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The World Bank 2020 INCENTIVE PROGRAM DEVELOPMENT POLICY GRANT (P172211)

Document of

The World Bank

FOR OFFICIAL USE ONLY Report No: PGD185

INTERNATIONAL DEVELOPMENT ASSOCIATION

PROGRAM DOCUMENT FOR A

PROPOSED IDA GRANT IN THE AMOUNT OF SDR 117.3 MILLION (US$160 MILLION EQUIVALENT)

AND

AN AFGHANISTAN RECONSTRUCTION TRUST FUND GRANTIN THE AMOUNT OF US$240 MILLION TO THE

ISLAMIC REPUBLIC OF AFGHANISTAN FOR A

2020 INCENTIVE PROGRAM DEVELOPMENT POLICY GRANT APRIL 8, 2020

Macroeconomics, Trade And Investment Global Practice South Asia Region

This document has a restricted distribution and may be used by recipients only in the performance of their official

duties. Its contents may not otherwise be disclosed without World Bank authorization.

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Islamic Republic of Afghanistan

GOVERNMENT FISCAL YEAR

December 22 – December 21

CURRENCY EQUIVALENTS

(Exchange Rate Effective as of March 26, 2020)

Currency Unit

US$1.00 = AF75.98

ABBREVIATIONS AND ACRONYMS

AF Afghanis (Currency)

ACGF Afghan Credit Guarantee Foundation

AFMIS Afghanistan Financial Management Information System

ALCS Afghanistan Living Conditions Survey

AML/CFT Anti-Money Laundering and Countering Financing of Terrorism

ANPDF Afghanistan National Peace and Development Policy Framework

AOGRA Afghanistan Oil and Gas Regulatory Authority

ARD Afghanistan Revenue Department

ARTF Afghanistan Reconstruction Trust Fund

ARTF IP Afghanistan Reconstruction Trust Fund Incentive Program

ASA Advisory Services and Analytics

BRT Business Receipts Tax

CPF Country Partnership Framework

CSO Civil Society Organization

DAB Da Afghanistan Bank

DABS National Electricity Utility of Afghanistan

DPF Development Policy Financing

DPG Development Policy Grant

ECF Extended Credit Facility

ESIA Environmental and Social Impact Assessment

FPIP Fiscal Performance Improvement Plan

FSP Fiscal Performance Improvement Plan Support Program

GDP Gross Domestic Product

GoIRA Government of Islamic Republic of Afghanistan

HIPC Heavily Indebted Poor Countries

HRM Human Resource Management

HRMIS Human Resource Management Information System

IARCSC Independent Administration Reform and Civil Services Commission

ICT Information and Communication Technologies

IDA International Development Association

IDP Internally Displaced People

IFC International Finance Corporation

IMF International Monetary Fund

IP-DPG Incentive Program Development Policy Grant

IPM Integrated Pest Management

LIS Land Information System

LTO Large Taxpayer Office

MCIT Ministry of Communication and Information Technology

MOE Ministry of Education

MOF Ministry of Finance

MOJ Ministry of Justice

MTO Medium Taxpayer Office

MUDL Ministry of Urban Development and Land

NEPA National Environment Protection Agency

NTA National Technical Assistants

O&M Operations and Maintenance

PAISA Payments Automation and Integration of Salaries in Afghanistan (PAISA)

PCR Public Credit Registry

PEC Project Evaluation Committee (PEC)

PEFA Public Expenditure and Financial Accountability

PFM Public Financial Management

PFMR Public Financial Management Reform

PFMRII Second Public Financial Management Reform Project II

PIM Public Investment Management

PPA Power Purchase Agreement

PV Present Value

SAO Supreme Audit Office

SDR Special Drawing Rights

SIGTAS Standard Integrated Tax Administration System

SOC State-Owned Corporations

STO Small Taxpayer Office

TAGHIR Tackling Afghanistan’s Government HRM and Institutional Reforms project

TCC Tax Clearance Certificate

USAID United States Agency for International Development

VAT Value Added Tax

.

Regional Vice President: Hartwig Schafer

Country Director: Henry Kerali

Regional Director: Zoubida Allaoua

Practice Manager (s): Maria Manuela Do Rosario Francisco

Task Team Leader (s): Tobias Akhtar Haque and Tae Hyun Lee


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ISLAMIC REPUBLIC OF AFGHANISTAN

2020 INCENTIVE PROGRAM DEVELOPMENT POLICY GRANT

TABLE OF CONTENTS

SUMMARY OF PROPOSED FINANCING AND PROGRAM .......................................................................3

1. INTRODUCTION AND COUNTRY CONTEXT ...................................................................................5

2. MACROECONOMIC POLICY FRAMEWORK ....................................................................................7

2.1. RECENT ECONOMIC DEVELOPMENTS ............................................................................................ 8

2.2. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY ........................................................ 13

2.3. IMF RELATIONS ............................................................................................................................ 16

3. GOVERNMENT PROGRAM ........................................................................................................ 16

4. PROPOSED OPERATION ............................................................................................................ 17

