Economy & Development

The IMF, Kabul Bank, government salaries and transition (updated)

The IMF and the Afghan government failed to reach an agreement last week on how to deal with the Kabul Bank crisis. The long-simmering controversy, which began months ago, is starting to have far-reaching consequences both for the cash-flow of the Afghan government and for the possible nature of the transition, as donors are making their aid conditional on the decisions of the IMF. So what exactly is the matter?

The IMF program that is at the heart of the current crisis is a loan under the so-called Extended Credit Facility (ECF). The loan itself is not that important, but it is seen as a trusted framework for overall donor relations. The three-year program, worth $120 million, ended in September 2010. Its extension for another three year had already in principle been agreed in July 2010 (see this IMF press release), but was put on hold at the last minute when the Kabul Bank crisis broke. This last minute decision provided the donors with an unexpected opportunity to put pressure on a government that was reluctant to act. And although it is formally the IMF that is undertaking the negotiations, it is generally understood that the real actor behind the scenes, driving up the pressure, is the US administration.

The most direct consequence of the current stalemate has been the freezing of funds from the ARTF, the Afghanistan Reconstruction Trust Fund, which is administered by the World Bank. The trust fund was established to pay for government salaries in the non-security sectors (police and army are paid from LOTFA, the Law and Order Trust Fund), with a smaller portion reserved for a government reform incentive program. The Afghan government currently pays an estimated 60% of its non-security salaries from its own resources, but it will still need to re-direct money to compensate for the ARTF freeze (ironically, one of the reasons the ARTF was set up, was to prevent cash flow problems in the payment of salaries).

Consequences are unlikely to be immediate, but could potentially be far-reaching. It is unlikely that the salaries will not be paid at all, although they may be late (which is not unusual). Money will be moved around, most probably resulting in cuts in the discretionary development spending and the putting on hold of certain government-funded programs. Other key programs, like the often praised National Solidarity Program (NSP), will start running out of money soon and donors are unlikely to contribute in the absence of an IMF agreement. More fundamentally, the prospects of getting agreements on multi-year funding in crucial fields like health, education and agriculture are becoming very slim indeed.

So what needs to be done to turn the situation around? The Afghan government has been provided with a list of ten so-called ‘prior actions’ which need to be fulfilled for the IMF to agree to a new EFC program. All parties agree that by now eight conditions have been met. Two remain: the forensic audit of the Kabul Bank and a ‘second bank’ (*), and the gradual recapitalization of the Central Bank, endorsed by Parliament. The audit of the Kabul Bank, which was funded by Dfid, has started (The Economist mentioned Kroll as the company who got the job), but the audit of the ‘second bank’ seems to still be pending and it is not immediately obvious who has to move on this.

The second condition, the recapitalization of the Central Bank, has stranded in Parliament. When the budget was introduced for the second time, the inclusion of a first repayment installment of $73 million was one of the reasons the budget was rejected (again). The third time the Ministry of Finance took no risks and removed the added budget line. The donors now demand that the Ministry introduces a supplemental budget to Parliament and lobbies the MPs to ensure that it gets passed. The Minister insists that he has been lobbying day and night, while the Parliamentarians – who are currently somewhat preoccupied (see earlier blogs here and here, and the rumours that today the Special Court may be making some announcements) – insist that they need a more extensive explanation and that they want the relevant Ministers and the head of the Central Bank to appear in Parliament again. The MPS have formally not gone on recess yet, but it is unlikely that they will use this extra time – which is mainly spent in so-called ‘silent sessions’ – to discuss budget matters.

Interestingly, neither of the two remaining ‘prior actions’ are strictly in the realm of the executive, nor are they obvious indications of the sought-after government reform. It has now become a battle of wills, where the executive is expected to prove it is ‘trying harder’, and not just posturing and complaining that it has done all that was within its power and that it is now being unjustly punished for circumstances outside its control.

It is a stalemate, with both sides accusing each other of not really wanting to solve the problem. The Afghan government, in particular Finance Minister Zakhilwal, complains of moving signposts. He claims that new conditions are added whenever the old ones have been met, and that this has become a politicized case that is being used to squeeze and punish the Afghan government. The donors, on the other hand, don’t believe the government is trying as hard as it loudly claims and are reluctant to give up this unique piece of leverage, now that they have found it.

It has become a game of posturing, with both sides pretending to be not too bothered. The Minister of Finance, though quoted here as saying that his government would ‘exert every energy to reach a satisfactory agreement with donor countries’, is keeping up his bluff: ‘Suspending aid delivery will naturally cause difficulties for a country like Afghanistan [but] so far, our difficulties are not at a level to cause us serious and immediate concern. I ask my compatriots not to be influenced by negative propaganda by some foreign media in this very critical stage in our history.’ The donors in the meantime, while maintaining a united front, express concern over what may happen if neither side starts blinking soon.

After all these years of talking about the need for conditionality of aid, it has suddenly crept up on us. But as could be expected it is ambiguous what the real results of it are likely to be. It is meant as a clear message that those involved – the perpetrators of massive banking fraud, the oversight institutions that allowed this to happen, the government that doesn’t want to deal with it – should not be allowed get off too lightly, but in the confusion of unintended consequences and half-met conditions it is becoming somewhat inarticulate. It is not clear whether it will be resolved any time soon, neither side seems in a hurry. What is clear is that with the transition looming releations are changing. This may be a foretaste of how things are likely to become.


* The internationals are treading very gingerly and generally do not mention the second bank by name for fear of causing another bank crisis. The situation in the banking sector is, interestingly, common knowledge among well-informed Afghans – just like the corroded state of the Kabul Bank was commonly known before the story broke. The issue is thus not so much that the exposure of the weaknesses in other problematic banks would inform a public that would otherwise be largely unaware. It is rather that making these problems public – particularly when done by prominent US media outlets – is seen as a signal that the US will be going after these banks too. Depending on a person’s point of view, this is either seen favourably, in the hope that finally something will be done about the corruption and cronyism, or alternatively as a hostile and politicised act, undermining a financial system that would have otherwise been quite fine (a view often heard, in different variations, in government circles).


Update: Later that day Minister of Finance Omar Zakhilwal expressed his impatience with the impasse (Reuters quotes a press conference here): “We are now negotiating with a partner who is not a willing partner to actually conclude this … We find this shifting of position and rigidity on issues that are not consequential … it’s a waste of my time, absolutely. The IMF is making excuses. We have met all their demands” he said, describing the supplementary budget as “non-consequential”. 

The head of the High Office of Oversight (and IEC chair during the 2009 Presidential elections) Azizullah Ludin also weighed in on the matter – rather unhelpfully. Tolo quotes him as saying: “The donors should not stop giving aid for this minor incident. They should instead help us get rid of the situation.”  Unfortunately, treating the matter as overblown and inconsequential will only make it less likely that the donors will budge. More to follow, most probably.

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Thematic Category: Economy & Development