Statement by an IMF Staff Visit to the Islamic Republic of Afghanistan

Following a request by the Afghanistan authorities, an International Monetary Fund (IMF) team led by Enrique Gelbard visited Kabul during February 5–15 to assess economic conditions and discuss an economic program that could be supported by the IMF’s Extended Credit Facility (ECF).

The mission issued the following statement at the end of the visit:

“The mission held productive discussions with the authorities on their policy framework and reform plans, including monetary and fiscal policies as well as measures to address the situation of Kabulbank and strengthen the financial system.

“Economic activity has been growing at about 8 percent. Headline inflation has risen from 5 percent in July 2010 to 18.4 percent in January 2011, driven by higher international food prices and an accommodative monetary policy. Tax collection has been growing at about 32 percent per year, a commendable achievement for almost two years of impressive gains.

“The economic policy discussions centered on the need to keep monetary expansion under control with a view to lowering inflation and pressing ahead with revenue reforms to ensure continued sizable increases in tax collection in coming years.

“Regarding the financial sector, and following a run on Kabulbank in September 2010, the authorities have taken measures to reassure depositors, put the bank under the control of the central bank, and suspended shareholders’ rights. They are now finalizing a comprehensive plan to address the outstanding issues with Kabulbank. The goal should be to design and implement a plan that is transparent, credible, and fully financed. This will require several immediate measures to ensure the stability and future development of the financial system, beginning with a clear communication to explain the steps to be taken to deal with the bank and protect the banking system, ensuring that any illegal behavior or fraud is prosecuted in accordance with the law, and putting the bank under receivership, which is the most appropriate mechanism for successful resolution of the bank. This will be followed by a process where the bank will be rapidly sold or wound down and the central bank is recapitalized with government resources as needed.

“The authorities have strengthened supervision of banks and are expected to enforce key banking regulations and impose sanctions on any noncompliant bank. Our discussions also dealt with planned audits of several banks, other governance reforms affecting the financial sector, and revisions to the banking law to improve corporate governance in banks, prevent insider lending, and provisions for early intervention and resolution of “problem” banks.

“Discussions on a possible ECF-supported program will likely continue in the coming weeks, especially with regard to a resolution plan for Kabulbank and measures to increase transparency and accountability in the banking system. Once an understanding is reached, and contingent on IMF management approval, the Fund’s Executive Board could consider the approval of a new Extended Credit Facility for Afghanistan.”