AFGHANISTAN - A/S SULLIVAN DISCUSSES DEBT RELIEF

C O N F I D E N T I A L SECTION 01 OF 03 KABUL 003299 SIPDIS SIPDIS DEPARTMENT FOR EB/FRONT OFFICE AND EB/OMA SCA/FO, SCA/A, SCA/CEN NSC FOR AHARRIMAN CENTCOM FOR CG CFC-A TREASURY PASS TO ANDY BAUKOL, MARK JASKOWIAK, AND JAMIE FRANCO E.O. 12958: DECL: 07/27/2016 TAGS: ECON EFIN EAID PGOV USAID SUBJECT: AFGHANISTAN - A/S SULLIVAN DISCUSSES DEBT RELIEF AND ECONOMIC CLIMATE WITH FINMIN AHADY Classified By: Deputy Chief of Mission Richard Norland. Reasons 1.4 (b ) and (d). ¶1. (U) Meeting attendees from the USG: A/S Sullivan CDA Norland OPIC, Deputy Chief of Staff, Dulce Zahniser State, Bilateral Trade Officer, Mary Beth Goodman Econ Counselor, Jack Spilsbury Treasury Attache, Sonja Renander Attendees from the GOA: Minister of Finance, Ahady Advisor to the Minister, Allan Kelly Advisor to the Minister, Lisa Pinsley ¶2. (SBU) SUMMARY: The meeting between EB A/S Daniel Sullivan and Afghan Finance Minister Anwar-ul Haq Ahady, on July 15, covered a range of issues, including: power development in Afghanistan, debt relief negotiations at the Paris Club, budget and revenue performance, and how to effectively fight corruption in Afghanistan. During the discussions A/S Sullivan strongly urged Ahady to conclude the Paris Club negotiations as soon as possible. (Pursuant to his discussion with A/S Sullivan, Ahady subsequently reversed a GOA decision to delay talks in Paris until September, thus opening the way to the agreement reached by the Paris Club creditors on July 18, to provide Afghanistan a 100% write off of their claims.) A/S Sullivan also agreed to follow up on the Minister's request for help regarding implementing an appropriate anti-corruption framework in Afghanistan. END SUMMARY -------------- BUILDING POWER INFRASTRUCTURE -------------- ¶3. (SBU) A/S Sullivan opened the July 15 meeting by describing his trip to Turkey and the opening of the BTC pipeline. Ahady noted the importance of power development and the need to attract investment. In addition, Ahady expressed some frustration over the slow development of the power sector in Afghanistan, in particular with respect to the northern transmission line. Advisor Kelly noted that the Government of India is working on one section of the line and that they are currently six weeks ahead of schedule on the construction. Turning to discussions about the development of a gas pipeline, Ahady said that he did not think that a pipeline through Afghanistan would ever be developed without U.S. encouragement. If feasible, he saw a pipeline from Turkmenistan as a potential source of additional revenue for Afghanistan, especially as demand for energy increases in South Asia. Sullivan noted that it was important to make sure that any pipeline be commercially viable. Ahady expressed frustration that this proposal has been on the table since 1993, and yet no one in the government seems to know whether the project is commercially viable. Ahady said that although energy is not under his Ministry's responsibility that he would have his staff engage on the pipeline proposal when it is next raised by the Ministry of Mines in order to press the question of economic viability. -------------- -------------- DEBT RELIEF - 360 ON DECISION TO NEGOTIATE AT THE PARIS CLUB -------------- -------------- ¶4. (SBU) By way of background, on Thursday, July 13, the GOA had decided not to attend the Paris Club meetings that were scheduled to begin on Tuesday July 18th in Paris, where the GOA would negotiate with its creditors for debt relief. The GOA pulled out of the meetings because in meetings with President Karzai and the cabinet there was a decision that parliament would need to be consulted before negotiations could begin. Parliament was not scheduled to be back in session until the 22nd of July. As a result, the GOA sent out letters to the Paris Club, and to the Russians KABUL 00003299 002 OF 003 apologizing for the delay of negotiations until the September Paris Club session, and asking for patience as the GOA worked through its governmental processes. (NOTE: Pursuant to his discussion with A/S Sullivan, however, Ahady proceeded to reverse the GOA decision to delay and was able to reinstate the Afghan debt issue on the July 18 Paris Club agenda. At the July 18th session, all Paris Club creditors, which include Germany, Russia, and the U.S., agreed to provide Afghanistan a 100% write off of their claims. Russia's claims total over $11.1 billion. END NOTE.) ¶5. (C) On the subject of debt relief A/S Sullivan asked for an update on the current state of play. Sullivan also related USG experiences on securing debt relief for Iraq from the Russians, and how timing was critical for securing the deal. With respect to Afghanistan, Sullivan urged the Minister to move as quickly as possible to solidify debt relief with its creditors, particularly given that the Russians presently seemed favorably disposed to 100% debt relief. Ahady agreed that he was also concerned about the timing, and had expressed this concern