IMF Seeks to Avoid Repeating Kabul Bank Collapse Before Aid to Afghanistan

Afghan authorities need to prevent a repeat of the conditions that led to Kabul Bank’s collapse, before the International Monetary Fund agrees to an economic program, the institution’s regional chief said.

The Washington-based IMF recognizes the country’s progress in dealing with Kabul Bank, in particular the decision to liquidate it, Masood Ahmed, the head of the IMF’s Middle East and Central Asia department, said in a Bloomberg News interview yesterday. At the same time, IMF support is contingent on the country’s strengthening its financial system, he said.

“We are ready to move forward and support the Afghan authorities, including in the form of a new program, as soon as some remaining actions which we have been discussing with them for a number of weeks are undertaken,” according to Ahmed.

An agreement with the IMF on an economic program may make about $125 million available to Afghanistan and signal the fund’s approval of its policies, a condition for some governments that provide assistance. An estimated 97 percent of Afghanistan’s gross domestic product is generated by spending on foreign troops and aid efforts, according to a U.S. Senate report released this month.

Ahmed’s comments came as Afghan Finance Minister Omar Zakhilwal accused the institution of not wanting to conclude the talks, calling future discussions with the IMF “a waste of my time,” Reuters reported yesterday.

Source: AFP/Getty Images

Masood Ahmed, head of the International Monetary Fund's Middle East and Central Asia department. Close

Masood Ahmed, head of the International Monetary Fund's Middle East and Central Asia department.

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Source: AFP/Getty Images

Masood Ahmed, head of the International Monetary Fund's Middle East and Central Asia department.

Kabul Bank

The government took over Kabul Bank, the country’s biggest commercial financial institution, in September. Thousands of depositors rushed to withdraw their money last year after learning that Kabul Bank’s owners had lost hundreds of millions of dollars they had lent to themselves.

“The cost of that kind of crisis is large for the budget, it is large in terms of foregone expenditures in other areas, it has reputational consequences for the financial sector and it tends to overshadow the progress that has been made in so many other areas in economic management in Afghanistan,” Ahmed said.

The central bank will seek expressions of interest by next month for the purchase of Kabul Bank, and hopes to sell it by October, central bank Governor Abdul Qadir Fitrat said last month.

“Regarding the costs of Kabul Bank insolvency, a budget allocation is a critical measure going forward to ensure that additional tax revenues are used to begin paying for the costs,” Ahmed said when asked what measures need to be taken.

He declined to confirm whether measures also include a draft law to cut insider lending and bank owners’ powers, saying that the focus has been on ensuring “that the kinds of problems that happened in Kabul Bank do not recur elsewhere in the financial sector.”

Afghan Law

The IMF has called for revisions to the existing “banking law to improve corporate governance” among Afghanistan’s 17 commercial banks, an effort that Afghan officials said the cabinet rejected in January.

The new legislation, drafted last year by the central bank, would bar any shareholder from serving as a bank’s chief executive officer or supervisory board chairman, central bank Governor Fitrat said in a Feb. 26 interview at his office in Kabul.

President Barack Obama has vowed to end the U.S. combat role in Afghanistan by 2014, handing over security duties to Afghan forces that the U.S. is training and equipping.

To contact the reporter on this story: Sandrine Rastello in Washington at srastello@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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