KUWAIT'S CONTRIBUTION TO THE PARIS CONFERENCE ON

UNCLAS STATE 042157 SIPDIS SIPDIS SENSITIVE E.O. 12958: N/A TAGS: EAID ECON EFIN KDEM PGOV PREL AE AFIN KU QA SA SUBJECT: KUWAIT'S CONTRIBUTION TO THE PARIS CONFERENCE ON AFGHANISTAN REF: A. STATE 35680 ¶B. KUWAIT 00038 ¶1. (U) This cable contains an action request. See paragraph 7-9. ¶2. (SBU) In the lead up to the Paris Support Conference for Afghanistan on June 12, the U.S. Government is aiming for significant increases in financial support from the Gulf States to bolster the international community's long-term commitment to Afghanistan and show the insurgents that the Gulf States support the Afghan Government (Ref A). Considering the Gulf States are more likely to provide assistance if the Government of Afghanistan takes the lead in requesting help, we have recommended that the Afghan Government approach Gulf States with particular reconstruction projects that will require donor support. ¶3. (SBU) The Kuwait Government expressed a cautiously positive response to similar lobbying efforts by the Lithuanians to fund the road through the center of Afghanistan that would cross Ghor province. We strongly support this idea. However, the Kuwait Fund for Arab Economic Development (KFAED) tied additional aid to the Government of Afghanistan signing a repayment agreement on a $22 million soft loan that the KFAED provided Afghanistan in 1977 for a sugar factory (Ref B). ¶4. (SBU) Kuwait and Afghanistan have been debating the loan terms for years without resolution. The KFAED claims to have offered the Government of Afghanistan exceptionally favorable repayment terms, with a 16-year grace period and a 40-year period to repay the loan at a 0.5 interest rate, because Afghanistan qualifies as a Highly Indebted Country. However, according to the U.S. Treasury advisor on debt to the Afghan Ministry of Finance, the March 2008 loan terms offered by Kuwait fail to meet the Paris Club debt restructuring criteria under the Heavily Indebted Poor Country (HIPC)arrangement. The Paris Club agreement requires Afghanistan to secure comparable treatment from all its creditors. The latest loan terms provided by the KFAED still do not qualify as comparable to loan terms from other creditors. If the Afghan Government accepts the latest loan terms provided by the KFAED, it would be providing more generous treatment to Kuwait than other creditors, thus violating the Paris Club agreement (and the U.S.-Afghan bilateral agreement, and probably its other bilateral agreements),and possibly complicating receipt of billions of dollars of debt relief. ¶5. (SBU) While the U.S. Government has been urging resolution to this debate, Kuwait's decision to hinge all future assistance to Afghanistan on the repayment of this small and antiquated loan appears to be purely politically-motivated. Between 2003 and 2005, the Government of Kuwait was willing to provide $45 million to Afghanistan's reconstruction despite the existing debt. For example, when Kuwait provided a $30 million grant for the Kandahar ring road and salary payments for Afghan Government employees, Kuwait funneled the money through the World Bank's Afghan Reconstruction Trust Fund and the Asian Development Bank. The KFAED administered the grants on behalf of the Government of Kuwait because they did not technically consider them to be "KFAED projects." ¶6. (SBU) Kuwait Emboff reported that it was conceivable that the Kuwait Government could agree to provide additional grants for Afghanistan in this matter, but that this would require a political decision by the Kuwait Government, not the KFAED (Ref B). Considering the absence of legal restrictions preventing Kuwait from providing assistance, and noting the Government of Kuwait's previous willingness to contribute assistance, the U.S. Government will continue to press Kuwait to provide financial assistance to Afghanistan while continuing to work with the Afghan Government to expediently agree on loan terms. ¶7. (SBU) Action Request for Embassy Kabul: On April 13, Assistant Secretary Boucher suggested President Karzai or Foreign SIPDIS Minister Spanta present to Gulf States reconstruction projects that require financial support. Department requests Embassy Kabul follow-up with other senior Afghan government officials, urging them to present specific projects (as enumerated in Ref A) to the Government of Kuwait while continuing its effort to reach agreeable loan terms. ¶8. (SBU) Action Request for Embassy Kuwait: Department requests Embassy Kuwait urge senior Kuwait officials to consider financing more reconstruction projects through contributions to funds managed by international financial institutions for Afghanistan in the lead up to the Paris Conference. ¶9. (SBU) Both Embassies should express U.S. appreciation for the tremendous progress made in Afghanistan over the previous seven years, in large part due to the generosity of the international community. However, Afghanistan's stability remains fragile and a long-term commitment from the international community is required to ensure Afghanistan never again falls into the hands of the Taliban. RICE