CURRENT STATUS AND NEXT STEPS ON AGRICULTURE CREDIT

UNCLAS SECTION 01 OF 02 KABUL 000490 SENSITIVE SIPDIS DEPT FOR AID/ASIA SCAA DRAY TREASURY FOR MNUGENT, JCASAL, AKIFAYAT USDA FOR FAS BREWER E.O. 12958: N/A TAGS: EAID EAGR ECON SNAR PGOV PINS AF SUBJECT: CURRENT STATUS AND NEXT STEPS ON AGRICULTURE CREDIT KABUL 00000490 001.2 OF 002 -------------- SUMMARY -------------- ¶1. (SBU) Members of the Embassy Interagency Agriculture Team met with the Ministry of Agriculture, Irrigation, and Livestock (MAIL) on February 3 to discuss the current status and next steps on addressing the agriculture credit constraints facing the small commercial farmer. MAIL reiterated its commitment to agriculture credit and requested Embassy assistance to address the complex legal and policy issues involved with setting up a specialized national agriculture credit system. MAIL reviewed the report and recommendations prepared by consultants, Drs. John Mellor and Muhammad Usman, and requested additional support to provide legal and banking experts to assist the Afghan Government (GIRoA), including the Ministry of Finance (MOF) and the Central Bank (Da Afghanistan Bank-DAB),in developing a detailed roadmap that clearly outlines the legal and policy issues that GIRoA must address and by what date, in order to have a sustainable agriculture credit institution up and running at a time to be determined by GIRoA. In response to MAIL's request, Embassy interagency Agriculture Team, Treasury and State/Econ will provide banking and legal experts to assist MAIL, MOF and DAB develop the roadmap. Additionally, Embassy is modifying existing programs to address the credit needs of the small commercial farmer while the new specialized agriculture credit institution is being established. END SUMMARY. -------------- MAIL FEEDBACK ON CONSULTANT REPORT -------------- ¶2. (SBU) Senior MAIL representative, stressing that she was speaking on behalf of Agriculture Minister Rahimi, fully agreed with the concept of a specialized agriculture credit institution, but raised several concerns. --timeline: MAIL considers the timeline set forth in the AID-funded consultant report unrealistic, given the legal and policy complexities involved. (NOTE: During his January visit to Afghanistan, Agriculture Secretary Tom Vilsack, while agreeing for the need to develop a specialized national agriculture credit institution, shared similar concerns with MAIL regarding the timeline and suggested instead that a "model" institution be established in one location first before proceeding to develop branches nationwide.) --senior staff: MAIL representative stated that Minister Rahimi is "adamant" that previous employees of the defunct Agriculture Development Bank of Afghanistan (ADBA) not be hired in senior positions within the new institution. "No donor would buy into the consultants' recommended plan 'as is'", they stated. --budget/personnel: MAIL also expressed concern that the budget estimate was too low and that position descriptions of key employees lacked essential qualification criteria of the new institution. --other options: MAIL also asked for further analysis of the various institutional options available for GIRoA to consider, rather than different options to implement one single type of institution. --"lessons learned:" Stressing that MAIL supports the idea of a specialized national agriculture credit institution, they asked "what went wrong with the previous specialized agriculture credit institution-the defunct ADBA?" What lessons can be learned from that experience to ensure it does not happen again? --Analysis: Lastly, MAIL saw insufficient verification to support some of the analyses provided. Embassy Agriculture Team members responded that the credit demand analysis, requested by MAIL, should be complete by the end of April. -------------- ROADMAP -------------- ¶3. (SBU) MAIL requested Embassy support to provide a detailed roadmap or action plan that lists the specific legal and policy actions GIRoA (w/USG or other donor support) needs to undertake to set up a specialized agriculture credit institution. These include: 1) the steps GIRoA must take to approve the new institution; 2) structure and governance of the institution; 3) disposal of the assets of the defunct ADBA; 4) a review of the previous ADBA charter (from 1956) and by-laws to determine if they are appropriate for a new institution; 5) whether the new institution could operate as a "bank" without DAB issuance of a license to be a deposit-taking KABUL 00000490 002.2 OF 002 institution; and 6) whether the creation of such an institution impacts any loan conditionality from the International Monetary Fund (IMF),World Bank, or Asian Development Bank (ADB). (Note: In a February 4 meeting in Washington with USAID and Treasury, IMF economists urged caution about such a specialized agriculture credit institution, as described in the consultant report. Specifically, the IMF prefers a more "systemic" approach to address credit needs in Afghanistan. In their view, a specialized agriculture credit institution (and as described in the consultant report),is susceptible to high loan and institutional failure rates, widespread corruption, cronyism, inevitable state influence and creation of contingent liabilities for their governments. These types of legal and policy concerns and a roadmap with a detailed timeline need to be addressed. The current timeline, as provided in the consultant report, does not provide the level of detail requested by the Minister in his out-brief with the USAID consultants on January 20. -------------- IMMEDIATE USG ASSISTANCE -------------- ¶4. (SBU) USAID has engaged a senior banking specialist to respond to MAIL's questions. Specialist will arrive in Kabul o/a February 8 for a two-week period. In coordination with the Embassy Agriculture Team, Treasury and other Embassy officers, he will assist GIRoA (MAIL, MOF, DAB) develop a detailed roadmap/action plan. Additional banking and legal specialists are also available to provide short-term assistance on an as-needed basis to be determined by GIRoA. Lastly, USAID has hired a long-term agriculture credit specialist, who will serve a full one-year tour in Kabul and will arrive to post o/a March 1. ¶5. (SBU) While our Mission staff address MAIL concerns and set up the specialized agricultural credit institution, in collaboration with its implementing partners we have devised a holistic plan to address the credit needs of the small commercial farmer in the near-term. This plan includes increasing lending through existing credit unions, providing specialized voucher packages to small commercial farmers, and providing lines of credit to Afghan-led farm stores and agriculture depots that will then provide supplier credit directly to small commercial farmers. Additionally, a new USG program will start in spring 2010 that, inter alia, will provide incentives to existing commercial banks to increase their lending to the agriculture sector. Minister Rahimi, during the January 20 out-brief of the consultant report, agreed with this approach to complement efforts to establish the new agriculture credit institution. MAIL reiterated its support for this approach in the February 3 meeting. -------------- NEXT STEPS -------------- ¶6. (SBU) In response to the issues MAIL raised regarding the consultant report and its request for additional assistance, we have agreed to provide the legal and banking experts to develop an actionable roadmap for GIRoA and USG to move forward. The roadmap will include a detailed timeline of actions to set up a specialized agriculture credit institution by a date to be determined by GIRoA. As part of this process, these experts will assist GIRoA in developing its own internal consensus on the path forward, which is not yet present. Once consensus is reached within GIRoA, we can assist in gaining buy-in from IMF, World Bank, ADB and bilateral donors. Upon completion and review of the senior banking specialist's roadmap, MAIL will determine what further assistance it will seek from the USG to develop the specialized national agriculture credit institution that MAIL and the USG agree is urgently necessary. EIKENBERRY