VZCZCXRO0555
PP RUEHDBU RUEHIK RUEHPOD RUEHPW RUEHYG
DE RUEHBUL #0872/01 0961359
ZNR UUUUU ZZH
P 061359Z APR 09
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC PRIORITY 8282
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC 0773
RUCNAFG/AFGHANISTAN COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RUEABND/DEA HQS WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 03 KABUL 000872 
 
DEPT FOR SRAP, SCA/FO, SCA/RA, AND SCA/A 
DEPT PASS FOR AID/ANE 
DEPT PASS USTR FOR DELANEY AND DEANGELIS 
DEPT PASS OPIC 
DEPT PASS FOR TDA FOR STEIN AND GREENIP 
USOECD FOR ENERGY ATTACHE 
CENTCOM FOR CSTC-A 
NSC FOR JWOOD 
TREASURY FOR MHIRSON, ABAUKOL, AWELLER, AND MNUGENT 
OSD FOR SHIVERS 
COMMERCE FOR DEES, CHOPPIN, AND FONOVICH 
 
SENSITIVE 
 
SIPDIS 
 
E.O.  12958 N/A 
TAGS: ECON EFIN EAID AF
SUBJECT: AFGHANISTAN - A SPATE OF GOOD ECONOMIC NEWS 
 
REF: Kabul 701 
 
¶1. (SBU) SUMMARY.  Every once in a while, we report good news from 
Afghanistan.  There have been several recent positive developments 
on the economic front.  The government has apparently met conditions 
for scheduling the fifth Board review under its IMF program, by 
meeting (and surpassing) the revised FY 2008-09 domestic revenue 
target and fulfilling three other prior actions.  Parliament has 
passed the FY 2009-10 budget and the Mortgage Law, and the President 
passed the Negotiable Instruments Law by decree.  The economic 
reform window the U.S. worked hard to establish in the Afghanistan 
Reconstruction Trust Fund is now a reality.  Inflation has dropped 
sharply.  A new commercial bank has been licensed.  And a U.S. 
investor in an OPIC-supported project April 5 signed the first 
long-term lease of government-owned land under new legal authority 
enacted last year.  END SUMMARY 
 
MEETING IMF CONDITIONS 
 
¶2. (SBU) The GIRoA has met, indeed exceeded, its revised revenue 
target of Afs 40 billion ($769 million) for the fiscal year that 
ended March 21.  Deputy Finance Minister Sabit informed us March 29 
that the GIRoA collected Afs 41.6 billion ($800 million), 
representing 56.3 percent of total operating budget expenditures in 
FY 2008-09.  However, this is down from the 66.0 percent of 
operating budget expenditures covered by domestic revenue sources in 
FY 2007-08.  Sabit noted that revenue collection in the final 
quarter of the fiscal year was Afs 14 billion ($269 million), 
compared with just Afs 9 billion ($173 million) in each of the other 
three quarters.  Sabit attributes this positive outcome to the 
institution of daily monitoring of Customs revenues at all posts. 
Finance Minister Zakhilwal has said the GIRoA will implement new 
revenue measures and seek to surpass the FY 2009-10 revenue target 
of Afs 51 billion agreed with the IMF.  We hope he succeeds, since 
this would be 54.3 percent of planned operating expenditure, i.e. 
slightly weaker performance in percentage terms than the GIRoA 
registered in FY 2008-09. 
 
¶3. (SBU) The Afghan government also fulfilled all three prior 
actions agreed with IMF staff as conditions for recommending Board 
completion of the fifth review under the PRGF program.  Post 
understands that the Board will consider the review o/a April 22. 
Specifically, the GIRoA: 
 
-- Passed income tax legislation applying the Business Receipts Tax 
to imports, adding a levy of 2 percent to most imports.  Our 
business contacts have already complained to us about this tax 
increase, adding that government officials blamed "IMF and U.S. 
pressure" when confronted about it. 
 
-- Produced an external auditor's report on the finances of the 
state-owned electric utility, DABM. 
 
-- Began implementing the MOU between the Commerce and Finance 
ministries on granting Customs full and unfettered access to the 
state-owned fuel import depot at Hairatan.  This one went down to 
the wire, and IMF staff showed leniency in not requiring a full two 
weeks of Customs data (let alone a full month's worth as originally 
agreed) by the March 21 deadline.  We understand MOF produced a 
report with the available data and plans to deliver additional data 
in due course.  The important thing is that Customs has gained 
access at Hairatan.  Post will continue to monitor implementation of 
this important revenue-related structural reform. 
 
