Afghanistan Fiscal Policy

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© 2008 International Monetary Fund

February 2008 IMF Country Report No. 08/71

Islamic Republic of Afghanistan: Selected Issues
This Selected Issues paper for Islamic Republic of Afghanistan was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with the member country. It is based on the information available at the time it was completed on January 30, 2008. The views expressed in this document are those of the staff team and do not necessarily reflect the views of the government of Islamic Republic of Afghanistan or the Executive Board of the IMF. The policy of publication of staff reports and other documents by the IMF allows for the deletion of market-sensitive information. To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent by e-mail to publicationpolicy@imf.org. Copies of this report are available to the public from International Monetary Fund ● Publication Services 700 19th Street, N.W. ● Washington, D.C. 20431 Telephone: (202) 623 7430 ● Telefax: (202) 623 7201 E-mail: publications@imf.org ● Internet: http://www.imf.org Price: $18.00 a copy

International Monetary Fund Washington, D.C.

INTERNATIONAL MONETARY FUND ISLAMIC REPUBLIC OF AFGHANISTAN Selected Issues Prepared by Mohamad Elhage, Mitra Farahbaksh, Jaroslaw Wieczorek (all MCD), Justin Tyson (FAD), and Magnus Saxegaard (PDR) Approved by Middle East and Central Asia Department January 30, 2008 Contents Page

I. Fiscal Sustainability Issues in Afghanistan: Coping with Security Pressures and External Aid ............................................................................................................................. 3 A. The Afghan Context....................................................................................................... 3 B. Defining Fiscal Sustainability: A Practical Approach ................................................... 4 C. Additional Considerations.............................................................................................. 7 D. Moving Towards Sustainability..................................................................................... 8 II. Banking Sector Developments in Afghanistan ........................................................................ 12 A. Overview...................................................................................................................... 12 B. Recent Developments in the Financial Sector ............................................................. 12 C. Financial Status of the Banking Sector ........................................................................ 16 D. Legal Framework and Banking Supervision................................................................ 19 E. A Reform Strategy........................................................................................................ 21 III. The Exchange Rate and the Conduct of Monetary Policy in Afghanistan ............................. 22 A. Introduction.................................................................................................................. 22 B. The Monetary Policy Framework ................................................................................ 22 C. Monetary Policy Developments in 2007/08................................................................. 26 D. Conclusion and Summary of Recommendations ......................................................... 29 Box II.1 Da Afghanistan Bank’s Self-Assessment Against the Basel Core Principles ......................20 Figures I.1. Components of the Budget, 2007/08 ......................................................................................4 I.2. Domestic Revenue and Total Recurrent Government Expenditure, 2004/05–2012/13 .........6 I.3. Timing Revisions for Closing the Operating Budget Deficit, 2003/04–2012/13 ...................7 I.4. Breakdown of the 2007/08 Core...
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