Islamic Republic of Afghanistan

Ministry of Finance

Issue 2 | May 2012A quarterly publication of Directorate General Budget on foreign aid and budget

IMPROVING OUR DEVELOPMENT PARTNERSHIP

With the New Year comes the new

national budget. The past few months

have been busy for Directorate General

Budget (DGB) as we were putting

together this transitional budget for the

Fiscal Year 1391. FY 1391 will only have

nine months, as the new fiscal year

changes to December 22 – December

21, as opposed to March 21 – March 20.

I am pleased to share with you the

second newsletter, which we renamed

to reflect the

involvement of all Directorates within

DGB. I would like to thank my

colleagues for their input and, in

p a r t i c u l a r, A i d M a n a g e m e n t

Directorate for initiating and leading

this initiative.

Inside, along with updates on aid, my

colleagues give you a quick glance at

the 1391 national budget, an

assessment of fiscal sustainability of

Afghanistan and an interview with our

minister, Dr. Omar Zakhilwal.

We now focus our efforts on the

delivery of the budget to make sure that

it ensures services are provided in the

best way possible to the people of

Afghanistan.

Finally I would like to thank all of you

who provided comments on the first

issue of the newsletter. Please keep

sending them.

Ahmad Javed Jalali

Director General Budget

“Aid and Budget”

Contd. page 2 .../...

Over the last decade, international development efforts have evolved in

accordance with global economic shifts. This has naturally had knock-on

effects for international commitments to Afghanistan as well. The Fourth

High Level Forum (HLF -4) on Aid Effectiveness in Busan in November-

December 2011 was a defining event, as it translated these global shifts in economy and

aid architecture into a new partnership with development cooperation taking new forms

at the global level. Meanwhile, at the national level, the International Conference on

Afghanistan in Bonn, also in December 2011, renewed and deepened the international

community's long-term commitment to Afghanistan, a decade after the original Bonn

Conference.

The HLF-4, in which Afghanistan fully participated, resulted in the

and the ,

scheduled for implementation from mid-2012. The Government of Afghanistan (GoA), a

signatory to these outcomes, will incorporate the global principles of the Busan

Partnership and New Deal into its own medium to long-term development policies.

Busan Partnership for

Effective Development Cooperation New Deal for Engagement in Fragile States

With transition (2012-2014) already in progress and the transformation decade (2015-

2025) to follow, Afghanistan is passing through a critical period of security and

development. The challenges of Transition are indisputable. The withdrawal of military

forces and a possible decline in aid could leave Afghanistan facing hard budget constraints

and low economic activity in years to come. Government development spending is also

projected to shift to maintain the high operational and maintenance costs once

international assistance decreases.

Aid and Budget

Making Budgets and Aid Work Project

Supported by:

This inclusive economic pact will be presented at the Tokyo

Ministerial Conference on Afghanistan in July 2012. Tokyo will

be another landmark for Afghanistan, as the international

community will decide on economic development assistance

to the country during transition and throughout the

Transformation Decade.

The post-Bonn climate remains promising for Afghanistan for

the International Community declared its commitment beyond

Transition in pursuit of socio-economic development, security

and good governance. These commitments will hopefully

become concrete at Chicago and Tokyo this year. Combined

with the new policies and commitments to aid and

development effectiveness outlined at Busan, there is

optimism that, with political progress and enhanced security,

Afghanistan and its partners can progressively reach forward to

achieve the goal of self-sustainability.

.../...Page 1

At this juncture, therefore, close cooperation between

Afghanistan and the international community is crucial. By

2015 - after the drawdown of most international military forces

- Afghanistan aims to have taken over responsibility for its own

security and lead development processes that promote

economic growth and fiscal sustainability. To make this a reality,

leaders of NATO) states will

come together at the 25th NATO summit on 20-21 May 2012 in

Chicago to discuss their commitment to Afghanistan, through

transition and beyond, to ensure security of the country. The

expectation from the Chicago conference is that the

International Community continues its support for the Afghan

national Security Forces through 2025.

North Atlantic Treaty Organisation (

GoA has elaborated its economic transition strategy in the

document “Towards a Self-Reliant Afghanistan”, which was

initially presented at Bonn. It will be taken forward to merge

emerging policies with the commitments of Bonn and the

priorities specified in the National Priority Programs, originally

announced at the Kabul Conference in July 2010.

