AFGHAN FINANCE MINISTER NOTES PROGRESS

UNCLAS SECTION 01 OF 02 KABUL 003064

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SENSITIVE
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E.O. 12958 N/A
TAGS: EFIN EAID PREL ETRD PGOV AF
SUBJECT: AFGHAN FINANCE MINISTER NOTES PROGRESS
ON FISCAL REFORMS TO DEPUTY SECRETARY LEW

KABUL 00003064 001.2 OF 002


REFTEL: A) 09 Kabul 1029
B) 09 Kabul 2682


1. (SBU) Summary: Finance Minister Omar Zakhilwal presented the
progress the Afghan Government has made in its fiscal reform
efforts, noting revenue collections have nearly doubled in 2009.
The Ministry's revenue action plan and removal of underperforming
staff have been key factors in this success. He also briefed Deputy
Secretary Lew on a major government reorganization plan. Zakhilwal
praised USG emphasis on sub-national governance and asked that the
U.S. and other international donors directly channel more aid
through the Finance Ministry. While admitting the serious challenge
of corruption, he noted the Afghan Government had made progress and
could responsibly utilize increased USG assistance provided through
the Finance Ministry. Zakhilwal reiterated that Afghanistan remains
committed to concluding a transit trade agreement with Pakistan, but
asked for USG support against further Pakistani tariff increases.
End Summary.


2. (SBU) Afghan Finance Minister Zakhilwal, responding to Deputy
Secretary Lew's question about the current status of reform efforts,
proudly noted a series of better-than-expected accomplishments. The
Afghan Government nearly doubled revenue collection in 2009 and
increased total revenue by eighty-four percent over the previous
year's levels. Authorities collected a total of $290 million in
customs revenue between March and August, compared with $145 million
in the same period of 2008. The Minister described how had replaced
ineffective Ministry staff and ordered investigation of complaints
against staff members were fully investigated and action taken.

Restructuring to Increase GIRoA's Presence Outside Kabul
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3. (SBU) Zakhilwal expressed satisfaction with most of the GIRoA's
"civilian surge" paper, but commented it is not clear how assistance
would be distributed and which GIRoA agencies are included. He
thanked the Deputy Secretary for USG commitment to creating 55
advisory positions in Afghan Government departments. The MOF is
developing a restructuring plan and, after receiving President
Karzai's approval, will present it soon to foreign ambassadors and
United Nations Special Representative Kai Eide. The plan calls for
going from 17 inter-ministerial committees (IMCs),originally
designed to support implementation of the various Afghanistan
National Development Strategy (ANDS) sector strategies, down to
three clusters. This streamlined structure should boost
effectiveness and focus in year two of the ANDS, he asserted. The
three clusters will be: 1) Agriculture and Rural Development,
(Agriculture, Rural Development, Water, Counter Narcotics, and
Finance); 2) Human Resource Development (Education, Higher
Education, Labor, Women's Affairs, Finance); and 3) Infrastructure
and Economic Development (Commerce, Transportation, Public Works,
Power, Mines, Finance). The Ministry of Finance will oversee
national coordination.

"We Must Acknowledge Progress on Corruption"
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4. (SBU) Commenting that the USG wants to channel more development
funding through Ministries and local governments, Deputy Secretary
Lew said the ability to sustain reforms depends on transparency.
Zakhilwal responded that 20 percent of Afghanistan's foreign aid now
comes through the Ministry. Corruption remains a serious concern,
but the levels have decreased from last year. The media makes it
sound twice as bad as it is, and it is important to acknowledge
progress. Zakhilwal said the Ministry's corruption hotline
previously received two to five calls per day; now it receives only
about one call a week. Financial managers are less susceptible to
corruption than police officers, judges, and land managers, he
maintained.


5. (SBU) The Minister noted that the International Monetary Fund
concluded Afghan financial management stronger than most developing
countries and that USAID auditors expressed satisfaction with the
Ministry's balance sheets. Deputy Secretary Lew said the USG's
ability to sustain financing depends on GIRoA's sustained strong
financial management. Zakhilwal, in turn, encouraged the Deputy
Secretary to continue making aid conditional on reform.

Transit Trade: Progress and Roadblocks
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6. (SBU) Deputy Secretary Lew stressed that the transit trade
agreement remains a top USG priority, but the Government of Pakistan
had asked to make the talks bilateral rather than trilateral.
Zakhilwal described three outstanding issues: Pakistan's refusal to
allow Afghan trucks direct access to the Wagah border crossing

KABUL 00003064 002.2 OF 002


between India and Pakistan; Pakistan's distrust of third party
monitoring; and punitive tariffs that have had a negative impact on
Afghanistan's economy. He noted Pakistan had imposed eighteen-fold
tariff increases on Afghan fruits and vegetables the preceding week
(ref B) and asked the USG to press Pakistan on this issue. The
Deputy Secretary said he had spoken to the Pakistani Foreign and
Finance ministers while in Islamabad and that he would visit Torkham
Gate crossing the following day where he would be able to see the
situation first-hand. (Comment: upon leaving the meeting, the Deputy
Commerce Minister called the new levies on Afghan produce "clearly
designed to exploit vulnerable Afghan farmers and exporters" and an
example of why the Pakistanis don't want the U.S. assistance
monitoring progress between the two countries. End Comment.)

The Importance of Local Governance
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7. (SBU) In response to a question by Ambassador Eikenberry on the
ability of the District Development Plan to boost the capacity of
local governments, Zakhilwal replied that district governments are
unable to provide needed services, even though they understand local
needs better than the central government. The Minister stated the
Plan is the most important initiative in the country's
stabilization.

HIPC and PRGF Moving Forward
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8. (SBU) Zakhilwal asserted that Afghanistan, has met all conditions
for full Heavily Indebted Poor Countries (HIPC) debt relief. He
asked for U.S. support within the International Monetary Fund and
World Bank to ensure Afghanistan quickly receives full HIPC status.
He added that Afghanistan will complete an IMF Poverty Reduction and
Growth Facility program in March 2010.

Participants:
U.S.:
Deputy Secretary Lew
Ambassador Eikenberry
Acting USAID Administrator Fulgham
A/S Richard Verma
Ambassador E. Anthony Wayne

Afghanistan:
Minister of Finance Omar Zakhilwal
Deputy Minister of Finance Gul Sabit


9. (U) This cable was cleared by D(L) staff subsequent to the
delegation's departure.

EIKENBERRY