(MENAFN - Wadsam) The IMF team has reached a staff-level agreement with the
Afghan authorities on the completion of the first review under the Extended
Credit Facility arrangement.
An International Monetary Fund (IMF) team led by Azim
Sadikov conducted virtual discussions with the Afghan authorities on the first
ECF review in March-April, 2021, and concluded to agree on the completion of
the first review under the ECF arrangement.
The agreement is subject to approval by the IMF Executive
Board, which is expected to consider the first review in early June. The
review's completion will make about US$147 million available to Afghanistan to
cover external and fiscal financing needs.
The three-and-half-year ECF arrangement approved in November
2020 is supporting Afghanistan's recovery from the Covid-19 pandemic,
buttressing reforms to tackle structural weaknesses in the economy, and
providing financing to enable priority spending. The ECF was also instrumental
in catalyzing donor financing at the Geneva donor conference in support of
Afghanistan's reform and development.
Afghanistan continues to face formidable challenges, with
the precarious security situation hurting confidence and growth. The peace
negotiations hold the promise of a resolution of the armed conflict paving the
way for lasting economic development and prosperity. In the meantime,
reform-oriented policies supported by donor grants and capacity development
remain critical to lay the foundation for inclusive growth and poverty
reduction and limit economic scarring from the pandemic.
Afghanistan has been hit hard by the Covid-19 crisis. To
mitigate its impact on the Afghan people, especially the vulnerable, the
authorities raised spending for health and social needs supported by donor and
IMF financing. The authorities' swift response and the favorable weather, which
boosted the agricultural production by more than 5 percent, helped contain the
economic contraction in 2020 to 2 percent. Revenue shortfalls due to the
slowdown and pandemic spending led to a widening of the fiscal deficit to 2.3
percent of GDP in 2020.
High-frequency data are pointing to a recovery, with working
hours, social mobility, and cross-border traffic largely back to pre-crisis
levels. Growth is projected to rebound to 2.7 percent in 2021 but remains
subject to considerable downside risks from the evolution of the pandemic,
insecurity, and the incipient drought due to a disappointing winter
The team discussed with the Afghan authorities the
implementation of economic reforms, commending them for prudent macroeconomic
management under challenging circumstances as well as progress towards
bolstering financial sector resilience and enhancing the transparency of public
To help sustain the recovery and limit scarring, the
authorities intend to target a 2.5 percent of GDP overall fiscal deficit this
year. Hitting the 2021 budget's ambitious revenue target became challenging
after a disappointing first quarter outcome. The authorities have therefore
realigned their 2021 spending plans with prudent revenue estimates by putting
on hold slower-performing projects while protecting health and other social
priority outlays. The authorities' task of mobilizing domestic revenue hinges
critically on restoring tax compliance to its pre-pandemic level and
accelerating preparations for the VAT introduction later this year.
Monetary policy remains geared to low and stable inflation,
with the authorities committed to letting the Afghani move with market trends
to preserve competitiveness. The pandemic has heightened strains in the banking
sector, leading to a worsening of asset quality and lower bank profits. In
response, Da Afghanistan Bank has appropriately intensified its monitoring for
early detection of stress, focusing on weak banks which boosted their capital
and loan-loss reserves.
Despite delays inflicted by the pandemic, the authorities
remain committed to structural reforms. They intend to reinvigorate the reform
of state-owned banks with support of the World Bank, strengthen the
institutional framework for managing fiscal risks, conduct the audit of
COVID-related spending in 2020, and complete systematic digitalization of asset
declarations. Going forward, given fragility and capacity constraints, the
authorities should further prioritize their reform agenda to ensure steady
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