Via IMF (Den Internationale Valutafond)

On December 19, 2019, the Executive Board of the International Monetary
Fund (IMF) concluded the Article IV consultation

[1]

and completed the sixth and final review under the Extended Credit
Facility (ECF) arrangement

[2]

for the Islamic Republic of Afghanistan. Completion of this review
enables the disbursement of SDR 5.38 million (about US$ 7.4 million). The three-and-half year ECF arrangement for SDR 32.38
million (about US$44.7 million or 10 percent of Afghanistan’s quota in
the IMF) was approved by the IMF Executive Board on July 20, 2016

(See Press Release No. 16/348)
, to support the government’s reform efforts and to help catalyze donor
funding.

A challenging political and security environment has constrained
Afghanistan’s real GDP growth to below 3 percent in recent years. Most
vulnerability and social indicators show Afghanistan trailing other
low-income countries, with the poverty rate having risen to almost 55
percent. The authorities have focused on maintaining macroeconomic and
financial stability and pursuing reforms, guided by the Afghanistan
National Peace and Development Framework.

Despite the difficult circumstances, program implementation has
remained satisfactory, with all quantitative performance criteria and
all but one structural benchmark under the ECF arrangement met. The
remaining structural benchmark, aimed at accelerating Kabul Bank asset
recoveries, was implemented with delay in November.

Regarding the macroeconomic outlook, growth is projected at 3 percent
in 2019, up from 2.7 percent in 2018, buoyed by a recovery in
agriculture, and rising to 3.5 percent in 2020 before stabilizing at 4
percent in the medium term, assuming no significant security
deterioration, continued reforms, and sustained aid inflows. Inflation
is expected to rise from an average of 0.6 percent in 2018 to reach 2
percent this year and rise gradually to 5 percent in the medium term,
reflecting a pickup in economic activity. Assuming continued grant
inflows, fiscal and external balances are expected to remain
sustainable. Risks to the outlook are tilted to the downside, and
include a deterioration in security, heightened political tensions, a
significant drop in aid, and reform slippages. On the upside, durable
peace would boost confidence and economic activity, setting Afghanistan
on a higher growth path.

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Following the Executive Board discussion, Mr. Mitsuhiro Furusawa,
Deputy Managing Director and Acting Chair, made the following statement:

“The Afghan authorities are to be commended for successfully completing
their ECF-supported program. They continue to implement their reform
agenda consistent with Afghanistan’s National Peace and Development
Framework, aimed at reducing poverty, raising inclusive growth, and
boosting job opportunities for the growing labor force. However,
insecurity and political uncertainty continue to affect confidence and
discourage investment, thereby undermining economic growth and job
creation. Poverty remains high, and the country continues to be
dependent on external grants for fiscal and external sustainability.

“Given these challenging circumstances, continued macroeconomic policy
discipline complemented by structural reforms is needed. Macroeconomic
policies that instill fiscal discipline, stabilize inflation, support a
flexible exchange rate, and safeguard financial stability will remain
critical going forward.

“Fiscal policy should continue to target a broadly balanced budget,
supported by fair and sustainable domestic revenue mobilization and
strong financial support by donors. Resources should shift toward
pro-growth and pro-poor outlays and create fiscal space to meet the
country’s considerable development needs. The country’s economic
development plan should be grounded in a robust and sustainable
macro-fiscal framework reflecting Afghanistan’s still-limited
debt-carrying capacity and high risk of debt distress.

“Financial sector reforms that address the shortcomings among the weak
private banks, strengthen the framework for crisis prevention and
resolution, and implement the strategy to reform the state-owned
commercial banks are critical to ensure a resilient banking system.

“The anti-corruption agenda has advanced and needs to be cemented with
implementation, supported by prioritization of the on-going
anti-corruption efforts in cooperation with donors and guided by the
National Strategy for Combatting Corruption. These efforts should go
hand-in-hand with improvement of the business environment and the
regulatory framework.

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“The successful completion of the ECF arrangement demonstrates the
authorities’ strong ownership of their reform agenda. The Fund
continues to stand ready to assist Afghanistan, including through the
provision of technical assistance.

The Executive Board also concluded the 2019 Article IV consultation
with Afghanistan.

Executive Board Assessment

Executive Directors agreed with the thrust of the staff appraisal. They
commended the authorities’ commitment to implement their reform program
consistent with Afghanistan’s National Peace and Development
Framework, aimed at reducing poverty, raising inclusive growth, and
boosting job opportunities for the growing labor force.
However, insecurity and political uncertainty continue to undermine
confidence and hinder investment and sustained growth. Directors
stressed that policies should remain focused on preserving
macroeconomic and financial stability, strengthening institutions, and
accelerating the reform momentum to entrench sustainable
private‑sector‑led growth. Continued financial support by donors will
remain critical to help preserve macroeconomic stability, support
reforms, and finance security and development needs.

Directors encouraged the authorities to continue to pursue fiscal
discipline. They noted that the economic development plans currently
under consideration should be grounded in a robust and sustainable
macro‑fiscal framework reflecting Afghanistan’s still limited
debt-carrying capacity and high risk of debt distress. The latter calls
for continued reliance on grants and highly‑concessional borrowing,
supplemented by efforts to strengthen capacity in public financial and
debt management and the assessment of investment projects and fiscal
risks.

Directors agreed that the overall fiscal balance including grants
should remain the fiscal anchor that preserves a broadly balanced
budget, prudent cash buffer, and low public debt. This policy should be
supplemented with a gradual reduction of the operating deficit before
grants to prudently use domestic resources, shift expenditure toward
pro‑growth and pro‑poor outlays, rationalize current spending, and
create fiscal space to meet the country’s considerable development
needs. Directors supported the authorities’ continued targeting of
sustainable revenue collection through an expanding tax base, increased
efficiency, and VAT adoption planned by early 2021.

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Directors welcomed the authorities’ commitment to price stability
supported by exchange rate flexibility. They noted that further
measures to reduce high dollarization can help improve monetary
transmission. They highlighted the importance of safeguarding financial
stability and welcomed the continued focus on addressing shortcomings
in weak private banks, strengthening the framework for crisis
prevention and resolution, and implementing the strategy to reform the
state‑owned commercial banks. They also took positive note of efforts
to formalize the activities of unregulated financial institutions.
Directors encouraged fostering financial intermediation through the
implementation of the recently adopted National Financial Inclusion
Strategy.

Directors were encouraged by the authorities’ progress with
anti‑corruption legislation and institutions, but stressed the need to
strengthen implementation by prioritizing anti‑corruption efforts in
cooperation with donors and guided by the National Strategy for
Combatting Corruption. They urged swift progress in closing gaps in the
criminalization of the remaining corruption offenses, and the staffing
and operationalization of new anti‑corruption institutions. These
efforts should go hand‑in‑hand with improvement of the business
environment, the regulatory framework, and the AML/CFT regime.
Addressing poverty and gender inequality should also remain a top
priority.

Directors encouraged continued improvement of economic data, with Fund
technical assistance.

It is expected that the next Article IV consultation with the Islamic
Republic of Afghanistan will be held on the standard 12‑month cycle.