ENSURING MUTUAL ACCOUNTABILITYThe United States (US) is the largest donor for

Afghanistan. Since 2001, the US has pledged US$

66.76 billion to Afghanistan, out of which US$ 53.88

billion has been committed. The assistance of the US

government is implemented by various agencies

including the United States Agency for International

Development (USAID), the Department of State, the

Department of Defense, the Department of

Agriculture and US Trade and Development Agency.

The Governments of Afghanistan and the US

recently restarted the Portfolio Review (PR); a

process of jointly reviewing all US funded programs

and projects in education, health, agriculture,

economic growth, governance and infrastructure

sectors. The review was held from 13-19 March,

2012 at Ministry of Finance.

Building on an enduring partnership between the

two countries, the PR enhances the effectiveness of

projects by identifying relevant issues, improves

alignment with national priorities, promotes use of

country systems and increases coordination

between Government of Afghanistan and US

agencies.

AFGHANISTAN TO LAUNCH NEW AID MANAGEMENT POLICYThe new Aid Management Policy aims to accelerate the achievement of Afghanistan's vision to move towards increasingself reliance by 2025, a commitment made at the International Conference on Afghanistan in Bonn (December 2011). Thispolicy, which succeeds the previous Aid Policy of 2007, promotes the realization of Kabul Process commitments outlined atthe Kabul International Conference (July 2010). It specifically addresses the short to medium term impacts of decliningmilitary expenditure and the exit strategy of NATO-ISAF, with possibility of declining international aid commitments post2014. The policy also addresses the key issues of fiscal management, government capacity and donor behavior, as well as

new international agreements embodied in the two outcomes of the Fourth High Level Forum on AidEffectiveness (HLF-4), held in Busan, Republic of Korea (December 2011), namely the Busan Partnership for EffectiveDevelopment Cooperation and the New Deal for Engagement in Fragile States.

incorporating

Both sides agreed on the immense importance of the joint review in

increasing mutual accountability and helping to achieve development goals.

This is all the more crucial in the stage of state-building in this transition

period. The Government of Afghanistan looks forward to working closely with

US in the years to come to effectively utilize their generous assistance for the

sustainable development of Afghanistan.

TOWARDS A SELF SUSTAINING AFGHANISTANAn interview with H.E. Minister of Finance

What are your expectations from the International

Community over the next ten years?

Success in implementing our strategy in an environment of

diminishing resources will require increasing level of

coordination among donors, and between donors and the

Afghan Government. Moving aid on budget will allow us to

achieve higher levels of value for money. Aligning assistance

behind the National Priority Programs (NPPs) focuses our

efforts in areas where they can achieve the highest impact. We

are working closely with donors to find modalities to finance

and implement our NPPs in a phased and fiscally responsible

manner, through a mix of on and off budget systems, and

utilizing multi-lateral trust funds where possible.

Success in these measures will lead to higher levels of

employment, reduced under-employment, improved incomes,

higher domestic revenue receipts, and ultimately, improved

security.

Afghanistan recently presented the paper 'Towards a

Self-sustaining Afghanistan in Bonn conference'. What is

your strategy towards achieving that?

The strategy towards achieving the vision we have set forward

for Afghanistan over the coming 2 decades has been laid out in

the same paper. Afghanistan's National Priority Programs are

the means towards the achievement of these goals. These

programs focus on growing agricultural productivity and

increasing rural development, developing our human capital

and providing jobs, building infrastructure to support

economic growth, improving the business climate for investors,

increasing the effectiveness of our civil service, reducing

corruption and ensuring rule of law across Afghanistan. We

have set clear, quantitative targets, we seek the assistance of

our international partners in reaching them, and ask that they

join the Afghan people in holding us accountable to make this

happen.

What impact will declining aid have on the economy in

the coming years?

Reduction in aid will not have as catastrophic an impact as

some have predicted because most international spending

“on” Afghanistan is not spent “in” Afghanistan, and much of

what is spent in Afghanistan leaves the economy through

imports, expatriated profits and outward remittances.