PARLIAMENT PASSES THE BUDGET 
 
¶4. (U) Parliament formally passed the budget for FY 2009-10 on April 
¶1.  It calls for total operating expenditures of Afs 94.0 billion 
($1.8 bQlion), an increase of 27 percent over the FY 2008-09 
budget, mainly caused by increases in police and teacher salaries. 
Security accounts for over 42 percent of total operating expenditure 
in the new budget, up from about 39 percent last year.  Across the 
board, wages and salaries make up 60 percent of total GIRoA 
operating costs in FY 2009-10.  The budget reduces new development 
spending from the budgeted Afs 112.4 billion ($2.2 billion) last 
 
KABUL 00000872  002 OF 003 
 
 
year to Afs 58.1 billion ($1.1 billion) in FY 2009-10.  The budget 
also carries over Afs 49.7 billion ($956 million) in unspent funds 
from the previous fiscal year for a total development expenditure of 
Afs 108.8 ($2.1 billion.  The Ministry of Finance attributes the low 
development budget execution rates in FY 2008-09 to the 
deteriorating security situation and the increased degree of donor 
preferencing of funds disbursed through the Afghanistan 
Reconstruction Trust Fund (ARTF). 
 
ARTF ECONOMIC REFORM WINDOW ESTABLISHED 
 
¶5. (U) The GIRoA and donors have reached final agreement on 
U.S.-proposed reforms to the recurrent cost window of the 
Afghanistan Reconstruction Trust Fund (ARTF).  Under these reforms, 
"baseline" recurrent cost support from the ARTF will decline byQ5 
million per year from its level of $276 million in FY 2008-09. 
Meanwhile, donors have agreed to establish an ARTF Incentive 
Program, starting at $40 million in FY 2009-10, to reward GIRoA 
performance against a set of agreed policy benchmarks.  These 
include, for FY 2009-10, benchmarks on sustaining domestic revenues, 
improving public sector governance, and enabling private sector 
development.  The objective is not only to support the reform 
process, but also to allow for increased allocations towards the 
financing of the government's core development programs through the 
ARTF Investment Window.  Mission staff played a key role in securing 
this important reform. 
 
PROGRESS ON COMMERCIAL AND FINANCIAL LAWS 
 
¶6. (U) The upper house of Parliament finally passed the Mortgage Law 
on March 1, and President Karzai has signed it into law.  (The lower 
house had passed it last November.)  Passage should support 
development of the housing sector.  The Law on Negotiable 
Instruments was recently passed by Presidential decree.  The lower 
house March 28 passed the Law on Secured Transactions for Moveable 
Property, which now moves to the upper house for review. 
 
FINANCIAL SECTOR DEVELOPMENTS 
 
¶7. (U) A new private bank, Ghazenfar Bank, opened for business in 
March 2009, bringing to 17 the total number of commercial banks 
(private and state-owned) licensed in Afghanistan.  According to the 
central bank, total assets of the banking system reached $2.4 
billion in January 2009, an increase of 67 percent compared with 
January 2008.  These banks have a total loan portfolio of $1 
billion, up 37 percent on January 2008, and deposits of $2 billion, 
up 69 percent on January 2008.  Some 5,000 jobs have been created in 
the banking sector. 
 
INFLATION, RESERVES 
 
¶8. (U) Inflation (year over year) declined from over 40 percent in 
mid-2008 to just 3.2 percent in March 2009.  The GIRoA also met both 
monetary performance criteria (ceiling on currency in circulation 
and floor on net international reserves) under its IMF program. 
Gross foreign reserves of the central bank increased by 30 percent 
over the previous year, reaching $3.6 billion in March 2009, 
equivalent to 12 months of imports. 
 
LEASING GOVERNMENT LAND 
 
¶9. (SBU) The GIRoA last year amended its land-use law to enable 
long-term lease of government-owned land - up to 50 years for 
irrigated and 99 years for non-irrigated land.  The first (50-year) 
lease under this new legal authority was signed April 5 by an 
American investor, Summit Associates, and the Ministry of 
Agriculture for the land under a milk plant in the northern city of 
Kunduz.  The U.S. Overseas Private Investment Corporation is 
supporting this project with a loan, and the Mission supported the 
U.S. investor's efforts to secure a lease on favorable terms.  The 
longer lease periods allowed under the amended law should promote 
private investment and more rational use of the GIRoA's extensive 
land holdings. 
 
COMMENT 
 
KABUL 00000872  003 OF 003 
 
 
 
¶10. (SBU) Afghanistan's success in staying on track with its IMF 
program is highly significant.  Nevertheless, not all of these 
good-news stories represent unalloyed successes.  The revenue target 
achieved by the government had been revised down from the original 
Afs 44.5 billion agreed to for this year, which the GIRoA could not 
meet.  Domestic revenue as a percentage of operating expenses is 
declining, suggesting that the government's expenses are becoming 
more fiscally unsustainable and increasing Afghanistan's reliance on 
donor funding. Customs access to the Hairatan fuel depot needs to be 
monitored to prevent any back-sliding and extended to all 
state-owned fuel depots.  Numerous commercial laws remain to be 
passed, and the capacity of the central bank to regulate and 
supervise the rapidly expanding banking sector needs to be 
strengthened.  Still, given Afghanistan's profoundly challenging 
economic circumstances, we will take good news where we can get it. 
 
RICCIARDONE