VZCZCXRO6142
PP RUEHDBU RUEHPW RUEHSL
DE RUEHBUL #0228/01 0240735
ZNR UUUUU ZZH
P 240735Z JAN 10
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC PRIORITY 4937
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC 0968
RUCNAFG/AFGHANISTAN COLLECTIVE

UNCLAS SECTION 01 OF 03 KABUL 000228 
 
SIPDIS 
SENSITIVE 
 
DEPT FOR EEB/IFD/OMS - SAUNDERS AND SCA/A - JEA AND SABAR 
TREASURY FOR McDONALD, JCASAL, ABAUKOL, AWELLER, AND MNUGENT 
 
E.O. 12958; N/A 
TAGS: EAID ECON EFIN PREL PGOV AF
SUBJECT: AFGHANISTAN: FY 2010 PROHIBITION ON ASSISTANCE TO GOVTS. 
WITH NON-TRANSPARENT BUDGETS 
 
REF:  (A) 09 STATE 01923 
      (B) 09 STATE 81177 
      (C) 09 STATE 288885 
      (D) 09 KABUL 2812 
      (E) 08 STATE 016737 
 
¶1.  (SBU) Summary:  Since 2005, Afghanistan has made steady progress 
in fulfilling its commitment to fiscal transparency, reinforced by 
the passage of a Public Expenditure and Financial Management Law 
(PEFML - 2005), a Procurement Law (2005), the publication of a 
Medium-Term Fiscal Framework (MTFF - 2005), and the issuance of the 
Afghanistan National Development Strategy (April 2008).  Most 
recently, in December 2009, the Afghan government reinstated Article 
61 of the PEFML, restoring the authority of the Finance Ministry 
(MoF) to conduct audits of other line ministries.  In concert with 
these reforms, the MoF has regularly posted the annual GIRoA budget 
on the internet since 2004.  On balance, we believe GIRoA is making 
solid progress towards improving fiscal transparency but it will 
need to work with donors to identify additional resources needed to 
carry out its reform roadmap.  Granting the waiver on fiscal 
transparency not only provides the support needed to do this work 
but encourages the GIRoA to stay on track.  Specific answers to 
reftel questions follow.  End summary. 
 
¶2.  (U) Is the central government expected to receive funding under 
the FY 2010 Department of State, Foreign Operations, and Related 
Programs Appropriations Act (SFOAA)? 
 
Yes.  FY-10 funding for Afghanistan is the largest country-specific 
element of the current SFOAA, reflecting the President's priorities. 
 
 
¶3.  (U) Is the GIRoA's annual national budget publicly available? 
 
Yes.  The MoF annually publishes the Afghan national budget on a 
public website (http://www.budgetmof.gov.af) in three languages: 
English, Pashto, and Dari.  In addition, the MoF posts mid-year 
reviews of the national budget (reconciling expenditures with the 
budget ceiling), the MOF's Treasury Department execution and 
disbursement reports, and end-of-the-year closing account and audit 
reports on its website. 
 
¶4.  (U) Are incomes and expenditures included in the publicly 
available budget? 
 
Most revenues and expenditures are captured by the budget and made 
public.  The budget has a core and external component.  The core 
budget details all funds flowing through government accounts, and 
the external budget covers external assistance directly executed by 
donors.  The core budget consists of an operating budget, covering 
current expenditure, and a development budget detailing 
reconstruction costs.  External expenditures are not captured 
comprehensively by the public budget since they are covered mostly 
by donors, who also fund a substantial part of the government's 
recurring expenses.  (FYI: According to GIRoA, 100% of Afghanistan's 
development budget and 35% of operating expenses are covered by 
donors.  Foreign Assistance accounted for 43% of Afghanistan's GDP 
in 2008.) 
 
The legislative basis for public access to budget and fiscal 
documents is the Public Expenditure and Financial Management Law 
which stipulates that the Ministry of Finance must publish the 
annual budget upon approval, quarterly progress reports upon 
submission to the Government and the President, as well as a final 
budget reconciliation report and a set of financial statements.  Of 
those, only the final budget reconciliation report has yet to be 
made public.  The Procurement Law (2005) stipulates that the 
procuring entities must publish notice of all procurement awards on 
a special web site (www.ards.org.af). 
 
