Editor in Chief: Moh. Reza Huwaida Wednesday, January 17th, 2018

Donors Suspending Aid to Afghanistan

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Donors Suspending  Aid to Afghanistan

The Kabul bank collapse and the subsequent refusal of the International Monetary Fund (IMF) to deliver its aid packages have caused a stir in the government of Afghanistan. The Kabul Bank crisis led to the collapse of the bank and forced Da Afghanistan Bank, the country's Central Bank, and government of Afghanistan to take swift action by guaranteeing the assets of the bank, and in fact nationalizing Afghanistan's largest private sector bank.

As reported, the Finance Ministry had requested the Parliament to earmark a $52 million bailout package as part of a $73 million government plan to settle the bank's short-term financial obligations so that the bank can resume full activities.

The Parliament has so far refused to allocate the funds, demanding prosecution and conviction of the bank's erring management. Finance Minister, Hazrat Omar Zakhilwal, has warned the Parliament that its refusal to clear the funds will further exacerbate the government's financial problems.

Earlier in February, the IMF had suspended delivering aid to Afghanistan, demanding resolution of the ongoing crisis in the bank. Afghanistan government and the Finance Ministry in return cut off relations with the IMF, accusing the institution of unjust interference and pushing its own "politically motivated" agenda.

The government of Norway also has suspended its aid to Afghanistan citing serious concerns regarding corruption and the state of governance in Afghanistan. The U.K. government too has put on hold delivering funds to Afghanistan's Reconstruction Trust Fund. Developmental budget of the government of Afghanistan comes in its entirety from foreign donors.

Another half of the normal, operating budget of the government is also funded by foreign donors. Afghanistan's Reconstruction Trust Fund was first established in April 2002 to provide a single platform for various donor countries to pool their resources and give overall direction and coordination to the incoming aid funds.

Afghanistan government's developmental, as well as, operating budgets are financed through this Trust Fund. The government of Afghanistan has been able to at least provide for half of its running expenses by relying on its own domestic sources of revenue.

Every body agrees that holding the government of Afghanistan to account and demanding action by it to improve the state of governance is desperately needed; especially at a time when the country prepares to take a much greater responsibility for its security and economic affairs in the run-up to the 2014 deadline. The IMF's decision to withhold aid to Afghanistan is, ostensibly, a move in this direction by this international financial institution.

However, the track record of IMF over the past many decades and in other developing countries such as Afghanistan is indeed filled with politically motivated proposals aimed at pushing a harsh version of neo-liberal economic policies.

For example, in Egypt under Hosni Mubarak, IMF policies implemented over more than three decades, resulted into impoverishment of millions of Egyptians. The same is true in the case of Tunisia. The policy makers in the government of Afghanistan might have a good set of reasons to sever ties with the IMF.

Apart from IMF, other countries and international institutions that assist Afghanistan have for long complained about corruption and the state of governance in the country. They view these problems as major obstacles in the way of making their aid effective.

As far back in 2005, many donor countries and institutions had realized that a large share of their financial aid is wasted due to corruption in both the government and the domestic NGO sector. Back then, they had started to develop a cold feet and had begun to contemplate reducing their volume of aid to Afghanistan.

The concerns and apprehensions of the International Monetary Fund (IMF) regarding the banking system in Afghanistan is justified. As the country's banking sector slowly expands and more people and investors start to deposit money and obtain credit and loans, the need for an effective regulaory environment has been increasingly felt.

In its current form and shape, whether the government can provide this sort of effective regulation is highly uncertain especially for the International Monetary Fund and other countries that are engaged in building Afghanistan's banking and financial system.

Now the government of Afghanistan and the Finance Ministry argue that if the lawmakers do not ratify the $52 million bailout package, then the government will face serious financial problems. This statement made by the Finance Minister is only true to some limited extent since the funding that has been suspended by the IMF and the World Bank have nothing to do with the normal, operating budget of the government.

The areas of funding that are cut by the IMF are all developmental activities aimed at reconstructing and modernizing Afghanistan's public finance institutions and mechanisms. IMF currently helps Afghanistan build and strengthen its central banking, regime of rules and regulations, tax and customs administration.

These are all developmental areas and have nothing to bear with the normal, operating budget of the government of Afghanistan. Therefore, IMF's funding suspension will have little impact on the government's coffers and financial position to meet its running expenses.

On the other hand, the IMF's decision to halt delivering assistance to Afghanistan is an indication that the international community, particularly the U.S. and other major donor countries, are deeply dissatisfied with how the government of Afghanistan has been handling and overseeing its banking and financial sector.

Reports say that more than $460 million dollars in Kabul Bank were loaned to cronies without proper documentation and with no collateral and security. This alone is enough to expose the extent of the rot, with the Central Bank of Afghanistan being nowhere all these years to take appropriate action. The concerns of IMF, the U.S. and other donor countries are well justified.

Afghanistan desperately needs to dastically increase its sources of income and move away from simply relying on foreign donors and international military-related spending. According to World Bank, 98% of Afghanistan's Gross Domestic Product comes from foreign donors and military-related spending.

This is not at all sustainable beyond 2014 and Afghanistan's government has a very limited window of opportunity to rapidly devise and implement plans in partnership with the international community to diversify and increase the country's income sources.

The author is the permanent writer of the Daily Outlook Afghanistan. He can be reached at outlook afghanistan@gmail.com

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