IDA 15 NEGOTIATIONS GOAL - SUSTAIN MULTILATERAL

UNCLAS SECTION 01 OF 03 KABUL 000684

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DEPT FOR EB/IFD/ODF, SCA/FO, AND SCA/A
TREASURY FOR LMCDONALD, ABAUKOL, AND JCIORCIARI
NSC FOR AHARRIMAN
OSD FOR BRZEZINSKI

E.O. 12958: N/A
TAGS: EAID EFIN PREL AF
SUBJECT: IDA 15 NEGOTIATIONS GOAL - SUSTAIN MULTILATERAL
DEVELOPMENT BANK FUNDING LEVELS FOR AFGHANISTAN

REF: BERLIN 215

(U) This message contains SENSITIVE BUT UNCLASSIFIED
information. It is predecisional and not for release outside
the U.S. Government. Please protect accordingly. Not for
Internet Distribution.

SUMMARY

1.(SBU) As mentioned in reftel, Afghanistan could face
declining assistance from the multilateral development banks
beginning in FY-08 because Afghanistan's status as a
"post-conflict" country will begin to phase out over the next
three years. While figures are only speculative at this
time, the decline could be as much as 75%, from $200 million
in FY-10 to $50 million in FY-11. Such a decline would not
be consistent with the reality of Afghanistan's needs and the
current virulent insurgency in parts of the country. In
addition, the World Bank's $400 million London Compact pledge
for FY-09 and FY-10 could be cut if the IDA-15 replenishment
negotiations produce insufficient donor contributions. A
decline in the World Bank budgets would have serious negative
consequences for economic development and for the U.S.
ability to influence economic policy decisions. U.S. IDA 15
negotiators should incorporate into their strategy the goal
of ensuring sufficient donor contributions to lock in the
World Bank's $400 million London Compact pledge for FY-09 and
FY-10. U.S. negotiators should also factor into their
calculations the very real necessity to sustain this level of
funding at least through the end of IDA-15 (FY-11). This
will require negotiating an extension of "post-conflict"
status or some other characterization that will provide the
World Bank with justification to sustain its current higher
level of funding allocations. A similar issue will arise in
ensuring adequate future Asian Development Bank Funding
levels for Afghanistan. END SUMMARY.

IDA 15 NEGOTIATIONS AND AFGHANISTAN

2.(U) Replenishment negotiations (IDA 15) for the World
Bank's International Development Agency and the ADB's Asia
Development Fund (ADF),the concessional windows of both
multilateral banks, will soon commence. IDA replenishments
are expected to conclude in 2007, while ADF is expected to
conclude in 2008. Funding under IDA 14 will expire in FY-08.
During the Afghanistan Compact negotiations in London in
2005, the World Bank pledged $1.2 billion over five years and
the ADB pledged $1 billion to rank second and third after the
United States among donors. The World Bank pledge was
structured in a three plus two format - $800 million of IDA
14 money (FY-06, 07, and 08) and $400 million in IDA 15 money
for FY-09 and 10. There is a major concern about the
available funding for the second phase of the 5-year pledge,
which was heavily caveated by the level of donor
contributions to IDA 15 and the performance of the Afghan
government. According to the World Bank office in Kabul, a
preliminary assessment of the GOA's performance relative to
other post-conflict countries is positive. U.S. negotiators
should encourage strong donor commitments to IDA 15 as well
as firm up the Bank's commitment to the $400 million
allocation for FY-09 and 10.

3.(U) The World Bank's large Afghanistan Compact pledge in
London was made possible because the Bank placed Afghanistan
in its special post-conflict status. According to Bank
officials, this status will be phased out under current
procedures at the end of FY-10/11, at which point Afghanistan
will become a normal IDA country and must compete for funds
globally. The IDA competition criteria are based on key
performance criteria - the quality of economic management,
structural policies, public sector management and
institutions(governance),and policies for social inclusion
and equity. While Afghanistan looks reasonably good when
compared to most post-conflict countries, it will need to

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improve drastically its record on corruption, governance, and
public financial management to compete with normal IDA
countries. Assuming little change in these areas, the FY-11
World Bank allocation will fall substantially, to perhaps as
low as $40-50 million.

FISCAL POLICY IMPACT OF THE WORLD BANK PROGRAM

4.(U) World Bank contributions to the Afghan operating budget
help the Afghans finance recurrent spending priorities while
staying within IMF budget limits. A significant proportion
of World Bank allocations in the past two years has gone to
support Afghanistan's operating/recurrent cost budget.
Another $80 million is slated for this purpose in FY-08. The
grant or no-interest loan basis for the World Bank
contributions also assists the government in its efforts to
keep the budget in balance by eliminating or reducing
Afghanistan's debt repayment burden. The loss of World Bank
budget support in future years could seriously affect Afghan
government operations, including support for the security
forces.

