Professional Documents
Culture Documents
I. Introduction
1. The Asian Development Bank (ADB) proposes to provide a grant of $100 million to the
Government of Afghanistan under the Afghanistan COVID-19 Active Response and Expenditure
Support (CARES) Program to address the outbreak of coronavirus disease (COVID-19). The
program supports the measures to help mitigate the adverse impacts of COVID-19 on the
population’s health, incomes, and economic opportunities as well as macroeconomic stability.
The outcome will be the COVID-19 outbreak more effectively managed and its adverse social and
economic impacts reduced. The program will provide critical budget support to enable the
government to undertake countercyclical pandemic response measures to (i) strengthen the
health system capacity to combat the spread of COVID-19; (ii) expand social safety nets; and (iii)
support affected sectors and job creation. Afghanistan meets all the criteria required to access
the ADB’s COVID-19 Pandemic Response Option under the Countercyclical Support Facility.
4. Afghanistan has a large informal economy, accounting for 80% of employment. In addition,
Afghanistan remains dependent on development partner aid that has underpinned reconstruction
and economic growth since the Taliban were removed from government. During 2017–2019, on
average, the grants to the budget accounted for 14.4% of GDP, accounting for 50.9% government
expenditures (28.2% of GDP). During the same period, the development expenditures−GDP ratio
averaged 9.0% compared to operating expenditures−GDP ratio of 19.2% of GDP. High operating
expenditures are mainly driven by security related spending.1
1 Details of fiscal balance are in the Debt Sustainability Analysis (accessible from the list of linked documents in
Appendix 2)
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6. PEFA Assessment. The last national level PEFA assessment for Afghanistan was
performed in 2018.3 In Table 1, PEFA assessment indicated weak performance by the central
government in terms of budget credibility and reliability (performance indicators 1–3),
transparency and disclosure of public finances (performance indicators 4–9), management of
assets and liabilities (performance indicators 10–13), policy-based budgeting (performance
indicators 15–18), predictability and control in budget execution (performance indicators 19, 20,
22, 23, 25 and 26), accounting and reporting (performance indicators 27–29) and external
scrutiny and audit (performance indicators 30–31). The assessment also highlighted fragmented
budgeting, weakness of budget and policy links to development priorities, weak procurement
practices, and inadequate internal controls. Areas with good performance included
macroeconomic and fiscal forecasting (performance indicator 14), predictability of in-year
resource allocation (performance indicator 21) and procurement management (performance
indicator 24). However, the 2018 PEFA assessment showed improvements compared to 2013
assessment in PFM systems related to revenue planning, macroeconomic and fiscal forecasting,
procurement management, bringing national budget processes in line with international
standards and legislative scrutiny of audit reports.
2 IMF. 2019. Staff Report for the 2019 Article IV Consultation and the Sixth Review Under the Extended Credit Facility
Arrangement −Press release; Staff Report and Statement by the Executive Director for Islamic Republic of
Afghanistan. IMF Country Report No. 19/382. Washington, DC.
3 PEFA Secretariat. 2019. Afghanistan 2018 Public Expenditure and Financial Accountability (PEFA) Performance
Assessment Report. Washington, DC: World Bank.
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7. Afghanistan has been making progress towards a largely disciplined PFM system with
support from the development partners. The IMF has supported strengthening of the treasury
functions, national budget formulation, allotment, and monitoring process with the establishment
of the budget execution directorate and regulations. The World Bank has also supported
improvements in public sector accounting and audit systems. ADB has provided TA to strengthen
fiscal and debt management, including (i) formulation of medium-term debt strategy; (ii)
strengthening of the MOF’s Debt Management Unit for reporting of public liabilities; and (iii)
capacity building of MOF to monitor fiscal risks from public private partnerships and SOEs.4
8. Furthermore, the adoption of new procurement law in 2016 has yielded positive results to
reform the procurement system. In line with broader efforts to improve the management of public
finances, the government has been transitioning to e-procurement, including the development of
