VZCZCXRO3408
PP RUEHDBU RUEHPW RUEHSL
DE RUEHBUL #3471/01 3021258
ZNR UUUUU ZZH
P 291258Z OCT 09
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC PRIORITY 2660
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC 0926
RUCNAFG/AFGHANISTAN COLLECTIVE

UNCLAS SECTION 01 OF 02 KABUL 003471 
 
DEPT FOR S/RAP, SCA/FO, SCA/RA, AND SCA/A 
TREASURY FOR M. KAPLAN, A. WELLER AND J. CASAL 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN EAID PGOV PREL AF
SUBJECT: IMF BULLISH ON AFGHAN REFORM EFFORTS; WRAPS UP PROGRAM 
REVIEW 
 
¶1. (SBU) Summary.  At the urging of the Afghan Government and of the 
U.S. and other donors, the IMF rescheduled its previously canceled 
mission and traveled to Kabul to conduct the sixth review of 
Afghanistan's Poverty Reduction and Growth Facility (PRGF).  The IMF 
mission's review of the program was favorable and team members 
expressed confidence the Fund and the Afghan Government will 
negotiate by mid 2010 a successor program entailing deeper financial 
and structural reforms.  The IMF team also assessed Afghanistan's 
progress under the Highly Indebted Poor Countries (HIPC) Program and 
found implementation of the various "triggers" within the HIPC 
framework is progressing.  The recommendation for "Completion Point" 
and full debt relief from the Paris Club debtors is expected 
sometime in early 2010. 
 
¶2. (SBU) Reporting on the overall Afghan economy, the IMF mission 
found that GIRoA has exceeded the IMF's revenue collection target 
set last year due to stronger than expected revenue performance 
(almost entirely increased customs receipts).  Nevertheless, revenue 
as a share of GDP remained unchanged at around 7 percent, extremely 
low even for least developed countries.  IMF staff stated that they 
will likely adjust the revenue target upwards and press the Afghan 
Government to broaden and strengthen its tax base.  The IMF also 
noted while banking sectors performance is satisfactory, it has 
rapidly expanded and should be monitored carefully.  Improved 
banking supervision and stronger anti-corruption measures are 
necessary.  End Summary. 
 
¶3. (U) An IMF mission visited Kabul October 20-27 to review 
Afghanistan's Poverty Reduction and Growth Facility (PRGF) and to 
look as well at Afghanistan's progress in achieving the requirements 
("triggers") under the Highly Indebted Poor Countries (HIPC) 
program.  The team's visit was especially appreciated given its 
refusal in September to come to Afghanistan, a decision which 
produced sharp criticism from Finance Minister Zakhilwal as well as 
from donor governments. 
 
INCREASING AFGHAN GOVERNMENT REVENUES 
 
¶4. (SBU) In an October 26 meeting with Ambassador Eikenberry and 
senior Embassy officials, the IMF mission noted that compared to 
other low income countries, Afghanistan's current revenue 
performance -- collecting about 7% of GDP, or approximately $1.1 
billion -- is significantly below average, even for post-conflict or 
least developed countries.  The good news is that while revenue 
collection slowed in recent months due to political uncertainty 
surrounding the elections, revenue collections grew 40% increase 
during months 5 and 6 of the Afghan calendar year (August and 
September) over last year.  Increased trade and customs receipts 
(particularly fuel duties), described by the IMF as "low hanging 
fruits," are largely responsible for the improved revenue picture. 
While good in the short-term, this change alone will not lead to 
long-term fiscal sustainability.  The IMF noted the key is to 
increase quantitative targets in concert with qualitative reforms. 
The latter, according to the IMF mission, will place Afghanistan on 
a path toward sustainable increases in revenue -- potentially 
achieving 15% of GDP in the next five to ten years.  Even with these 
reforms, Afghanistan's fiscal situation will remain fragile over the 
next ten years given expansion of security forces and the need for 
increased spending in other areas. 
 
