VZCZCXRO9936
PP RUEHDBU RUEHIK RUEHPOD RUEHPW RUEHYG
DE RUEHBUL #0923/01 1050503
ZNR UUUUU ZZH
P 150503Z APR 09
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC PRIORITY 8372
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC 0783
RUCNAFG/AFGHANISTAN COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RUEABND/DEA HQS WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 03 KABUL 000923 
 
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SENSITIVE 
 
SIPDIS 
 
E.O.  12958 N/A 
TAGS: EFIN EAID ECON EAGR PGOV AF
SUBJECT: Deputy Secretary Lew's Meeting with Afghan Finance Minister 
Zakhilwal 
 
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SUMMARY 
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¶1. (SBU) In an April 4 meeting with Afghan Finance Minister 
Zakhilwal, Deputy Secretary of State for Management and Resources 
Jacob Lew stressed the need to demonstrate accountability as U.S. 
assistance to Afghanistan increases.  Zakhilwal agreed, said 
Afghanistan has made progress on this, and that donors should reward 
the progress by channeling more aid through the central government 
budget.  Such assistance could be made conditional on improved 
Afghan transparency and accountability.  Zakhilwal said his main 
focus is strengthening revenue collection and that he is instituting 
a policy of zero tolerance for corruption at the Ministry of Finance 
(MOF).  He requested U.S. assistance in increasing transparency, 
including to strengthen the government's internal audit function. 
Deputy Secretary Lew welcomed Zakhilwal's efforts as helping to show 
good GIRoA management of new resources.  The two agreed 
Afghan-Pakistan transit trade issues could be a topic for the 
upcoming trilateral conference.  End Summary 
 
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AID FLOWS AND ACCOUNTABILITY 
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¶2. (SBU) Deputy Secretary Lew opened the meeting saying the U.S. was 
at a critical moment as it transitions from developing the new 
strategy for Afghanistan to implementing it.  As increased resources 
begin to flow, the U.S. needs to demonstrate that they are being 
used accountably.  Finance Minister Zakhilwal agreed that how 
resources are spent is a key issue.  The priorities of donor 
countries, he lamented, are often not those of the GIRoA, especially 
at project- or program-level.  As a result, these projects are not 
benefiting the people of Afghanistan in a meaningful way.  (Comment: 
USAID has aligned its assistance programs with the Afghanistan 
National Development Strategy and coordinates regularly on project 
design and implementation.  End comment.)  Zakhilwal said project 
selection and mode of delivery are both issues.  The GIRoA seeks to 
empower and strengthen Afghan institutions, but donors channel too 
little of their aid through the Afghan central budget to accomplish 
this.  Afghan accountability has improved, and donors should reward 
this progress -- even if it is still below their expectations.  Lew 
said it is in the U.S. interest to build Afghan institutions and in 
no one's interest for Afghanistan to be permanently reliant on 
foreign aid.  But realistic expectations are needed as we also do 
not want to overload those institutions.  The U.S. tries to find a 
balance; USAID is channeling an increased level of assistance 
through the central budget. 
 
¶3. (SBU) Zakhilwal cited the ministerial changes at Commerce, 
Interior and Agriculture as positive for good stewardship of donor 
funds.  The change at Interior, in particular, resulted from donor 
pressure.  Pressure should continue and be rewarded when it brings 
positive change, as reward will encourage further reform.  DepSec 
Lew said the U.S. Strategic Review represents change.  For example, 
the USG plans to increase investments in agriculture and must work 
with the Ministry of Agriculture on operational details to get 
results and build a regional focus.  Other donors will also increase 
agricultural aid, and we need to ensure coordination, including 
tracking and auditing of increased resource flows.  The Deputy 
Secretary said President Karzai is interested in an Implementation 
Working Group, and that Secretary Clinton supports its early 
establishment.  USAID Afghanistan/Pakistan Task Force Director Bever 
urged that the Finance Ministry play a role in this Working Group 
because of its control of the purse. 
 
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FIGHTING CORRUPTION TO 
INCREASE GOVERNMENT REVENUES 
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¶4. (SBU) DepSec Lew said the USG also wants to support Afghan 
efforts to increase revenues.  Zakhilwal said his number-one focus 
is strengthening revenue collection.  The GIRoA has already made 
progress since he became minister in February, and he will institute 
 
KABUL 00000923  002 OF 003 
 
 
new measures, including a policy of zero tolerance for corruption. 
The government can double the current level of revenue collection 
and exceed IMF targets.  Zakhilwal sought U.S. support, both 
equipment and training, to strengthen local finance offices 
(mustufiat) and MOF's Internal Audit Unit. 
 