Nevertheless, projections suggest that economic growth will

fall. Moreover, Aid has not been evenly spread across the

country. Because of the choices made by donors, some

provinces have had significantly higher aid than

other provinces. As a result, the slowdown in aid will be felt

more acutely in the conflict-affected areas and in urban

centers. If aid declines gradually so that it can be partly offset

by growth of the security, mining, and civilian public sectors,

the impact could be softened and spread over time. This would

allow the economy more time to adjust.

per capita

What are the main monetary and fiscal challenges that

the government faces?

One of the major achievements of Afghanistan during the past

decade has been providing economic stability. Although

challenges have emerged, monetary prudence and fiscal

discipline have been based on best international practices. In

the foreseeable future, challenges will remain. However,

Afghanistan can only achieve fiscal independence through

continued private sector led economic growth. The

Government seeks to make strategic investments in

agriculture, trade and transit, the production and distribution

of electricity and the required infrastructure to enable our

extractive industries. These investments will be complimented

by aggressive reform of our financial sector, our legal and

regulatory framework, and our public financial management

systems

-

to increase transparency, reduce corruption and

boost the absorptive capacity of our budgetary systems.

Dr. Omar Zakhilwal is the Minister of Finance of Islamic Republic

of Afghanistan. He has been part of many initiatives pertaining

to economics and development issues of the country since

2003. He authored Afghanistan's first National Human

Development Report. Prior to his current position, Dr. Zakhiwal

served as the President of the Afghanistan Investment Support

Agency (AISA), a member of the Supreme Council of Da

Afghanistan Bank, Acting Minister of Transport and Civil

Aviation, Chief Economic Advisor to the President and the Chief

Advisor to the Minister of Rural Development of Afghanistan.

We spoke to Minister Zakhilwal on the future of foreign aid,

economic challenges and self-sustaining future of Afghanistan.

NATIONAL BUDGET- WHAT IS IN STORE?By Zia-ur-Rahman Haleemi, Budget Policy and Reform Director - The National Budget is the tool for implementation of

Government priorities. In the national budget, objectives within the development strategy of the Government are identified with the

resources for achieving them. Over the past few years, the Ministry of Finance of the Islamic Republic of Afghanistan has made

tremendous progress in strengthening the budget preparation, execution and reporting processes. In the preparation of FY 1391

budget, the fundamental principles of fiscal sustainability and fair and inclusive allocation of resources have been respected. FY 1391 is

a transition year in the sense that a change in fiscal year is going to be implemented with this year being only 9 months.

Domestic RevenuesDomestic revenues for FY 1391 are projected to reach about

US$ 1.76 billion, which shows an increase of about 25% over

the same period of FY 1390. The encouraging performance of

domestic revenue collection is attributed to strong economic

growth, increase in trade, and the increase in efficiency of tax

collection, triggered by implementation of vast area of reforms

in revenue and custom offices.

Development BudgetOver the past few years, significant efforts and progress have

been made to strengthen the link between budget and

development strategy. Total development spending for FY 1391

will be about US$ 2.2 billion. The major share will go to the

Infrastructure sector, followed by Agriculture, Education,

Health, Economic Governance, Good Governance, Security and

Social Protection, respectively.

Financing of Core BudgetFor FY 1391, on top of US$ 1.76 billion dollars in domestic

revenues, the Government is expected to receive US$ 2.7

billion dollars in grants. Other financing includes US$ 54 million

from the sale of copper mines, US$ 88 million from treasury

balances and US$ 73 million in project loans. Out of the total

core budget of US$ 4.89 billion, FY 1391 budget is estimated to

have a US$ 250 million unfunded portion (deficit) of the

discretionary development budget.

Operating BudgetFY 1391 operating budget is going to be around US$ 2.7 billion.

The major drivers of increase in operating budget are

implementation of civil service reform, increase in personnel in

most budgetary entities and some adjustments in

macroeconomic variables (inflation etc.).

Afs (million)

Composition of revenue 1391 / 9months

Afs (million)

1391 Development Budget by Sector

Risks, challenges and uncertaintiesDespite a strong revenue performance in the past few years, the fiscal situation remains uncertain due to emerging fiscal pressures

arising from wider civil servant reforms and security forces expansion programs, as well as higher benefits to retirees by

implementation of new pension reform. The unpredictability of longer-term donor grants, the costs associated with the transition

process and operations and maintenance of existing assets add yet more uncertainties surrounding the public finance management

of the Government.

