Afghanistan’s Numbing Scandal Scars
As donors convened in Bonn for their annual Afghanistan pledging session on the tenth anniversary of the Taliban’s overthrow, Pakistan stayed away in protest over security clashes as Asian, Western and Gulf delegates considered aid documents critical of banking sector cleanup and future economic viability with desired mid-decade foreign troop exit. The meeting came as the IMF finally agreed to a new 3-year $125 million facility after the collapse of number one Kabul Bank with $4 billion in assets due to widespread insider dealing and fraud met with belated and lackluster regulatory response. Despite provoking a run on other institutions including Azizi which too is now under investigation, initial reaction was muted as presidential family members and allies claimed innocence and relationship protection. After an international audit, senior management was sacked and a receiver appointed for bad asset recovery while deposits were transferred to new entity. To cover the balance sheet damage the Finance Ministry was authorized by parliament to issue a promissory note to the central bank through 2020. About one-tenth of the $1 billion missing has since been seized. Since 2002 some 15 domestic and foreign banks have opened but the financial system remains dominated by hundreds of informal hawala money-transfer networks, with over 300 licensed. Collateral and contract enforcement practices are rudimentary and oversight has been “almost non-existent,” according to IMF findings. Poor governance and corruption, and low per-capita income at just over $500 are a “heavy toll” explaining grant reliance for 40 percent of GDP, although opium and related illegal activity could account for a comparable portion.
Growth will be over 5 percent this fiscal year, with inflation running at double that pace on high imported fuel and food costs. The budget deficit outside transfers is 4 percent of GDP and the currency has been stable against the dollar. Tax revenue with mining and VAT proceeds could reach 15 percent of output in the medium term, the Fund projects, and government securities could be launched over the period to support local borrowing but fiscal sustainability is a “distant goal.” International reserves are sufficient for several months of imports but depend overwhelmingly on billions in foreign donor and defense inflows. The country is at the bottom of world competitiveness and transparency rankings, and is still at high risk of debt distress. On monetary policy no-interest Islamic sukuks will be introduced for interbank cash and liquidity purposes, and the New Kabul Bank will be privatized next year or will be closed or merged without a suitable buyer. Eventually Basel capital adequacy and FATF anti-terror and money laundering norms could be incorporated, but that agenda is ambitious as the decade-long overseas presence is phased out, the review suggests.