¶5. (SBU) Zakhilwal also promised efforts on the spending side of the 
budget and described his efforts to cut fraud in public contracting. 
 He said Afghanistan has good procedures on paper, but they are 
often subverted in practice, and MOF's Internal Audit Unit needs to 
do a better job at investigating discrepancies.  For example, a call 
for competitive bids on a contract is published in the newspaper, 
but some interested party buys up all the papers that day.  Also, 
although MOF is responsible for internal auditing government-wide, 
the legal provision granting that authority has been suspended at 
the request of the Auditor General through the President.  DepSec 
Lew agreed enforcement of rules is critical.  Violators must be 
prosecuted and/or barred from further bidding.  Internal audit is 
also critical and should be strengthened.  As background, DepSec Lew 
noted as positive the fact that U.S. programs in Afghanistan are 
scrutinized at three levels: the General Accounting Office, 
inspectors general in each agency, and the Special IG for Afghan 
Reconstruction. 
 
¶6. (SBU) Zakhilwal described MOF's fraud hotline, which the public 
and business community can use to complain about corruption.  He 
said he gets personally involved in following up on complaints.  In 
one case, an MOF Tax Department official was caught in a sting for 
demanding a bribe from a company seeking certification that it was 
current on its taxes.  Zakhilwal said he intends to prosecute 
individuals caught taking bribes. 
 
¶7. (SBU) Zakhilwal also requested aid to increase revenues collected 
by other ministries, e.g. vehicle registration fees collected by 
Interior and civil aviation navigation fees collected by the 
Ministry of Transport and Civil Aviation.  Both of these ministries 
are cooperating, he said.  In MOI's case, the ministry would get to 
keep some of the additional revenue generated.  There is potential 
for increased revenue at the ministries of Power and Water and Mines 
too, but they are not cooperating.  As a result, the cabinet decided 
MOF will lead a review of all mining contracts concluded (except the 
Aynak copper mine, the largest of them all) to see if the GIRoA is 
raising all the revenue it should. 
 
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AID EFFECTIVENESS 
----------------- 
 
¶8. (SBU) DepSec Lew said Zakhilwal's efforts are very encouraging 
and should help the US show good GIRoA management of new resources. 
Zakhilwal also described the Aid Coordination Unit at MOF and asked 
for equipment and technical assistance to strengthen it.  The 
government has also asked donor agencies to designate an Afghan 
employee to provide continuity for aid reporting purposes.  DepSec 
Lew said USAID has done this. 
 
¶9. (SBU) Zakhilwal reiterated his call for channeling more aid, 
whether discretionary or donor-preferenced, through the central 
budget and said this could be made conditional on improved Afghan 
transparency and accountability.  He also called for a greater GIRoA 
role in project impact evaluations.  USAID Mission Director Yates 
said GIRoA reps participate in USAID's procurement panels and should 
also join impact evaluation teams.  DepSec Lew said the U.S. would 
consider direct budget support and that a proposal was under 
consideration in Washington but that this was often difficult. 
 
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BORDER ISSUES 
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¶10. (SBU) In response to DepSec Lew's question, Zakhilwal reviewed 
Afghan traders' complaints with Pakistani implementation of the 
current bilateral Transit Trade Agreement.  He said the GOP ban on 
transshipping goods from India was mainly economically motivated, 
even though the GOP always cited political/security issues.  DepSec 
 
KABUL 00000923  003 OF 003 
 
 
Lew said the new Trilateral Commission should take up these issues. 
While escorting Zakhilwal out after the meeting, Emboffs raised the 
issue of longer opening hours for Customs houses along the Pakistan 
border to facilitate the coming increase in U.S. military shipments. 
 The minister said the government was looking into this but had not 
yet discussed it with GOP counterparts.  The Embassy is following 
up. 
 
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COMMENT 
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¶11. (SBU)  Zakhilwal's willingness in principle to accept conditions 
to ensure transparency and accountability of any new U.S. direct 
budget support is an opening the USG should seize.  In this 
connection, the Mission supports the proposed Cash Transfer Program 
under consideration in Washington and is prepared to help develop 
policy reform benchmarks that this assistance could be designed to 
promote.  The Mission also strongly supports taking up Af-Pak 
transit trade issues as one of the key economic agenda items in the 
Trilateral Commission. 
 
¶12. (U) D(L) staff cleared this cable. 
 
RICCIARDONE