CHIEF AFGHAN FINANCIAL REGULATOR: "GOOD PEOPLE UNDER ATTACK"

C O N F I D E N T I A L SECTION 01 OF 02 KABUL 000125 SIPDIS E.O. 12958: DECL: 1/15/2020 TAGS: EFIN PREL AF SUBJECT: CHIEF AFGHAN FINANCIAL REGULATOR: "GOOD PEOPLE UNDER ATTACK" Classified By: Ambassador E. Anthony Wayne for reasons 1.4 (b) and (d). ¶1. (C) SUMMARY: Central Bank Governor Abdul Qadeer Fitrat met with Ambassador E. Anthony Wayne to discuss the Afghan Central Bank's efforts to promote macroeconomic stability and expand key projects. The Governor stated he has not met with President Karzai in more than two months and is uncertain about his own future, especially given enemies he has made in Parliament by fighting for regulatory enforcement and his earlier guidance to banks not to get involved in electoral funding. Fitrat highlighted efforts to combat corruption, recommended changes to the Ministry of Finance, and said Karzai had supported him in his efforts to remove tainted Pashtany Bank leadership. END SUMMARY. ¶2. (C) In a January 7 meeting with the Coordinating Director for Development and Economic Affairs, Fitrat acknowledged the need for Afghanistan to make progress in key reform areas as soon as possible. He also noted the importance of sustained U.S. engagement with Afghanistan, saying it is a "war of necessity" (quoting President Obama) and if America withdraws, al Qaeda will expand its reign of "brutality." Ambassador Wayne stressed that the next eighteen months represent an important test for increasing the credibility of government and the degree to which the Afghan people are willing to work with the government. TAKING ON CORRUPTION AND FINANCIAL IRREGULARITIES - - - - - - - - - - - - - - - - - - - - - - - - - ¶3. (C) Fitrat, who is two years into his five-year term as Central Bank Governor, said he is "pleased" certain Karzai cabinet picks were rejected by Parliament. He said during his confirmation one or two people asked for cash bribes, but he suggested that bribes played a larger role in some parliamentarians voting patterns this time around. He also believes his enforcement of laws and regulations has created enemies in Parliament and as a result "good people [like him] are under attack in Afghanistan because they are the minority." Fitrat also stressed that hi relations with the Palace are also uncertain, he believes, because he instructed all licensed banks to remain neutral during the Presidential election late last year. According to Fitrat, this blanket order has been taken out of context and some "political players" have told President Karzai that the Governor attempted to stop banks from supporting his re-election. ¶4. (C) In the coming year, Fitrat intends to take on difficult regulatory challenges, namely, some of the banks with close connections to the Palace (which may cost Fitrat politically). To do this, Fitrat said he will need the backing of President Karzai - something he hopes will be granted given the focus on anti-corruption and transparency. (Note: In separate meetings, Fitrat confidants told the Treasury Attache that the Governor - or anyone else in the position - cannot be effective without Karzai's support, given the power and connections of Afghan banks.) REFORM NEEDED AT MINISTRY OF FINANCE - - - - - - - - - - - - - - - - - - ¶5. (C) Looking broadly across the government, the Governor singled out the Ministry of Finance as responsible for revenue collection and budget allocation. The Governor indicated that real changes at the Ministry of Finance were both necessary and critical to moving Afghanistan ahead. Specifically, Fitrat cited the lack of transparency in the Ministry of Finance's hiring procedures and Minister Zakhilwal's reluctance to remove corrupt Pashtany Bank leadership. (Note: In an earlier meeting with Ambassador Wayne, Minister Zakhilwal confirmed that the chief executive officer of Pashtany Bank is indeed corrupt in the Minister's view. Zakhilwal also said he would remove this individual upon confirmation of the new Karzai cabinet because the bank chief has bought much influence in Parliament. End note.) ¶6. (SBU) The Ministry of Finance is the majority shareholder of the state-owned bank. Governor Fitrat continues to push for the Pashtany Bank CEO's removal and feels the CEO is "bankrupting" the financial institution by making numerous improper loans to members of Parliament and other individuals of influence. Fitrat said at the time of the supervisory review, Pashtany Bank's non-performing loan ratio had climbed from 3% to 12% and adversely classified loans from 6% to 36%.) Ambassador Wayne reaffirmed that the U.S. is keenly interested in a strong, viable financial sector and is increasing efforts in this area through support from Treasury and USAID. Fitrat also noted his concern about Azizi Bank which he said had overextended its physical presence and loans. IMPROVING THE AFGHAN FINANCIAL SECTOR - - - - - - - - - - - - - - - - - - - ¶7. (C) Governor Fitrat touted recent improvements at the Central Bank designed to reduce corruption and strengthen the Afghan financial sector. For example, he pointed out that the Central Bank has raised salaries in key areas such as audit and financial supervision. He also mentioned that FinTRACA, Afghanistan's Financial Intelligence Unit, is working on a variety of high-profile cases that will soon be KABUL 00000125 002 OF 002 turned over to Afghan law enforcement for further investigation. In the area of human resources, Fitrat said he does not hire people based on political preferences and instead relies on an independent board (which includes up to two advisors) and a transparent testing system. This, he said, lessens political interference from parliament and other connected individuals. ¶8. (C) Fitrat noted progress on many other fronts: - Afghan Deposit Insurance Corporation: Both the Central Bank and Ministry of Finance have contributed $10 million to this effort. Each of the 17 licensed commercial banks will also pay a premium into this arrangement (Note: An invoice was recently sent to each bank for the final quarter of 1388.) Deposit insurance will cover up to Afs 100,000. - Financial Dispute Resolution Commission: Six or seven disputes have been successfully resolved through this forum. In the coming months, the Central Bank hopes to place the outcome of each decision on a public website. - Credit Information Bureau and Collateral Registry: Both efforts are underway, though more training, equipment, and personal are needed. (Note: In recent meetings with Afghan banks, CEOs have strongly stated the need for both of these functions - with many believing it will be two years or more before it is operational.) - Afghan Banking Institute: The banking institute has hired a director and has received funding from the World Bank and Harakat. Governor Fitrat requested further funding assistance from USAID, indicating another $1 million is needed. COMMENT - - - - ¶9. (C) While rumors continue to swirl about Governor Fitrat's future, we remain convinced that his leadership has improved the financial sector. He has consistently pushed key reforms (e.g., Credit Information Bureau, and the Afghan Banking Institute) and taken on difficult regulatory challenges when necessary (e.g., Pashtany Bank and the licensing hawalas countrywide). Unfortunately, his work to uphold the law and enforce regulations may have made him a target of power banks like Kabul Bank and the parliamentarians they support. In the coming month, Post will launch a semi-formal Financial Sector Advisory Group (comprised of the U.S., IMF, World Bank, etc.) to address a wide range of issues related to the Afghan financial sector. The Governor and the banking community are both strongly supportive of this idea. EIKENBERRY