¶5.  (U) What is post's assessment of the extent to which the 
publicly-available budget accurately reflects actual government 
incomes and expenditures? 
 
MoF officials acknowledge that the Ministry must refine its 
budgetary submissions further to meet international transparency and 
internal controls standards.  The MoF is considering adopting a 
performance review system that would report both disbursements to 
line ministries and the actual performance outcomes of those 
disbursements.  The MoF is requesting World Bank and other donor 
assistance to implement this performance-based budgetary reporting 
system so that it could be expanded to provincial and district-level 
offices. 
 
Development budget execution (necessary for growth and development) 
remains low in Afghanistan. The MOF has taken a range of measures to 
improve the situation including the introduction in 2007/8 of a 
 
KABUL 00000228  002 OF 003 
 
 
clearer development budget structure that better identifies projects 
for which resources are available.  The MoF (in collaboration with 
the Ministry of Economy) has also produced a standard template for 
investment projects.  While this was used in eight line ministries 
beginning in 2008/9, further technical assistance is needed to 
improve its use in key spending line ministries.  The U.S. Mission's 
assistance plans include projects to improve Ministry capacity in 
this area. 
 
¶6.  (U) Have there been any events since the 2009 review that may 
have affected fiscal transparency? 
 
In December 2009, the Afghan government reinstated Article 61 of the 
PEFML, restoring the authority of the Finance Ministry (MoF) to 
conduct audits of other line ministries. This audit authority was a 
benchmark set under the Afghanistan Reconstruction Trust Fund (ARTF) 
rubric in conjunction with the World Bank and International Monetary 
Fund.   In addition, the MoF's Treasury Department instituted an 
integrated financial management software program that is run on a 
well- known commercial software package.  At present, the MoF is 
considering how to roll out this program to its provincial offices. 
 
 
In line with GIRoA's progress towards fiscal transparency, USAID has 
certified three GIRoA ministries to receive direct U.S. assistance: 
the Ministry of Public Health, Ministry of Communication and 
Information Technology, and the Ministry of Finance.  USAID is 
currently assessing the Ministries of Education and Agriculture, 
Irrigation, and Livestock and will soon begin assessing the Ministry 
of Rural Rehabilitation and Development.  The U.S. aim is to 
increase the percentage of U.S. assistance that flows directly 
through GIRoA institutions from approximately 12 percent in FY 2009, 
to 20 percent in FY-2010 and about 40 percent in FY 2011. 
 
¶7.  (U) Since last year's review, what efforts has the Afghan 
government undertake to improve fiscal transparency?  What progress 
has been made, pursuant to the 2009 demarches on the subject? 
 
Over the past year, budget performance has been regularly monitored 
by the Ministry of Finance Technical Coordination Committee (TCC), 
meeting monthly at the MoF to track progress toward IMF benchmarks. 
The most recent analysis indicates that within the core budget, 
development budget execution stands at 29% so far in this Islamic 
solar year (which ends March 20) compared to 32% the previous year, 
while operational budget execution stands at 70% so far this Islamic 
solar year compared to 61% this time last year.  Execution rates 
reflect a range of factors, including lack of discretionary 
resources for development budget, weak budget planning by line 
ministries, the recent election uncertainty, and lack of security. 
Meanwhile, revenue collection is continuing to improve, with 45 
billion Afs collected as of January 6, meeting 83 percent of GIRoA's 
target of 54.5 billion Afs, with 2.5 months remaining in the 2009/10 
fiscal year. 
 
Increasing the execution of the core development budget requires 
further reforms in GIRoA's allotment and disbursement procedures, 
improved compliance on procurement plans, and most importantly, 
robust capacity building at key spending ministries. 
 
In response to our demarche request to post budget documents in 
government offices and other public places, MoF officials have 
questioned the utility of such actions in light of the relatively 
high illiteracy rate and the complexity of budget documents.  To 
date, the MoF has not posted budget documents beyond its publicly 
available website. 
 
¶8.  (U) Efforts by GIRoA to improve fiscal transparency. 
 
The MoF has taken steps to make its financial information compliant 
with the IMF's Government Financial Statistics (GFS) standard, and 
the IMF has noted this progress in accountability.  In addition, 
Public Expenditure and Financial Accountability (PEFA), a worldwide 
partnership of multilateral and bilateral donors, has conducted 
several Public Financial Management Performance Assessments.  The 
most recent PEFA assessment acknowledged progress made in public 
financial management and fiscal transparency.  The report is 
available on the World Bank website (www.worldbank.org/afghanistan) 
and shows that Afghanistan outperformed the average for middle 
income countries (such as Ukraine and Armenia). 
 
