Afghan Finance and Commerce Ministers Report Progress in

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SENSITIVE

SIPDIS

E.O. 12958 N/A
TAGS: EFIN ECON PREL IMF AF
SUBJECT: Afghan Finance and Commerce Ministers Report Progress in
Meeting IMF Program Conditions

REF: A) Kabul 558 and previous B) Kabul 633

SUMMARY AND COMMENT


1. (SBU) Finance Minister Zakhilwal told the Ambassador March 18
that the GIRoA has met its revised revenue target for the fiscal
year ending March 21 and thus fulfilled a key condition under its
IMF program. He also described plans to increase revenues next
fiscal year, including through a zero-tolerance policy on corruption
that reduces revenues. Zakhilwal and Commerce Minister Shahrani
both say the MOU between their ministries on Customs access to the
fuel import depot at Hairatan - another IMF condition - is being
implemented. While we will continue to urge MOF to document Customs
receipts resulting from the reported new access, as required by the
IMF, these ministerial assurances along with the revenue outcome
raise hope that Afghanistan can resume good performance under the
IMF program. End Summary and Comment


2. (SBU) The Ambassador began the meeting by congratulating Finance
Minister Zakhilwal on parliamentary passage of the government's FY
2009-10 budget earlier in the day. A clearly elated Zakhilwal said
he was worried the bill might not pass and that he had lobbied MPs
who had threatened to vote against it. He said he has developed
good relations with parliament by respectfully listening to MPs'
concerns and candidly conveying his own views, including on the need
to curtail meddling in MOF's hiring and firing decisions. The
Ambassador stressed the importance of good relations between the MOF
and parliament, praised Zakhilwal's efforts in this regard, and said
the U.S. is ready to help if needed.

PROGRESS ON IMF CONDITIONS


3. (SBU) In the course of the meeting an aide entered to report that
the government has met the revised FY 2008-09 revenue target of Afs
40 billion. Zakhilwal (ref A) had been saying the government would
come close but probably fall just short of the target. He told the
Ambassador that his goal is eventually to cover the government's
operating costs from domestic revenue sources and that with new
measures the government can double the revenue it now collects. He
reviewed his plans (see ref A),which he described as targeted
interventions, e.g. increasing fees for vehicle registration while
speeding the process to receive one. Most other ministries have
indicated a willingness to cooperate with his plans, but Zakhilwal
noted that the Ministry of Mines (MOM) was resisting efforts to
improve revenue collection from mining concessions (see ref B).
Zakhilwal said that at his instigation the cabinet has created a
committee to look into revenue collection by ministries other than
MOF.


4. (SBU) Zakhilwal said the MOU between MOF and the Ministry of
Commerce on Customs access to the state-run fuel import depot at
Hairatan is now being "fully implemented." Documenting customs
receipts from implementation of this MOU is a prior action for
completion of the fifth review under Afghanistan's IMF program.
Zakhilwal said his Director General for Customs is now in Hairatan
overseeing implementation. (In a separate meeting March 16,
Commerce Minister Shahrani also assured EconCouns and Finatt that
the MOU is being implemented. While expressing consternation that
his ministry had been unfairly criticized for foot-dragging on this
issue, Shahrani said the MOU should be extended to import operations
at the border crossing points of Torghundi and Islam Qala.)


5. (SBU) Comment: The specific IMF prior action is a report showing
two weeks of Customs collections at Hairatan. It remains to be seen
whether/how the government will fulfill this specific requirement.
Post will continue to urge preparation of this report and continued
implementation of the MOU. Following the meeting, Deputy Finance
Minister Sabit informed Finatt that the President had signed into
law amendments to Afghanistan's income tax legislation, introducing
a 2 percent business receipts tax on imports, thereby fulfilling
another IMF prior action.

FIGHTING CORRUPTION TO CAPTURE LOST REVENUE


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6. (SBU) In discussing the fuel import issues, Zakhilwal reiterated
his view that housecleaning at Customs is also important. He
admitted that corruption, within both MOF and other ministries,
impedes revenue generation and vowed to show "zero tolerance" for
it. Zakhilwal requested U.S. support to strengthen the Internal
Audit and Procurement departments at MOF, which will report directly
to him, not a vice minister. A citizen's corruption complaint
hotline will be publicized on television, and he will demand a daily
summary on calls received. He will meet with provincial Customs
directors to convey the new zero-tolerance policy; those unwilling
to cooperate will be replaced. MOF will also conclude an MOU with
the High Office of Oversight (HOO),one of the government's main
anti-corruption units, to increase outside oversight at MOF. The
Ambassador urged streamlining of government and clarifying the
different ministries' mandates, to reduce overlap and opportunities
for corruption. For example, the number of approvals required for a
government service should be reduced, usually to one, and the
remaining approving authority held accountable.


7. (SBU) Zakhilwal also acknowledged that problems exist with high
expenditures and promised greater spending restraint through
increased MOF oversight of major procurement contracts. He said he
had rejected some two dozen contracts in recent weeks because costs
were 20 percent higher than the value of the goods and services the
government was receiving. He also plans to crack down on the
practice of other ministries signing contracts first and seeking MOF
approval later.


8. (SBU) The Ambassador welcomed the good news on revenues and
Hairatan, as well as Zakhilwal's plans to improve fiscal performance
and fight corruption, and promised USG support. He said the U.S.
believes the IMF plays a constructive role in Afghanistan and will
continue to press them to do so.

ORGANIZING FOR DEVELOPMENT


9. (SBU) The Ambassador and Minister also discussed leadership of
the Joint Control and Monitoring Board (JCMB) and implementation of
the Afghanistan National Development Strategy (ANDS). Zakhilwal
admitted that the JCMB needs more active Afghan government
leadership and that the multi-ministry implementation structure for
ANDS implementation is not ideal. The Ambassador added that the
Obama Administration is tackling many issues and quickly putting its
own structures in place. If the GIRoA can soon streamline its ANDS
implementation structures, the two countries can progress together.



10. (SBU) The Ambassador said the international community also needs
to improve donor coordination and that the U.S. wants to channel
more of its aid funding through Afghan systems and the national
budget, but that current mechanisms must be reinforced in order to
improve accountability. The U.S. also seeks way to increase
discretionary budgetary resources for the provinces. Zakhilwal
supported the latter objective, provided provincial accountability
could be assured. One idea, he said, might be to strengthen MOF
offices in the provinces (mustufiat),which could help increase
accountability to Kabul when aid funds were provided directly to
provinces.

WOOD