,

* The figures in this article are based on the executive budget proposal to the Parliament and are subject to change.

The fiscal year was March 21 – March 20. Now the fiscal year will change to December 22 – December 21.

(Exchange rate is Afs 50/1US$).Operating budget for full 12 months of 1391 would have been about Afs 180 billion, an increase of 20% over 1390.

Afghanistan remains one of the largest recipients of external

assistance measured as a percentage of GDP. According to

World Bank estimates, Afghanistan received donor aid almost

equal to the size of its economy (about US$16 billion) in 2010-

11. Aid has funded the delivery of essential services including

education and health, infrastructure investments as well as

government administration. There have been substantial

improvements in the lives of Afghans over the last 10 years as a

result of this aid, despite the growing concerns regarding the

local impact of these huge aid inflows.

At the Bonn International Conference on Afghanistan in

December 2011, the government highlighted again its

intention to frame its fiscal policy to improve security, foster

economic development, promote governance and reduce

dependency on donors in the long term.

The current fiscal outlook anticipates that Afghanistan will be

able to improve its domestic revenue collection to around

20.7% of GDP by 2030 as opposed to only 11% in 2011-12.

During the past 10 years, the main objective of the Government

of Afghanistan was to move towards achieving fiscal

sustainability. To this end, numerous reforms were introduced

in revenue policy and management that resulted in a huge

spike in domestic revenue collection, particularly during the

past three years (11% of GDP). Afghanistan funds around 62%

of its operating expenditures from its domestic revenues. The

operating gap (38%) and entire development budget is funded

using donor grants.

The major contributors to the revenue growth

are thought to be the introduction of VAT in

2014-15, which will generate around 4.5% of

GDP, and expected revenues coming from

mining sector beyond the transition year

(2014). However Afghanistan would seek

continuous longer-term support of the

international community to finance its

development priorities in the medium to long

term. On the expenditure side, public

expenditure would decrease as a percentage

of GDP to only 30% by 2030 as opposed to

nearly 100% in 2011-12. In other words, even

in 2030, Afghanistan would rely on donor

grants to fund its expected fiscal deficit of

around 10%, equivalent to other developing

and post-conflict countries.

The government will present its post-transition development

strategy to the international community in the upcoming

Chicago and Tokyo International Conferences on Afghanistan.

The strategy should help attain firm commitments from the

international community to fund Afghanistan's security and

development needs in the long term. The joint efforts of the

Afghan Government and International community must ensure

that Afghanistan is moving in the right direction towards

achieving fiscal sustainability.

MOVING TOWARDS FISCAL SUSTAINABILITYBy Niaz Ali Khan, Senior Fiscal Policy Analyst, Ministry of Finance

BUDGET EXECUTION ON THE RISE

The development budget execution rate reached 52% in 1390,

a significant improvement over 39% last year.

This was particularly impressive as it was achieved despite

approximately $217 million of committed funds and a further

$258 million of the discretionary budget not being available.

Otherwise, the development budget execution rate would

have been near 67%.

In absolute terms budget execution increased by almost 27 per

cent from $894 million in FY 1389 FY to $1,136 million in FY

1390. This goes beyond the 10-20% annual increase targeted

by the Ministry of Finance.

Financing gap, as % of GDP, will reduce from 90% to 30% in 2020 and to 10% in 2030. If security

expenditures are not taken into account, the financing gap will reduce to 14% in 2015 and in to 0%

in 2030.

AID HIGHLIGHTS

Produced by: Aid Management Directorate | Directorate General Budget | Ministry of Finance | Pashtunistan Watt | Kabul, Afghanistan

For queries and feedback : e-mail:jawid.omar@budgetmof.gov.af | Telephone: +93 (0) 7520 52411| www.budgetmof.gov.af

SUCCESSFUL AFGHAN-GERMAN NEGOTIATIONS

AFGHANISTAN SIGNS MoU WITH IRAN

The Afghanistan and German governments held their annual

negotiations on the allocation of development resources

channelled through the German Ministry for Economic

Cooperation and Development (BMZ) on March 5- 6, 2012, in

Berlin.

Dr. Omar Zakhilwal (Minister of Finance, Afghanistan) and Mr.

Andreas Gies (Director General for Asia, Middle East, South-

Eastern and Eastern Europe, BMZ) led the delegations, which

resulted in the allocation of EUR240 million to the 5 northern

provinces of Badakhshan, Balkh, Baghlan, Kunduz and Takhar.

