FINANCE MINISTRY DEFLECTS CUSTOMS REFORM

C O N F I D E N T I A L SECTION 01 OF 03 KABUL 005052 SIPDIS USAID FOR ANATSIOS STATE FOR SA/FO, SA/A, EB NSC FOR THARRIMAN, KAMEND TREASURY FOR APARAMESWARAN COMMERCE FOR AADLER E.O. 12958: DECL: 12/14/2010 TAGS: EFIN ECON EAID ETRD PGOV AF SUBJECT: FINANCE MINISTRY DEFLECTS CUSTOMS REFORM REF: KABUL 4952 Classified By: AMBASSADOR RONALD E.NEUMANN. REASONS 1.4 (B,D) -------------- Summary -------------- ¶1. (C) Afghan customs reform is lagging due to weak GoA commitment and systemic corruption at all levels. In discussions between USAID and its implementing partner Bearing Point (BP) and with the UK,s DFID and its implementing partner Adam Smith International (ASI),there was broad agreement that the GoA Ministry of Finance lacked a coherent vision and strategy for comprehensive customs reform and has yet to exhibit political will to promote change. Instead of focusing on increasing customs revenue levels, the Finance Ministry appears more concerned with responding to the interests of traders who benefit from corrupt border practices. DFID will terminate its support to central customs office in July 2006 at the request of the Finance Minister, who cites the need to "rationalize" donor assistance. Customs revenue is critical to achieving budget sustainability in the next few years. Reftel outlined Embassy,s Border Management Initiative proposal to enhance customs collection at 12 key border crossing points. However, without firm GoA resolve to support this and related efforts to develop transparent customs operations, Afghan customs revenues will not increase and the budget gap will not be adequately addressed. How and how urgently the GoA addresses the need for customs reform will be and important issue for donors to address on the margins of the upcoming Afghanistan London Conference. The Ambassador viewed the Herat customs operation December 13 and plans to make a major push on the issue with the Finance Minister and President Karzai. End Summary. -------------- Customs Reform: Lacking -------------- ¶2. (SBU) In a December 6 meeting with BP and ASI, key expatriate advisors with three years experience working on Afghan customs issues noted that customs reform under ex-Finance Minister Ashraf Ghani was swift and there had been clear GoA resolve to reestablish controls at borders and at customs houses throughout Afghanistan. A new customs law was passed to increase transparency and controls in customs administration. A working division of labor was established whereby DFID assistance through ASI focused on customs reform at the central government level and USAID support through BP was directed to customs operations in the field. Even with political resolve and effective technical assistance, there were and remain many difficulties, as vested interests entrenched over the past thirty years have resisted changes that would limit or eliminate corrupt practices. ¶3. (C) According to ASI and BP, bribes to undervalue cargo or to list cargo at reduced volumes are common at Afghan border crossings. Cargo passes through border points and then proceeds to the nearest customs house for processing. In Herat, the busiest border crossing, the customs house is 100 km from the border. Along the way, many truck cargoes are unloaded and their goods transported as contraband, often to Pakistan. Many provincial governors have established well-oiled mechanisms to extract patronage with traders to circumvent customs procedures. Minister Ghani strongly supported customs reforms and revenues quickly increased from minimal levels to over USD 150 million in 2004. ¶4. (C) Under new Minister of Finance Ahady and new Deputy Minister Farhad, reform efforts have palpably slowed. Estimates from CFC-A, BP and ASI all conclude that customs revenues could easily double with transparent and effective controls. Private customs brokers, new players authorized and regulated under the new customs law, process customs forms in the customs house and ensure transparency. Ahady has asked that traders also be able to process their own goods directly, a change that would require amending the customs law. Traders wield tremendous power. This change would represent a setback for reform and it is inconsistent with international best practice. Twenty seven women had been trained over the past two years by Bearing Point on data entry for the new computer system of customs tracking, called ASYCUDE. The GoA agreed to hire the women in July, 2005. As of December 2005 they have yet to receive remuneration from the government, but have continued to work based on the hope that they will eventually be paid. This pool of skilled labor is at risk and a significant investment could be wasted. These issues highlight the influence peddling of local traders and the lack of resolve of central government to induce reforms. ¶5. (C) Both BP and ASI long-term advisor teams on the front line of customs reform shared the view that the Director of Customs Dismullah Kamawi and Deputy Minister of Finance Asad Sakhi Farhad are not transparent actors in the customs reform process, but are in fact direct beneficiaries of the current system of corrupt practices. Both the USG and DFID have insisted on moving customs collection from towns inside Afghanistan directly to the border crossings. This has met with stiff resistance and non-action from the GoA. There is also little