AFGHANISTAN RECONSTRUCTION TRUST FUND (ARTF)

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E.O.12958: N/A
TAGS: EINV EFIN ENRG ETRD ECON AF FAS
SUBJECT: AFGHANISTAN RECONSTRUCTION TRUST FUND (ARTF)
UPDATE

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SUMMARY
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1. At the December 17 Quarterly Donors meeting, the
Afghan government met with donors to discuss the
Afghanistan Reconstruction Trust Fund (ARTF). The
Government of the Islamic Republic of Afghanistan
(GIRoA) and the ARTF donors approved a proposal to
reform the Recurrent Cost Window of the ARTF. The
proposal, drafted by a working group consisting of the
Afghan Ministry of Finance and donors that included the
United States, lays out a gradual decline in automatic
budget support through the Recurrent Cost Window. It
also establishes an off-setting incentive mechanism to
reward the government for achieving economic reform and
revenue generation benchmarks to be agreed upon by
GIRoA and donors during an annual consultation process.
If these benchmarks are achieved, incentive funds would
be made available as part of the following yearQs
Recurrent Cost Window support. This represents a key
step in the future evolution of the ARTF from an
emergency support mechanism to a program development
fund, and is scheduled to be in place for the upcoming
1388 budget year (March 2009 Q March 2010). Formation
of a technical working group is planned for January
2009 with a mandate to produce a draft Financing
Strategy by the next ARTF Quarterly Meeting, in March

2009. Program-based budgeting is an important step to
align ARTF funding with the Afghanistan National
Development Strategy (ANDS) to achieve Millennium
Development Goals (MDG).


2. Members of the Technical Working Group that formed
as a result of the ARTF Donors Committee meeting in
September 2008 to review the findings of the ARTF
External Evaluation included the Ministry of Finance
(Budget, Revenue, Fiscal Policy, MinisterQs Office),
U.S., UK, Italy, Germany, EC and the IMF. The World
Bank facilitated the working groupQs discussions
leading up to the December meeting. END SUMMARY.

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AFGHANISTAN RECONSTRUCTION TRUST FUND (ARTF)
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3. The ARTF is a multi-donor trust fund administered
by the World Bank and funded by 27 donors; mobilizing
over USD 2.4 billion by the end of solar year 1386
(March 2008). During the six years since it was
established in 2002, the ARTF has been the main source
of pooled financing for GIRoAQs recurrent budget, but
has increasingly supported priority investments in the
GovernmentQs reconstruction program. At the end of
solar year 1386, projects covering infrastructure,
rural development, technical assistance (TA),capacity
development, and education had a total commitment of
over US $750 million.


4. For solar year 1387 (March 2008 Q March 2009),
donors pledged US $670 million, bringing the six-year
total to over US $3 billion. The main ARTF donors are
the United Kingdom, Canada, United States, European
Commission, Netherlands, Norway, and Germany. Iran,
India and Arab states are also members of the ARTF.


5. Afghanistan is subject to exogenous shocks. Large
volumes of off-budget assistance (i.e. the External
Budget) mean unpredictability for the future
requirements of the core operating budget (including
implications of external budget investment on the
future core operating expenditures). Insecurity,
national elections, and public administration reform
also create new and uncertain pressures on
expenditures. Therefore, any overall and rapid decline
in ARTF Recurrent Cost (RC) support would aggravate
AfghanistanQs fiscal position, especially in the short-
term.

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NEW ARTF RECURRENT COST WINDOW PROGRAM
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6. Donors and GIRoA approved a new ARTF Recurrent Cost
Window mechanism that has the following objectives: 1)
predictable ARTF RC funding over the medium-term,
improving aid effectiveness; 2) support for GIRoAQs
core policy reforms, including domestic revenue
generation; 3) strengthening the ARTF as a platform for
policy dialogue between donors and Government; and 4)
clearer strategic objectives for the ARTF RC Window.


7. Starting in solar year 1388 (March 2009 Q March
2010),ARTF RC allocations each year would be twofold;
the first part would consist of a sum of a baseline
guaranteed amount of annual support. The baseline
component will phase out over a set period Q thereby
establishing a predictable exit strategy from automatic
ARTF support to the operating budget. This exit
strategy is to prevent the ARTF from creating perverse
revenue generation incentives. The share of ARTF RC
support that is linked to the governmentQs core reform
program will increase over time. Importantly, this
allows for a potential ARTF RC window of approximately
US $270 million for the next three years, an amount
that is consistent with GIRoAQs Mid-term Fiscal
Framework (MTFF) in the ANDS.


8. The second component of the ARTF RC allocations
would be a policy and performance based initiative
scheme; a multi-year, whole-of-government program to
support GIRoAQs core reform program. Although specific
benchmarks for Solar Year 1388 and the details of the
revenue matching grant program are still being
finalized, GIRoA and the donors approved common themes
in three areas: revenue generation, public sector
governance, and private sector development. For
example, an overall precondition for the incentive
component is GIRoA remaining on track with the Poverty
Reduction Growth Facility (PRGF) program and improved
audit of core budget expenditures. At least some
benchmarks will likely reinforce measures that GIRoA
has committed to under the IMF program. As the scheme
proceeds, it is expected that policy discussions will
include more line ministries and reflect structural
benchmarks that target cross-government reforms.

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NEXT STEPS
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9. The World BankQs 2008 independent external
evaluation of the ARTF also recommended that it develop
a Financing Strategy in order to maximize the
predictability, efficiency and transparency of ARTF
resource allocation. Such a Financing Strategy would
establish the principles by which investment funds are
allocated. Objectives of the Financing Strategy would
be to: 1) increase budget predictability and aid
effectiveness; 2) increase alignment of ARTF resources
with government priorities and programs; 3) maintain &
strengthen donor support for ARTF as a mechanism; 4)
increase transparency of ARTF decision-making with
regards to resource allocation; and 5) increase the
intra-year flexibility of ARTF cash management by
reducing preferencing at the project level. A
technical working group will convene in January 2009 to
finalize benchmarks for solar year 1388, and settle on
the exact workings of the revenue matching grant
program. It also has a mandate to produce a draft
Financing Strategy by the next ARTF Quarterly Meeting
in March 2009.


Wood