Abstract

Political and security uncertainties and an inadequate policy response led to lower growth and emergence of important fiscal and banking vulnerabilities in 2014. The establishment of a national unity government and the December 2014 London Conference has helped build confidence and reconfirmed donor support for Afghanistan. The proposed staff-monitored program (SMP) will foster continued close engagement with Afghanistan, address vulnerabilities, and help manage risks. An independent staff team is preparing an ex post assessment of the Funds’ engagement with Afghanistan since 2006 and its report will be sent to the Executive Board separately. Focus of the SMP: In the attached Letter of Intent, dated May 6, 2015, the authorities requested a new SMP covering the period April 1, 2015–December 31, 2015. The SMP will aim to mobilize revenue and address urgent banking vulnerabilities. Successful performance under the SMP would support a future request for an IMF financial arrangement, foster macroeconomic stability and inclusive growth. Policy recommendations: Fiscal policy will focus on mobilizing domestic revenue and rebuilding the treasury’s cash balance. Monetary policy will aim to preserve low inflation and maintain exchange rate flexibility to protect international reserves and competiveness, and avoid excessive volatility. Structural reforms will focus on: (i) revenue mobilization, expenditure control and repayment of arrears; (ii) financial sector reforms to deal with weak banks, promulgate the new banking law, amend the central bank law, strengthen banking supervision, and address weaknesses in state banks including New Kabul Bank; and (iii) improving economic governance by strengthening the anti- corruption, anti-money laundering, and countering the financing of terrorism regimes. Risks to the SMP: Risks, mostly on the downside, are related to adverse security developments, inadequate implementation of economic policies, political instability, and donor fatigue. Large security and development expenditure needs mean that Afghanistan will remain dependent on donor financing for an extended period. On the upside, a political agreement that improves security conditions, stronger domestic demand and early development of mining projects would result in faster growth.