July 22, 2024

World Bank Is Withholding $70 Million as Afghans Try to Resolve a Scandal

The delay is part of a looming crisis surrounding Kabul Bank negotiations that could force the Afghan government to dip into badly needed cash reserves and imperil future development projects, according to Western diplomats. It also stands to deepen the crisis in confidence in the government at a key moment, as NATO forces begin handing over security responsibilities in seven areas of the country next month, Western diplomats say.

The World Bank-managed Afghanistan Reconstruction Trust Fund, which receives money from international donors, was scheduled to deliver $70 million on June 11 for incentive programs intended to reward the government for meeting certain benchmarks in areas like public administration reform. But the payment was contingent on the International Monetary Fund’s renewing its main credit program for the country, which was suspended in September as the banking crisis worsened.

“That money hasn’t gone to the government by the deadline of June 11, and the donors are undecided whether to say to the government, ‘You’ve lost it forever,’ or to just hold it back,” said one Western diplomat, who spoke on the condition of anonymity.

With no program in place, Western donors have suspended payments to the reconstruction trust fund. In addition to providing incentive money, the trust fund finances about half the non-security costs of government, including salaries for civil servants. No donor nation has given money to the fund in the last three months, the diplomat said.

At the current spending rate, the fund stands to run dry sometime next month, which could force the Afghan government to dip into its reserve funds to pay the salaries of some 250,000 civil servants on its own. The government reserves are deep enough to do that for now, the diplomat said, but such a move could hamper the government’s ability to become self-sustaining as foreign aid money draws down, which is expected to occur over the next few years.

The continuing discord between the Afghan government and the monetary fund over the banking crisis is a “litmus test” of the country’s governance, said a senior Western diplomat, who also spoke on the condition of anonymity. “And all of us have held to the view that the I.M.F. program is of paramount importance to show the Afghan government’s commitment to transparency, especially when it comes to Kabul Bank, which is critical to regain the confidence first and foremost of the Afghan people, but also to the international community.”

The banking crisis erupted in August when depositors made a run on Kabul Bank in a panic after government officials learned of $300 million in losses and demanded the resignation of the bank’s president and chairman. Banking specialists and others feared the crisis at Kabul Bank could prompt a run on solvent banks and threaten to destabilize the country’s financial system.

The bank was the nation’s largest private financial institution, and its politically connected shareholders included the brothers of President Hamid Karzai and First Vice President Muhammad Qasim Fahim. By January, the estimated losses had reached as much as $900 million.

In April, the Afghan government presented an overhaul plan intended to resolve the crisis by splitting the bank in two: one unit would take over the bank’s branches, deposits and good loans, and the other would be set up as a receivership to try to collect bad loans.

Afghan officials and diplomats at the time hoped the plan would persuade the monetary fund to resume its credit program. But Raphael Anspach, a spokesman for the monetary fund, said Friday that important issues still needed to be addressed, “including actions to ensure that problems that led to the collapse of the Kabul Bank do not recur.”

“The timing of how fast to move forward depends on how quickly the authorities act on the remaining issues,” he added, without providing specifics on the outstanding issues.

Among the steps the monetary fund had been pushing were that the Afghan government put the Kabul Bank in receivership to try to collect as much as possible from the bad loans and that it prosecute those who defrauded the bank. But so far, no one has been charged; in fact, a presidential commission last month cleared some of the most politically connected borrowers.

The commission, appointed by President Karzai to assess responsibility for the wide-ranging fraud scheme, said last month that 207 borrowers, including members of the president’s cabinet and Parliament, had taken out undocumented loans. But the commission absolved the brothers of the president and the first vice president of any wrongdoing. The commission concluded that, so far, only about $347 million was expected to be repaid.

The monetary fund has also been pushing the government to pass a supplemental budget to recapitalize the Central Bank for money it spent keeping Kabul Bank afloat, said Najibullah Manali, an adviser to the Afghan finance minister.

“We sent this proposal to the Parliament but the Parliament rejected it,” he said. The Karzai administration will try again when Parliament reconvenes in August, Mr. Manali said.

Sharifullah Sahak contributed reporting from Kabul.

Article source: http://feeds.nytimes.com/click.phdo?i=749d980de2b614c5037db3ce1ea9cf26

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