4 ADB. 2019. Afghanistan: Support to Public Debt Management. Manila.
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an online procurement portal on the National Procurement Agency (NPA)’s website, 5 which
regularly publishes procurement contracts. In furtherance of this initiative and as a prior action
for the IMF’s ECF arrangement approved on 6 November 2020, 6 the NPA has revised the
procurement regulations on 30 September 2020 to require in all public procurements, starting 1
November 2020, collection of beneficial ownership information in bidding documents and online
publication of beneficial ownership information of all entities contracting with the government
within 30 days of contract signing. ADB has supported strengthening of the safeguards and
procurement systems in line ministries to enhance project implementation in line with the fragile
and conflict affected situations (FCAS)-sensitive approach. To strengthen project management
capacity, ADB has provided several TA support for strengthening (i) national procurement
systems and (ii) national capacity in compliance with ADB’s safeguards policies.7 As a result of
these improvements in the legal, institutional, and operational framework for PFM functions, the
introduction of modern budget tools and automated payments, improved public procurement, and
the establishment of the independent joint anti-corruption monitoring and evaluation committee,
the national PFM systems have started to be gradually used by the development partners.
10. Although Afghanistan has made some progress, corruption (particularly in the form of
bribe-solicitation and giving) and weak governance continue to hinder the effectiveness of state
bodies and undermine confidence in the government. The governance assessment in IMF’s ECF
approved on 6 November 2020 indicates that corruption and weak governance undermine the
rule of law and hinder the emergence of strong public institutions. With limited capacity and
operating in a difficult environment, weak institutions are at risk of being captured by powerful
vested interests and are challenged to design and implement consistent policies and reforms and
ensure adequate and effective provision of public goods, including security, infrastructure, social
5 https://ageops.net/en/procurement-procedure/announcement/award-decision
6IMF. 2020. Islamic Republic of Afghanistan: Request for a 42-Month Arrangement Under the Extended Credit Facility-
Press Release; Staff Report; and Statement by the Executive Director for the Islamic Republic of Afghanistan. IMF
Country Report No. 20/300. November. Washington, DC.
7 ADB. 2015. Afghanistan: Building Resilience to Fragility in ADB-Supported Projects. Manila; ADB. 2017. Afghanistan:
Second Support for Infrastructure Investments and Policy. Manila; ADB. 2019. Improving Management of Involuntary
Resettlement Impacts in Afghanistan. Manila; ADB. 2019. Infrastructure Project Implementation Support. Manila.
8 Afghanistan ranked 169th out of 176 economies with a score of 15 out of 100 in 2016 Corruption Perceptions Index.
Afghanistan made high-level commitments, both domestically and internationally, to fight corruption. The
government’s main policy priorities are captured in the ANPDF, 2017–2021, the Geneva Mutual Accountability
Framework, and Afghanistan’s 2017 National Strategy for Combatting Corruption.
9 The government’s other anti-corruption efforts includes: (i) a merit-based recruitment process through Civil Service
Commission; (ii) adoption of new state-owned corporation law to improve fiscal risk management and corporate
governance; (iii) stronger oversight of public procurement; (iv) a legislative framework for anti-money laundering and
combatting the financing of terrorism; and (v) increasing asset declarations and number of corruption court cases.
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protection, enabling business environment, etc. This worsens economic, political, and social
outcomes and further erodes trust in the state, reinforcing drivers of fragility. A recent political risk
analysis highlighted that the current political and security risk environment in Afghanistan will
likely continue with no final peace deal to be reached between the state and the Taliban before
2025. The prolonged government formation, a weak legal enforcement regime and a tumultuous
peace process would imply that the political and regulatory risks are likely to persist, and proposed
reforms by the government are unlikely to fully materialize with corruption continuing to persist in
public bodies and state decision-making.10 The government’s effectiveness is further constrained
by poor links between the national and subnational levels of governance combined with
institutional and human capacity challenges. Enforcement of anti-corruption laws still faces
significant challenges and does not always target key corruption risks. Strengthening the
institutional structure and building the capacity of anti-corruption bodies remain as a top priority.
11. There is also a need to effectively mobilize anti-money laundering (AML) and combatting
the financing of terrorism (CFT) tools to help identify and recover proceeds of corruption. The
extent of proceeds from illicit activities poses a challenge for financial oversight. Illicit production
and trafficking of drugs remains an important part of the economy, estimated by the United
Nations at 6%–11% of GDP. The extent of illicit proceeds, coupled with the highly unstable
environment and financial integrity risks from sanctions on Iran, have pressured correspondent
banking relationships (CBRs). As a result, few domestic banks have CBRs, hampering formal
cross border transfers and remittances. An AML/CFT risk assessment guideline for banks and a
related training needs have also been approved. Efforts are underway to staff the Anti-Corruption
Commission and the newly established Offices of the Ombudsman. Digitalization of asset
declarations of government officials are underway, both in the Administrative Office of the
President (AOP), and other parts of the government. 11 The government recognized the
challenges posed by the illicit economy and is committed to the implementation of the AML/CFT
measures. DAB places strong emphasis on AML/CFT in its financial sector reform efforts. 12 An
interagency Oversight Committee was formed to review the AML/CFT legal and regulatory
framework to identify shortcomings and critical reforms needed in the criminal justice system to
enhance money laundering enforcement efforts. By September 2021, a national AML/CFT
strategy will be developed, which will outline policy priorities and guide risk mitigation measures.