¶5. (SBU)  Fund staff emphasized the importance of sustaining 
long-term revenue potential by broadening the tax base, through 
expansion of the Large Tax Payer Office (LTO) and the Medium Tax 
Payer Office (MTO), and the eventual introduction of 
consumption-based taxes, such as a Value Added Tax.  Moreover, 
long-term revenue improvements need to be structural.  They will 
depend too on strengthening tax administration, developing Afghan 
customs, and curtailing corruption.  The IMF stressed it will be 
critical for donors to align their positions and push for meaningful 
reforms during the next year as a part of a broader "reform 
framework" with the new administration. 
 
IMPROVING THE BANKING SECTOR 
 
¶6. (SBU) The banking sector in Afghanistan has grown rapidly over 
the past 5 years, which has generated concerns about its overall 
health.  The IMF does not believe there is an imminent danger, but 
the extent to which the sector has expanded means donors -- and 
GIRoA -- should maintain a close watch.  The IMF staff stated 
non-performing loans levels are manageable and the capital base 
within banks is acceptable.  Over the coming years, however, 
Afghanistan will probably see some banks merge. 
 
¶7. (SBU) Mission staff expressed concern that the commercial banking 
sector seems reluctant to lend to certain businesses.  The IMF team 
said commercial banks still see loans to Afghan businesses as "too 
risky."  Moving forward, the government will need to build up its 
 
KABUL 00003471  002 OF 002 
 
 
credit information bureau (now housed at the Central Bank) and 
collateral office so bankers can assess risk and better execute the 
function of lending.  In addition, the Central Bank will need to 
strengthen its regulatory capability.  Increased banking sector 
growth has led to concerns about governance within individual banks 
and the ability of supervisory authorities to keep pace.  Until this 
situation improves, a lower lending rate could be beneficial from a 
regulatory standpoint. 
 
OTHER KEY INDICATORS 
 
¶8. (SBU) The IMF team also provided several points on Afghanistan's 
macroeconomic and fiscal sustainability: 
 
--Economic growth.  IMF staff now expects real GDP growth in 2009-10 
of 15.7 percent.  For 2010-11 the Fund forecasts 8.6 percent growth, 
slightly down from their earlier forecast of 9.0 percent. 
 
--Revenues/GDP.  The new revenue targets and GDP forecasts suggest a 
revenue/GDP target of 7.7 percent for 2009-10 (compared to an 
original program target of 7.3 percent). 
 
--Inflation.  Staff said interest rates are dropping and headline 
inflation is negative, with core (i.e., non-food) inflation almost 
flat.  By contrast, Pakistan has 10-15% headline inflation. 
 
--Reserves.  This target was the only one missed, Staff said. 
Accumulated reserves fell short because of data audit problems and 
not GIRoA policy reasons. 
 
TIMING GOING FORWARD 
 
¶9. (SBU) Depending in part on political developments in the coming 
weeks, the IMF will complete its Sixth PRGF review in December and 
take the findings to the Board in January 2010.  Despite a few 
outstanding triggers (e.g., pension reform and mining regulatory 
framework), the IMF and World Bank also expect to recommend HIPC 
completion point in January 2010.  Following Board approval, the 
team plans to return to Afghanistan in January to discuss the 
2010/2011 budget and begin negotiations on a new PRGF, which again 
will be a three year program.  The IMF team mentioned negotiations 
for the new PRGF may be difficult, but this situation is to be 
expected if more complex and meaningful reform measures are 
implemented.  As a result, they envision a possible extension of the 
current PRGF through June to allow for new program discussions.  The 
GIRoA strongly supports a new PRGF program that would help move the 
reform agenda forward.  Formal negotiations for the new PRGF program 
will probably start in April 2010.  The parameters of the reforms 
will focus on improving domestic revenue generation and fiscal 
management as well as on privatization of public enterprises.  Each 
of the reform benchmarks will also include good governance and 
anti-corruption elements as well. 
 
EIKENBERRY