In an effort to increase "Afghanization" and aid effectiveness in 
ministries that have demonstrated the capability, procedures, and 
transparency to manage U.S. resources, GIRoA has entered into 
Host-Country Contracts (HCCs) with USAID that permit GIRoA to 
oversee implementation of assistance programming.  Both the Ministry 
of Health (MOH) and the Ministry of Communications and Information 
Technology (MCIT) are recipients of ongoing USAID HCCs, totaling 
 
KABUL 00000228  003 OF 003 
 
 
approximately $260 million and $1 million, respectively. 
 
¶9.  (U) USG/Post actions and strategy to promote such efforts, 
including pursuant to reftels and resulting progress: 
 
The United States Government is providing technical support to 
improve Afghanistan's financial management practices, transparency, 
and accountability.  The U.S. Mission is implementing: 
 
--the Economic Growth and Governance Initiative (EGGI), a five-year 
program to work with the Ministry of Finance to improve fiscal 
policy and revenue collection, and the Central Bank to strengthen 
supervision of the banking sector, risk, and accountability. 
 
--the Afghanistan Civil Service Support Program (ACSS) to strengthen 
government capacity in procurement, financial management, project 
management, strategic planning, and human resources.  The program 
also provides technical assistance in program budgeting and budget 
formulation at the central and provincial levels. 
 
--the five-year Afghanistan Parliamentary Assistance Program (APAP) 
to reinforce legislative capabilities in the governance and fiscal 
arenas. 
 
--an Executive Masters in Public Administration program through its 
e-Quality Alliances activity to strengthen the governance and public 
management skills of rising Afghan civil servants. 
 
The Mission is also providing technical advisors to assist the 
Ministry of Finance to improve the management and transparency of 
public debt, strengthen internal audit.  The advisors are also 
working with the Central Bank to strengthen controls against money 
laundering, terror finance and other forms of illicit finance. 
 
¶10.  (U) An updated 2010 action plan to improve fiscal transparency 
and promote graduation out of the need for a waiver. 
 
MoF is currently reviewing a proposed action plan shaped by the 
World Bank's recent Report on Observance of Standards and Codes 
(ROSC) in Accounting and Auditing on Afghanistan.  We are 
considering the potential to engage with GIRoA on the following ROSC 
recommendations: 
 
--establish a government-led National Steering Committee to 
coordinate, supervise and direct additional financial reporting and 
auditing reforms in Afghanistan.  This Committee would serve as the 
ultimate trustees to ensure that Afghanistan develops a high quality 
financial reporting and auditing system over the longer term. 
 
--support the National Steering Committee in developing an 
implementation plan (including short, medium and long term measures) 
to develop accounting and auditing capacity in Afghanistan.  This 
plan would form the basis for a government program on education and 
training, which would likely require both financial and technical 
support from development agencies. A large scale education and 
training in Accounting and Auditing has to be at the backbone of the 
establishment of the profession in Afghanistan. 
 
--extend Afghanistan Reconstruction Trust Fund (ARTF)-like financial 
controls to the core budget as a whole.  These financial controls 
would include having the Auditor General conduct annual financial 
statement audits to international auditing standards with the 
support of an international firm of public accountants or extending 
the ARTF Monitoring Agent beyond its ARTF rolew. The Monitoring 
Agent is currently Price, Waterhouse, and Coopers of Netherlands. 
 
¶11.  (U) COMMENT: The U.S. Mission is supporting the above ROSC 
recommendations by urging the Afghan government to develop a 
sequenced and prioritized action plan promoting greater fiscal 
transparency and by shaping future programs providing support for 
Afghanistan's development of the accounting and auditing profession. 
 The Mission continues to encourage opportunities to channel 
resources directly through the Afghan Government.  On balance, we 
believe Afghanistan is on the right path to increasing fiscal 
transparency, but its government will need to work further with 
donors to identify additional resources to carry out its roadmap. 
Granting the waiver on fiscal transparency not only provides the 
support needed to do this work but encourages the GIRoA to stay on 
track.  End comment. 
 
EIKENBERRY