Afghanistan recommended the expansion to other northern

provinces and also encouraged meeting the Kabul Process

target of achieving 50% of funding on-budget.

A Memorandum of Understanding was signed in the second

session of economic cooperation in Kabul on January 27, 2011,

between the Ministry of Finance of Afghanistan and Ministry of

Economy of Iran. Both sides decided that the private sector

investment should be encouraged, to expand economic growth

of Iran and Afghanistan. The third Session of Economic

Cooperation is to be held in July 2012 in Tehran.

ALL EYES ON RECCA

and Tajikistan discussed regional cooperation and the stability

of Afghanistan. Key topics of the conference were:

The Central Asia-South Asia (CASA-1000) Power

Transmission Project, which exports around 1000 MW

of electricity from Kyrgyz Republic and Tajikistan to

Afghanistan and Pakistan

The Turkmenistan-Afghanistan-Pakistan-India gas

pipeline (TAPI) initiative

The proposed Kyrgyzstan-Tajikistan-Afghanistan-Iran

railway network

It is envisioned that implementation of these three mega-

projects will pave the way towards further economic

development in the region.

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Tajikistan hosted the 5 Regional

Economic Cooperation Conference

(RECCA-V) on March 26-27, 2012 where

leaders from Afghanistan, Pakistan, Iran

th

AFGHANISTAN - FRANCE TREATY

GERESHK HYDRO POWER PLANT TO BE REHABILITATED

CAPACITY BUILDING PROJECT LAUNCHED

Asian Development Bank signed an agreement to provide

US$75.4million on January 21, 2012 to upgrade the Gereshk

hydropower plant. This will ensure that 50,000 Gereshk

residents and local businesses have access to a more reliable

electricity supply. This is to run through March 31, 2015. Da

Afghanistan Breshna Sherkat (DABS), the official government

company that operates and manages electric power will

oversee construction and manage the plant.

,

The Friendship and Cooperation treaty was signed on January

27, 2012 between France and Government of Afghanistan

(GoA) in Paris. This was preceded by technical and policy

consultations between the French Embassy and the GoA. In the

light of common objectives of peaceful and prosperous

Afghanistan, France committed to support GoA in security,

health, agriculture and education sectors. Both sides agreed to

eradicate terrorism, organized crime and the narcotics trade

which are threats for both countries. The duration of the treaty

is 20 years and the development programs under the treaty will

be developed jointly by the French mission and the Ministry of

Finance with other stakeholders.

,

On December 28, 2012, the World Bank signed a $100m

agreement for the Capacity Building for Results Facility Project

(CBR). This will assist the government in improving the capacity

and performance of selected line ministries in the following

areas: 1. Technical Assistance Facility for Preparation and

Implementation of Line Ministry Capacity Building Programs;

2. Building Human Resources; 3. Civil Service Training; 4.

Project Management, Monitoring and Evaluation. The project

is to run until December 31, 2017.

ADB held the ADF) XI second and

third replenishment meetings in Dhaka and Manila, on

December 2011 and March 2012, respectively. (ADF)

is a major instrument of concessional financing that has been

supporting Asia's poorest countries since 1973. Funded by

ADB's member countries, it offers low-interest loans and grants

to help reduce poverty in the region. Afghanistan is one of the

largest recipients of ADF, which are essential for infrastructure

development, a key priority area of the Government. Since

2007, all ADF assistance to Afghanistan was on a 100% grant

basis (59% of total ADB assistance so far). In the third ADF

Replenishment meeting, donors agreed on an extended post

conflict phase-out period for Afghanistan that would resume

the phase-out in 2013 and end it in 2018.

Asian Development Fund (

5-6, 7-9,

ASIAN DEVELOPMENT FUND CONTINUES TO SUPPORT AFGH

In partnership with the Ministry of Finance (MoF), the UNDP Making Budgets and Aid Work Project provides technical assistance to MoF to develop institutional

capacity for improved budget planning and management, policy and strategy development including aid coordination for better service delivery. It strengthens the

link between the Afghanistan National development Strategy (ANDS) and the National Priority Programmes (NPPs) helping in the design of the NPPs, supports

effective delivery management and strengthens institutional development