Identifier
Created
Classification
Origin
05KABUL5052
2005-12-14 09:27:00
CONFIDENTIAL
Embassy Kabul
Cable title:  

FINANCE MINISTRY DEFLECTS CUSTOMS REFORM

Tags:  EFIN ECON EAID ETRD PGOV AF 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
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
-------

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.

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Customs Reform: Lacking
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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.

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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.

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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