in circulation of 31 
percent.  Since inflation has moderated, and in hopes of locking in 
lower inflation, the bank has adopted a target of 16 percent in 
2009-10. 
 
¶9. (SBU) Inflation.  Staff said they now forecast end-March 2009 
(over March 2008) inflation of 13 percent, down from their forecast 
in December of 19 percent.  Average full-year 2008-09 inflation is 
estimated at 28.4 percent.  Average full-year 2009-10 inflation is 
estimated at 6 percent.  The rise in inflation last year and its 
ongoing moderation now mainly reflect global factors. 
 
CONTINUING CONCERNS ABOUT FISCAL PERFORMANCE 
 
¶10. (SBU) Despite the agreement described above, IMF staff remain 
very concerned about Afghan fiscal performance.  They said the GIRoA 
could not adequately explain the very recent improvement in customs 
receipts; Fund staff are concerned it might not be sustainable. 
Longer term, they said that on current trends and even with bold new 
revenue measures, the GIRoA would not cover its operating budget by 
2013, the target date in the ANDS, i.e. there would be a significant 
postponement of even this limited measure of fiscal sustainability. 
 
 
¶11. (SBU) The main problem with revenue generation, they said, is 
not technical, but corrupt diversion of resources - what the mission 
chief called the "infrastructure of leakage."  A related factor is 
weak capacity in the Afghan Customs Department, despite having 
received much foreign technical assistance.  One bright spot is the 
extension of ASYCUDA to more customs office locations; the IMF has 
urged its further extension to more border crossings, though this is 
not a program condition.  Staff also stressed the importance of a 
comprehensive border management plan that clearly defines the roles 
and responsibilities of all actors and brings all the donors and 
Afghan organizations together to improve management.  They urged 
donor support for this objective. 
 
¶12. (SBU) Regarding tax obligations by commercial airlines (Ref B), 
IMF staff said all airlines except one are current, and they have 
been assured that the delinquent payer would pay back taxes in 
installments.  The ad hoc committee that has recommended tax relief 
for airlines is still active but it lacks any legal basis and its 
proposals have not been accepted.  In a separate meeting, 
then-Acting Transport Minister Zakhilwal told EconCouns January 24 
that he does not support these recommendations and they will not be 
adopted. 
 
¶13. (SBU) Fund staff said the GIRoA had internalized the revenue 
constraint on the spending side of the FY 2009-10 budget now before 
Parliament.  Not counting possible extra security-related spending, 
domestically financed spending is set to increase by the rate of 
real GDP growth or perhaps less.  Cash balances throughout 2009-10 
will remain very tight, and there is no margin for any exogenous 
shocks.  There will be essentially zero domestically financed 
development spending. 
 
TIMING GOING FORWARD 
 
¶14. (SBU) IMF staff have urged the GIRoA to fulfill the three prior 
actions by March 21, but this is not a firm deadline.  If the 
government does meet these conditions by then, the Board could 
consider the review by late April.  The GIRoA would also ask the 
Board to approve extension of the PRGF, probably until March 2010. 
Under this scenario, the earliest Afghanistan could reach HIPC 
completion point would be September 2009, i.e. after six months of 
good performance under the PRGF and at the time of the sixth review. 
 
 
 
KABUL 00000317  003 OF 003 
 
 
¶15. (SBU) If the GIRoA does not fulfill the prior actions in time 
for Board review by June, the PRGF would officially expire.  Staff 
say they would have to negotiate a new program, but a staff 
monitored program lasting 6-12 months would probably precede a full 
program.  In any case, they would not want to negotiate with the 
current government so soon before the presidential election, now 
scheduled for August.  Any negotiations on a new IMF program would 
thus be delayed until after a new government has taken office after 
the election.  Action on HIPC completion point, affecting more than 
$1 billion in promised debt reduction, would also be delayed by at 
least 1.5 years.  A delay in HIPC would also affect the Paris Club 
agreement, which expires end-March 2009; absent extension, Afghan 
interest payments could come due in April 2009.  Expiration of the 
IMF program could also halt budget support from some donors, e.g. 
the World Bank. 
 
WOOD