interest on the part of the Afghan government to allow for permanent international oversight at border crossings. Minister of Finance Ahady objects to the "high cost" of these international advisors, even though ASI and BP project that advisor oversight would produce far more revenues than the cost of their salaries, which in any case are paid for by international donors at no cost to the Afghan government. -------------- GoA Not Focused on Customs Revenue Generation -------------- ¶6. (C) The Ministry of Finance customs policies place, according to BP and ASI experts, far greater priority on serving the interests of traders at the border than on revenue generation. Politically ambitious Finance Minister Ahady, they say, is well aware of corruption issues, but does not want to take actions that could estrange important constituencies, including Herat traders and former Heart Governor Ismael Khan who still wields tremendous influence through a traditional system of patronage. As a result of such political pressures to maintain the status quo, the GoA impetus to increase revenue generation has lost momentum. ¶7. (C) DFID, which has provided support through ASI to customs in policy training and human resource management will end its customs support eight months early in July 2006, due to a request from Minister of Finance Ahady to "rationalize" donor assistance. Yet both USAID and DFID acknowledge close collaboration and zero overlap in activities of their BP and ASI customs reform implementing partners. DFID said it was informed by Minister Ahady that USAID, through BP, would focus on customs reform, while DFID and ASI would concentrate on tax and budget reform. The Finance Minister, however, has insisted on a very limited number of advisors from BP that would not permit adequate support to customs reform. USAID does not have funding to support complete customs reform that BP advisors estimate will cost USD 55 million. ¶8. (SBU) The World Bank began support for customs reform in May 2003, focusing on customs refurbishment in Kabul. Its new customs reform program (CURE) was subsequently undertaken to provide technical assistance to central government customs administration and provide improved communications and software for customs management. The Bank has produced numerous customs policy papers for the GoA. However, according to BP and ASI advisors, little action has been taken on their recommendations. For security reasons, World Bank staff are limited in their access to remote customs houses and border points in Afghanistan and BP and ASI advisors agree that the World Bank approach until now has had limited impact on the customs reform process. -------------- Customs Revenues Needed To Close Budget Gap -------------- ¶9. (SBU) The IMF, in its latest November 2005 Staff Monitored Program review, states that customs duties will remain the most significant source of government revenues in the near-term until Afghanistan,s income and consumption tax base expands. Ambitious GoA revenue targets to increase domestic revenues from 4.5 percent of GDP in FY 04/05 to 8.1 percent in FY 10/11 will require significant customs administration reform in addition to a more coherent tax policy. Government revenue projections for FY 10/11 still have customs duties accounting for about 50 percent of overall budget revenues, based on the assumption of significant customs reform. Customs reform is central to improving government revenue streams and, without revitalized Ministry of Finance focus on customs policy and practice, there is general agreement among international financial institutions that GoA budget revenue targets will be difficult to realize. -------------- Customs Reform: London Conference Theme? -------------- ¶10. (C) Reftel details Post,s Border Management Initiative proposal on how to proceed with customs reform, a vital priority. The acceleration of GoA customs reform and Finance Ministry resolve to promote key reforms should be an important theme in discussions of further donor assistance in the margins of the London Conference (the GoA needs to hear a forceful message of donor concern but we think this should not be public). Joint donor recommendations could include moving the physical collection of customs duties and tariffs out to the borders; establishing permanent international oversight at key border control points for a two to five year period; and even (quietly, behind the scenes) propose the removal of the Director General of Customs who has not supported administrative reforms. With these changes, additional resources to develop customs capacities at the borders can be provided. Customs revenues could increase dramatically as a result of these changes and the GoA could exceed IMF revenue benchmarks and accelerate progress towards budget sustainability. If Afghanistan is to promote itself as a "land bridge" between Central and South Asia, a transparent customs process in the framework of broader and more efficient border management is the first building block. -------------- Ambassador,s Comment -------------- ¶11. (C) I toured the Herat customs post December 13. Everything I saw and sensed is troubling and supports this analysis. In coming days I intend to start consulting the donor community and SRSG to try and raise the political level of our concerns. This will be a hard, slow slog but we need not wait on London to start work. NEUMANN