Islamic Republic of Afghanistan: IMF Reaches Staff-Level Agreement on an Arrangement Under the Extended Credit Facility

Press Release No. 16/317 July 2, 2016

End-of-Mission press releases include statements of IMF staff teams that convey preliminary findings after a visit to a country. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. This mission will result in a Board discussion.

An International Monetary Fund (IMF) mission, led by Christoph Duenwald, held discussions with the Afghanistan authorities in May and June 2016, on IMF support for Afghanistan’s economic program. Following the discussions, Mr. Duenwald made the following statement:

“IMF staff and the Afghanistan authorities have reached staff-level agreement on an economic program to be supported by a three-year Extended Credit Facility (ECF) arrangement which the authorities have requested. Access under this arrangement is proposed to be set at 10 percent of Afghanistan’s quota in the Fund (SDR 32.4 million, or about US$45 million) in keeping with the current healthy international reserves position. The arrangement is subject to approval by the IMF Executive Board, which is scheduled to consider the authorities’ request on July 20, 2016.

“Economic conditions remain difficult. Real GDP growth was only 0.8 percent in 2015, and, while a small uptick to 2 percent is projected for 2016, this remains far below the level that is needed to ensure increased employment and improved living standards. Large fiscal and external deficits continue to be financed by donor aid. Downside risks, related to uncertain security conditions and potential shortfalls in external support, could lead to worse outcomes.

“The new ECF arrangement builds on the nine-month Staff Monitored Program¹ that was successfully completed in April 2016, and aims to play a catalytic role for continued strong donor support. The program supported by the ECF arrangement would rest on two pillars:

Structural reforms to facilitate private sector development. These will concentrate on areas where the Fund has a comparative advantage, to complement policies supported by Afghanistan’s other international partners. Initial measures will support the authorities’ anti-corruption efforts and fiscal reform agenda, including reforms to mobilize revenue and strengthen public financial management to enhance the efficiency of expenditure.
Policies to preserve macroeconomic and financial stability. The ECF arrangement will aim to gradually reduce underlying fiscal and external imbalances to prepare for a time when donor aid declines. Buffers—low public debt and ample international reserves—will remain strong to absorb adverse shocks. The budget will increasingly favor development spending to support a recovery in growth, while financial sector policies will aim to strengthen vulnerable and weak banks and reform the state-owned commercial banks. Monetary policy will continue to be focused on maintaining price stability and a flexible exchange rate regime, while fostering confidence in the domestic currency in the context of high dollarization.

“The authorities’ program supported by the ECF arrangement is part of a broader multi-year development framework that sets Afghanistan on a path to self-reliance and will help tackle economic challenges and assist in improving conditions for sustainable growth.”

¹ A Staff Monitored Program is an informal agreement between country authorities and Fund staff to monitor the implementation of the authorities’ economic program. It does not entail financial assistance or endorsement by the IMF Executive Board.