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IMF Country Report No. 14/128
ISLAMIC REPUBLIC OF AFGHANISTAN
2014 ARTICLE IV CONSULTATION—STAFF REPORT; PRESS RELEASE; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR THE ISLAMIC REPUBLIC OF AFGHANISTAN
May 2014
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2014 Article IV consultation with Afghanistan, the following documents have been released and are included in this package:
The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on May 16, 2014, following discussions that ended on February 19, 2014, with the officials of Afghanistan on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on April 22, 2014.
An Informational Annex prepared by the IMF.
A Debt Sustainability Analysis prepared by the staffs of the IMF and the World Bank.
A Staff Statement of May 16, 2014 updating information on recent developments.
A Press Release summarizing the views of the Executive Board as expressed during its May 16, 2014 consideration of the staff report that concluded the Article IV consultation with Afghanistan.
A Statement by the Executive Director for the Islamic Republic of Afghanistan.
The publication policy for staff reports and other documents allows for the deletion of market-sensitive information.
Copies of this report are available to the public from
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© 2014 International Monetary Fund
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ISLAMIC REPUBLIC OF AFGHANISTAN
STAFF REPORT FOR THE 2014 ARTICLE IV CONSULTATION
April 22, 2014
This report is dedicated to all the victims of violence in Afghanistan and to our colleague K. Wabel Abdallah, the IMF’s Resident Representative, who was killed in an attack in Kabul on January 17, 2014, along with 20 others. He was committed to improving the lives of the populations in countries where he worked, especially in Afghanistan.
Key Issues
Context. Over the past decade, Afghanistan has made enormous progress in reconstruction, development and lifting per capita income. Security and political uncertainties, and weak institutions have constrained growth and weighed on social outcomes. With significant reform efforts and donor support, Afghanistan has maintained macroeconomic stability, implemented important structural reforms, and built policy buffers, but significant vulnerabilities remain. The IMF has been supporting Afghanistan through technical assistance and a three-year Extended Credit Facility (ECF) arrangement. Reviews under the ECF arrangement have been delayed.
Outlook and risks. 2014 is a crucial year in the political and security transitions and the run-up to the “transformation decade” (2015–24). Assuming smooth political and security transitions, continued reform and donor financing, the outlook should be positive. Large security and development expenditure needs and a limited domestic revenue capacity mean that Afghanistan will remain dependent on donor financing for an extended period. Macroeconomic stability, structural reforms, and political and security stability are needed to ensure inclusive growth. Risks, mostly on the downside, are related to adverse domestic or regional security developments, political instability, inadequate implementation of economic policies, and donor fatigue.
Policy recommendations. The authorities’ economic strategy (maintaining macroeconomic stability, strengthening the financial sector, improving economic governance, and moving toward fiscal sustainability) remains appropriate and needs strengthened implementation. Sustained implementation of this strategy will safeguard growth and build buffers to help manage shocks. Policies should continue to aim at strengthening revenue collection, managing money growth to control inflation while preserving exchange rate flexibility, strengthening bank supervision, and quickly enacting anti-money laundering (AML), countering financing of terrorism (CFT), banking, central bank, and value-added tax legislation.
Approved By
Adnan Mazarei and Dhaneshwar Ghura
Discussions were held in Kabul, New Delhi, and Dubai during September 7–22, 2013, December 5–9, 2013, and February 15–19, 2014. The staff teams comprised Paul Ross (head), Kusay Alkhunaizi, Eric Mottu, Marcin Sasin, Renas Sidahmed (all MCD), Jeta Menkulasi, Andreas Tudyka (both FAD), Yugo Koshima, Cecilia Marian (both LEG), Rachid Awad, Aditya Narain (both MCM), Warren Coats (MCM consultant), Alexis Meyer-Cirkel (SPR), K. Wabel Abdallah (resident representative), and Roohul Amin (local economist). The team met with Governor Delawari, Finance Minister Zakhilwal, First Deputy Governor Hadawal, Deputy Finance Ministers Mastoor and Sabit, and other senior officials. Yi Liu provided research assistance and Norma Cayo (both MCD) was responsible for word processing and document management.
Contents
CONTEXT
RECENT DEVELOPMENTS
OUTLOOK AND RISKS
POLICY DISCUSSIONS: MANAGING THE TRANSITION, REDUCING VULNERABILITIES, AND PROMOTING INCLUSIVE GROWTH
A. Maintaining Macroeconomic Stability
B. Moving Toward Fiscal Sustainability
C. Policies to Strengthen the Banking Sector and Promote Credit Provision and Access to Finance
D. Business Environment
E. Promoting Inclusive Growth and Protecting the Poor
F. Statistical Issues
POLICIES FOR 2014
A. Macroeconomic Policy Mix
B. Fiscal Reforms
C. Financial Sector Reforms
D. Economic Governance
PERFORMANCE UNDER THE ECF-SUPPORTED PROGRAM
STAFF APPRAISAL
BOXES
1. The Authorities’ Response to Past Fund Advice
2. The Drug Industry and its Impact on Economic Stability and Development
3. External Stability and Exchange Rate Assessment
4. Afghanistan’s New Consumer Price Index
5. Kabul Bank Asset Recovery and Resolution
FIGURES
1. Real Sector
2. Fiscal Sector
3. Monetary Sector
4. External Sector
TABLES
1. Selected Economic Indicators, 2011–14
2. Medium-Term Macroeconomic Framework, 2012–18
3a. Central Government Budget, 2011–14 (In billions of Afghanis)
3b. Central Government Budget, 2011–14 (In percent of GDP)
4a. Central Bank Balance Sheet, 2011–14 (At current exchange rates)
4b. Central Bank Balance Sheet, 2011–14 (At program exchange rates)
5. Monetary Survey, 2008–14
6. Balance of Payments, 2011–14
7. External Financing Requirement and Sources, 2010–2014
8a. Quantitative Targets, 2012–13
8b. Quantitative Targets, 2013
9. Status of Agreed Structural Benchmarks
10. Millennium Development Goals
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April 23, 2014
Prepared By
The Middle East and Central Asia Department (In collaboration with other departments, the World Bank, and the Asian Development Bank)
Contents
RELATIONS WITH THE FUND
RELATIONS WITH THE WORLD BANK
IMPLEMENTATION OF THE JOINT MANAGEMENT ACTION PLAN ON BANK-FUND COLLABORATION
RELATIONS WITH THE ASIAN DEVELOPMENT BANK
STATISTICAL ISSUES
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April 23, 2014
Approved By
Adnan Mazarei and Dhaneshwar Ghura (IMF), Ernesto May and Jeffrey Lewis (IDA)
Prepared by the staffs of the International Development Association and the International Monetary Fund1
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Press Release No. 14/236
FOR IMMEDIATE RELEASE
May 21, 2014
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