12. Legal and Institutional Framework for PFM. The Public Finance and Expenditure
Management (PFEM) Law, 2005 is an overarching legislative framework for PFM in Afghanistan.
The Parliament, Ministry of Finance, Da Afghanistan Bank (DAB) and the Supreme Audit Authority
assume complementary roles. The Parliament is the supreme legislative organ for setting the
legal framework. In line with the PFEM Law, the MOF is responsible for fiscal matters including
budget execution and debt management. Within MOF, the Aid Management Directorate (AMD) is
responsible for mobilizing, coordinating, and allocating official development aid and loans and
10 The Risk Advisory Group. 2020. Political Risk Analysis for Afghanistan. 10 September. Washington, DC.
11 Updates to the regulation on asset declarations and the AOP’s internal procedures to facilitate digitalization was
finalized in September 2020. The AOP has been committed to complete systematic digitalization of asset declarations
of government officials and publish them on its website in line with the Law on Declaration and Registration of Assets
of Officials and Government Employees, by end-September 2021.
12 The banking supervision department of DAB plans to conduct AML/CFT examinations of all 12 banks by year-end
2020. DAB has established a nonbank financial supervision department (NBFSD) for the oversight of over 3,300
money service providers (MSPs) and foreign exchange dealers (FXDs), nine corporate money services businesses,
and four electronic money institutions. The department has been focusing on implementing the supervisory and
AML/CFT oversight frameworks, enforcing against unlicensed financial operations, building capacity, and developing
the regulatory framework for other nonbank financial operations. The NBFSD has initiated AML/CFT inspections of
MSPs and FXDs and imposed sanctions for noncompliance, including suspension and revocation of licenses.
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has a key role in the debt contracting process and securing grant funding into the consolidated
fund. The Macro Fiscal Policy Department (MFPD) assesses the country’s macroeconomic and
fiscal position and conducts its debt sustainability analysis. The Debt Management Unit is
responsible for debt recording and validation, debt accounting, assessment of lending terms, debt
service and debt reporting and also reviews all loan agreements in terms of accuracy and
compliance with stipulated procedures. Policy coordination on macroeconomic policies and debt
management exists between the MOF and the DAB.
13. The Supreme Audit Office (SAO) Law (2013) establishes the legislative basis of the SAO,
which conducts external audit. The SAO is responsible for audit of the government financial
statements, conducts regular compliance audits, and has recently begun a program of
performance audits in key sectors/functions. The performance audit reports by the SAO are
published on the website, in local language. Starting with 2016 the SAO developed an audit follow
up mechanism to track the implementation of its audit recommendations. The SAO must prepare
an annual audit report within six months of year-end and submit it to the President and later to
the Parliament whereupon it is to be made publicly available as per PFEM Law, Article 59. All
budgetary government entities are audited annually. The SAO has adopted International
Standards of Supreme Audit Institutions (ISSAI) as its national standards, and audit
documentation mainly comprise supporting documents for the audit observations. The SAO
submits the audit reports to the legislature within three months of the receipts of the accounts
from the MOF. The audit follow-up mechanism was operational, and formal response to the audit
observations was provided to the audit entities. There is no provision related to external audit or
the SAO in the Constitution. As per the SAO Law (2013), the selection and removal of the Auditor
General rests entirely with the President. The Auditor General is appointed for a period of six
years. No approval of the legislature is required to appoint or remove the Auditor General. With
the support of the World Bank, the government has submitted to the parliament a revised SAO
law in 2020 to strengthen its operational independence and capacity in line with international good
practice and consistent with relevant provisions of the Constitution and the PFEM Law.
