Press Release No. 19/479

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.

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.

“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.

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.