Journal Issue

In the News: IMF Approves $119 Million Loan for Afghanistan

International Monetary Fund. External Relations Dept.
Published Date:
July 2006
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The IMF’s Executive Board, on June 26, approved a loan of $119 million for Afghanistan under the Fund’s Poverty Reduction and Growth Facility. The Board cited the country’s strong economic performance and implementation of key structural reforms under a staff-monitored program, noting that these accomplishments had taken place amid continuing violence and turmoil. The priorities now will be to achieve further progress in boosting capacity, reducing poverty, and creating an investment climate conducive to private sector investment and sustained growth.

The Afghan authorities, with the help of the international community, have made impressive strides toward macro-economic stability since early 2002, when the Transitional Administration took over after more than 20 years of conflict. The authorities initially focused on crisis management and establishing or rebuilding key economic institutions and providing basic government services. The IMF, in early 2002, provided policy advice and technical assistance—notably on introducing a new national currency, preparing central bank and banking laws, improving fiscal management, strengthening revenue policy and administration, and bolstering the statistical database.

First step

In early 2004, the IMF and the Afghan government reached an agreement on the staff-monitored program, which provided a detailed framework for economic policies whose chief objectives were to maintain macroeconomic stability and build the capacity to implement policies and reforms. Under the staff-monitored program—which Steven Symansky, IMF mission chief, noted was as demanding as many of the Fund’s financial programs—the economy grew rapidly, inflation declined, and international reserves strengthened. Despite lingering insecurity, poor infrastructure, and weak institutions, the authorities were able to improve revenue collection, establish a transparent expenditure system with fiduciary standards, and modernize central bank operations.

More work to do

Reconstruction provided the catalyst for the resumption of broad-based economic activity, including agriculture. But sustained growth, according to Symansky, requires an enabling environment for private sector activity and investment. Other donors are providing support in this area. The IMF is working with the authorities to keep inflation relatively low, follow a prudent fiscal policy, and create a working central bank. Afghanistan has overperformed on revenue but underper-formed on expenditure—in part because, Symansky explains, “they are not able to spend the money.” In other words, the capacity to implement projects is still inadequate.

“The donors work very well together and in partnership with the government,” he says. But, at the same time, the government must also learn to manage its citizens’ expectations, as “donor pledges do not always translate into tangible results, such as more jobs.” Development often means building better institutions, and that, Symansky notes, takes time. Moreover, the results are not always apparent to the population.

The road ahead

Despite strong growth, Afghanistan remains one of the world’s poorest countries. Alleviating poverty will require well-targeted social programs and substantial investment if the authorities are to reach the announced goal of a per capita GDP of at least $500 by 2015.

The new economic program is meant to address these needs and help resolve outstanding debt issues, possibly in the context of the Heavily Indebted Poor Countries Initiative. The challenge will be that the program is taking place in an environment of increasing insecurity and weak capacity. Despite these concerns, Symansky is hopeful in light of the country’s performance under the staff-monitored program.

Over the next three years, the IMF-supported program will aim to sustain real GDP growth of about 10 percent a year, reduce inflation to about 5 percent, and further strengthen the country’s external position. The goal is to boost budgetary revenue to more than 8 percent of GDP while improving the provision of health care and education services.

For fiscal year 2006/07, the program assumes real GDP growth of 12 percent and a decline in year-on-year inflation to 9 percent. The operating budget deficit is targeted to decline to 2.9 percent of GDP through a combination of revenue measures and expenditure restraint. The fiscal program provides some flexibility to accommodate higher development spending if Afghanistan’s implementation capacity improves.

The authorities also intend to strengthen the monetary policy framework by developing the central bank’s analytical capacity, modernizing monetary policy instruments, and improving monetary statistics. To improve the investment climate, priority will be given to promoting good governance and strengthening the institutional framework, simplifying business regulations, and divesting public sector activities.

Given Afghanistan’s large development needs and limited repayment capacity, there will continue to be a need for a prudent external financing strategy, comprehensive debt relief, and continued donor support on highly concessional terms.

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