14. PFM Reform Strategy. PFM reforms (2018–2027) has been a high priority of the national
unity government. It is also part of the government commitments under the Geneva Mutual
Accountability Framework as requested by international development partners for providing aid
to Afghanistan. The PFM reforms have been undertaken under the IMF’s framework as part of
the accountability framework. Similarly, the government coordinates regularly with the IMF on
macroeconomic analysis and projections as well. Under the IMF’s ECF during 2016–2019,
Afghanistan has achieved the PFM and structural reforms as presented in Table 2 and Table 3.
15. The ECF during 2016–2019 was a critical driver of structural macroeconomic, fiscal and
governance reforms by strengthening (i) tax system with value added tax, (ii) monetary policy for
price and exchange rate stability, (iii) fiscal governance, (iv) anti-corruption, (v) state-owned
banks, (vi) management of public investment, fiscal risks and spending efficiency, (vii) asset
declaration, and (viii) social protection. Budget execution and project management have improved
over the past few years. The MOF has made the budget an effective policy tool, which requires
sustaining improvements in execution rates and the commitment to a realistic multi-year
development framework. The transparency in the budget execution process has been increased
by tracking contractual commitments. Afghanistan Financial Management Information System
(AFMIS) is in line with the related third review structural benchmark. Customs administration in
regional offices has also been bolstered by adopting risk-based customs clearance procedures
to improve the detection of fraud. Revenue developments also have started to report online.
16. The recent ECF approved in November 2020 will support complementary reforms to
improve fiscal governance, bolster the financial sector, and advance anti‑corruption efforts,
building on gains made under the 2016–19 ECF arrangement. Reforms include VAT
implementation, strengthening the anti-corruption regime, and, subject to fiscal space and donor
support, building a social safety net. The program will promote macro-financial stability and
resilience to preserve financial sector stability in the post-COVID-19 environment and maintaining
low debt, a prudent treasury cash balance, and an adequate level of international reserves.
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Revenue mobilization will be supported by VAT adoption in 2022 and reforms to improve tax and
customs administration. On the expenditure side, priorities include a new civil service pay policy,
public expenditure review, and strengthened management of the state-owned assets and
liabilities. Financial sector reforms target reforming the state-owned commercial banks, reducing
informality in the sector, and bolstering regulatory and supervisory frameworks, including
enhanced AML/CFT oversight. Governance and anti-corruption measures build on progress in
strengthening the legal and institutional framework for anti-corruption. Reforms will focus on
operationalizing and building capacity of anti-corruption institutions, boosting the effectiveness of
the asset declaration regime, and strengthening accountability of public spending.
17. Afghanistan’s budget, in its design and presentation has been approaching international
standards. Afghanistan had the best rating 49/100 compared to 21/100 in 2010 in the 2017 Open
Budget Index among South Asian countries. Since 2018, the budget includes information of past
performance, medium-term fiscal projections, details about the ministries, projects, and
provinces. In 2018, carry-over of unspent amounts from year to year was abandoned, thereby
improving the realism of projections and the control of corruption. The budget also includes
discussions of projections of major macroeconomic variables, the evaluation of contingent
liabilities, contingency measures, and a critical review of the budget’s gender responsiveness.
18. There are about 54 active state-owned enterprises (SOEs), nearly all of which need better
accounting practices and reporting standards for improving transparency. The government has
adopted a new State-Owned Corporation Law to improve management of fiscal risks and
strengthen the governance of public corporations. These efforts are advancing and recently the
government shared the income statements and balance sheets of the five largest SOEs to
illustrate their efforts to improve the governance and transparency of SOEs. The 2020 financial
statements of the five largest SOEs are expected to be externally audited by end-September
2021. IMF has been providing support, including training, to develop capacity to properly quantify
fiscal risks stemming from SOEs. Amendment of the relevant PFM law to strengthen fiscal risk
oversight over SOEs is underway. Regarding the extractive sector, Afghanistan is expecting the
second Extractive Industries Transparency Initiative (EITI) validation to commence in July 2020.
This follows its suspension in January 2019 when the first EITI validation concluded that
Afghanistan had made “inadequate progress” implementing the EITI Standard. In the meantime,
The Ministry of Mines and Petroleum has advanced its efforts in reporting on the mining industry
as agreed with the EITI. A transparency portal has been established, containing data on all issued
mineral rights, exploration, mining, dealers, and exporters licenses, as well as the related
payments. A preliminary assessment is that Afghanistan has fully addressed 13 of the 19
corrective actions and has made “meaningful progress” with improvements in addressing the
remaining six corrective actions. A final decision by the EITI Board is expected in November 2020.