MICROECONOMIC IMPACT OF THE WORLD BANK PROGRAM

5.(U) The World Bank is financing development projects across
the economy and throughout the country. At the project
level, perhaps the World Bank's greatest contribution is in
government capacity building. All Bank project funding
passes through the government's development budget, giving
the finance ministry and the line ministries invaluable
public financial management experience. The World Bank
provides funding for the operation of the Afghanistan
National Development Strategy secretariat, which manages the
JCMB/ANDS donor coordination process. The Bank is also
supporting the PRSP - Poverty Reduction Strategy Paper
process. Other areas in which the Bank is active include:
health (including Avian Influenza and HIV),public
administration Reform, rural development, the National
Solidarity Program, irrigation, horticulture, sub-national
governance, power (construction of the final leg of the NEPS
transmission line),and mining/hydrocarbon legislation.
Obviously, a precipitous decline in budgeting would force the
World Bank to either substantially reduce its effort across
this project portfolio or concentrate its effort in a few
sectors. Both options would have a negative affect on the
pace of development.

POLICY IMPACT OF THE WORLD BANK PROGRAM

6.(U) In the JCMB/ANDS donor coordination system, donors
garner greater influence in the policy and development
process the more resources they bring to the table. As
Afghanistan's second largest donor, the World Bank has used
its influence in the JCMB to keep the Afghans on track to
meet their Afganistan Compact objectives, without sacrificing
key policy requirements. The Bank's voice in Consultative
Group and Working Group meetings can be effective in pulling
together consensus on the way forward - as it is doing on
energy policy. The Bank has been decisive in deflecting
misguided initiatives, whether from Afghans or other donors,
back onto the track envisioned in London. The fact that
donors can alternate leadership on key issues demonstrates
broad donor support for Afghanistan to the government and to
the public. A smaller World Bank budget would imply a
smaller staff, less ability to lead, less influence, and
would necessarily place more of the burden on the U.S. to
lead the development effort here.

ASIAN DEVELOPMENT BANK

7.(U) Likewise, the Asian Development Bank programming is an
integral component of Afghanistan's development strategy. In
2007, the ADB plans to invest $150 million to help complete
the national highway system and $50 million to further

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develop power capacity by linking Afghanistan with Tajikistan
and Uzbekistan. ADB activities have focused on the national
roads, power and gas lines, and natural resource management
(agriculture, irrigation, and environment) sectors, together
with some programs on public financial management and public
administration reform. The ADB is also providing significant
capacity building technical assistance to Afghan economic
ministries.

COMMENT AND ACTION REQUEST

8.(SBU) If we do not act during the IDA 15 negotiations,
Afghanistan could suffer a precipitous decline in
concessional project funding from the multilateral
development banks at a critical juncture in its economic
development trajectory. We believe such a decline is likely
to have negative financial, programmatic, and policy impacts
on Afghanistan's medium term economic development. We simply
cannot afford to lose the World Bank's positive leadership
and financial contributions. The key seems to lie with the
World Bank's post-conflict status designation for
Afghanistan. It is not intuitive for the World Bank or the
Asian Development Bank to substantially reduce its role in a
situation in which the government is facing an active
insurgency in some parts of the country. However, we need to
take care not to overstate the situation. A designation of
Afghanistan as a nation in wide-spread conflict could also
have a negative impact as it would be difficult for these
multilateral development banks to maintain a presence here
under that context (as we have seen in Iraq). We understand
there is some talk of using the term "conflict-affected" to
describe the situation, but we would need to further explore
the definition and impact of such a designation.

9.(SBU) As the largest shareholder in the multilateral
development banks, U.S. leadership will be key to developing
consensus with other shareholders and senior bank management
on the necessity of sustaining multilateral development bank
funding levels for Afghanistan beyond the currently
anticipated end of Afghanistan's World Bank "post-conflict
status." U.S. negotiators are requested to include in the
strategy the twin objectives of ensuring sufficient IDA 15
contributions to guarantee the World Bank's $400 million
pledge for FY-09 and 10 and of sustaining those levels of
funding at least through IDA-15 (which ends in FY-11).
Similar objectives should be shaped to ensure adequate future
ADB funding for Afghanistan. END COMMENT AND ACTION REQUEST.
NEUMANN