to President Karzai that morning. Ahady explained how he had taken the proposal to debt relief before the President and the cabinet for approval, and that they had agreed, but that there was concern about the sensitivity with parliament, recognizing that the very acknowledgment of Russian debt could cause political problems for the Karzai administration. ¶6. (C) However, the GOA had now decided that rather than consulting the parliament as a whole that they could perhaps move forward with negotiations by consulting a select group of parliamentarians. The meeting with the parliamentarians was to take place on Sunday, July 16th. If the outcome of the meeting is favorable Ahady said that he would like to go ahead with negotiations in Paris beginning July 18th. A/S Sullivan expressed that waiting until the September negotiations leaves more time for things to go awry and for the Russians to change their minds. TREASATT agreed to follow up with Treasury to see if Ahady's proposal is feasible. TREASATT also noted that the GOA still needs to reconcile its debt with the Russians, and the Russians might not be willing to negotiate at this juncture. Ahady said he did not think there was much to negotiate since he does not have any leverage with the Russians, that essentially he just has to agree to whatever number the Russians put forward. He also indicated that since the Afghan private claims could not be included in the deal, that he had talked to President Karzai about perhaps doing a special deal with the Afghan private sector. He did not elaborate further on what this deal might include. ¶7. (C) Ahady further explained that he felt that the GOA needs to move forward on debt relief now in order to clean up its balance sheet - that 100% is the best deal that they are going to get and they need to take advantage of the favorable environment now. Ahady recognized, however, that there is some risk that they may not receive the 100% write-off if they don't reach completion point under the Highly Indebted Poor Countries (HIPC) initiative. HIPC links a country's debt stock write-off to performance under an IMF program, the development of a poverty reduction strategy, and the completion of a number of structural benchmarks. -------------- -------------- BUDGET IMPLEMENTATION - IMPROVING REVENUE COLLECTION -------------- -------------- ¶8. (SBU) A/S Sullivan also inquired into the implementation of the 1385 budget and how the government is doing in terms of meeting their revenue collection targets. Minister Ahady related that revenues were slow in the first quarter of the year, but they still have exceeded their revenue target set by the IMF by a substantial margin, although the numbers are not yet final. Ahady estimated that the revenues for first quarter were $181 million, of which $40 million was KABUL 00003299 003 OF 003 non-recurrent revenue, against a target of $105 million. Ahady attributed the increases to the implementation of a road toll tax that will generate roughly $8-$10 million in the 1385 fiscal year, and an additional $30-40 million for the increase in the customs tariffs from an average of 4% to 6%. However, there are problems with the implementation of the tariff rationalization program as many traders have protested the increases. To appease the traders, Ahady indicated that they may need to compromise by decreasing the average tariff rate to some unspecified lower rate. ¶9. (SBU) A/S Sullivan asked how these revenues contributed to the budget overall and how much of government expenditures are covered by government revenues. Ahady relayed that out of a recurrent budget of $831 million, $520 million is covered by government revenue, and given current revenue trends Ahady expects the total revenue to increase to $550 million by year-end. The revenue number could be higher, but there is leakage at the border and there is not strong compliance with the business receipt tax. Ahady explained that he was not pushing broad tax compliance at this time because he does not have the capacity to enforce it and he thinks that tax compliance needs to be phased-in due to political concerns. -------------- FIGHTING CORRUPTION IN AFGHANISTAN -------------- ¶10. (SBU) After hearing about the leakage at the border, A/S Sullivan inquired about the government's efforts to address corruption. Ahady was energized by this topic and said that he is in need of help to deal with the problem, and that he had asked the World Bank to do a study on causes and mechanisms behind corruption in Afghanistan; he was not sure where this stood. TREASATT agreed to follow up with the World Bank to determine the status of the report. In particular, the Minister expressed that what he would really like is a broad, cross-cutting action plan with USG help on how to deal with corruption in Afghanistan. A/S Sullivan thought that it was important to explore additional potential resources to help the GOA fight corruption and to continue to work with the GOA to comprehensively address corruption issues. NEUMANN