4.1. LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION .......................................... 17

4.2. PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS .................................................. 18

4.3. LINK TO CPF, OTHER BANK OPERATIONS AND THE WBG STRATEGY .......................................... 35

4.4. CONSULTATIONS AND COLLABORATION WITH DEVELOPMENT PARTNERS ............................... 36

5. OTHER DESIGN AND APPRAISAL ISSUES .................................................................................... 37

5.1. POVERTY AND SOCIAL IMPACT .................................................................................................... 37

5.2. ENVIRONMENTAL, FORESTS, AND OTHER NATURAL RESOURCE ASPECTS ................................. 39

5.3. PFM, DISBURSEMENT AND AUDITING ASPECTS .......................................................................... 40

5.4. MONITORING, EVALUATION AND ACCOUNTABILITY .................................................................. 43

6. SUMMARY OF RISKS AND MITIGATION ..................................................................................... 43

ANNEX 1: POLICY AND RESULTS MATRIX .......................................................................................... 47

ANNEX 2: FUND RELATIONS ANNEX .................................................................................................. 50

ANNEX 3: LETTER OF DEVELOPMENT POLICY ..................................................................................... 55

ANNEX 4: ENVIRONMENT AND POVERTY/SOCIAL ANALYSIS TABLE .................................................. 59

ANNEX 5: GOVERNMENT THREE-YEAR REFORM PROGRAM .............................................................. 61

The Incentive Program Development Policy Grant was prepared by a team comprising: Tobias Haque (TTL, Senior Economist, ESAMU), Tae Hyun Lee (Co-TTL, Lead Economist, ESAMU), Anna Custers (Economist, EMFTX), Habiburahman Sahibzada (Economist, ESAMU), Murtaza Muzaffari (Economist, ESAMU), Tahir Akbar (Senior Social Development Specialist, SSAU1), Enrique Pantoja (Operations Advisor, OPSIL), Cesar Cancho (Poverty Economist, ESAPV), Nandini Krishnan (Senior Poverty Economist, ESAPV), Mohammad Sulaiman Akbari (Private Sector Specialist, ESAF2), Yousif El Fadil (Senior Public Sector Specialist, ESAG1), Atiqullah Ahmadzai (Senior Public Sector Specialist, ESAG1), Kirk Schmidt (Governance Specialist, ESAG1), Aminata Ndiaye (Senior Financial Sector Specialist, ESAF2), Andrej Popovic (Senior Financial Sector Specialist, ESAF2), Syed Waseem Kazmi (Senior Financial Management Specialist, ESAG1), Suhail Kasim (Senior Private Sector Specialist, ESAF2), Carlos Lopez (Senior Extractives Specialist, IEEXI), Davit Melikyan (Senior Public Sector Specialists, ESAG1), (Anita Takura (Senior Environment Specialist, SSAEN), Fanny Missfeldt-Ringius (Lead Energy Specialist, ISAE1), Abdul Hamid Quraishi (Operations Officer, ISAE1), Ria Dharmawan (Counsel, LEGES), Ahmad Shakeeb Safai (Consultant, SACKB), Jane Ebinger (Program Leader, SACKB), Guillemette Sidonie Jaffrin (Program Leader, SACKB), Katie Blanchette (Operations Officer, SACKB), Hikmatullah Fayez (Consultant, ESAF2), Abdul Nasser Nazari (Consultant, SACKB), Muhammad Wali Ahmadzai (Operations Officer, SACKB), Anastassia Alexandrova (Senior Country Officer, SACKB), and Sardar Ahmadzai (Team Assistant, SACKB). Overall guidance was provided by Manuela Francisco (Practice Manager, GMF06), Homa Fotouhi (Operations Manager, SACKB), and Henry Kerali (Country Director, SACKB). Habib Rab (Program Leader, EECDR) and Bill Byrd (United States Institute of Peace) served as peer reviewers.


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SUMMARY OF PROPOSED FINANCING AND PROGRAM

BASIC INFORMATION

Project ID Programmatic

P172211 No

Proposed Development Objective(s)

Program Development Objectives are: i) strengthening the policy framework to support state effectiveness, private investment, and social inclusion; and ii) improving the policy and institutional framework for public financial management and fiscal sustainability

Organizations

Borrower: ISLAMIC REPUBLIC OF AFGHANISTAN

Implementing Agency: MINISTRY OF FINANCE

PROJECT FINANCING DATA (US$, Millions) SUMMARY

Total Financing 400.00 DETAILS

International Development Association (IDA) 160.00

IDA Grant 160.00

Trust Funds 240.00

Afghanistan Reconstruction Trust Fund 240.00

INSTITUTIONAL DATA

Climate Change and Disaster Screening

This operation has been screened for short and long-term climate change and disaster risks

Overall Risk Rating

High


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.

Results

Indicator Name Baseline

(End-2019) Target

(End-2021) Volume of tax and customs dues paid using electronic payments 0% 20%

Proportion of civil servants included on the HMRIS 25% 100%

Proportion of customs and procurement staff receiving cadre allowance 0% (Men)

0% (Women)

25% (Men)

25% (Women)

Proportion of business license renewals issued based on ACBR receipt of digital tax

clearance certificates 0% 20%

Doing business score against acquiring construction permits 34.5 >40

Technical losses as a proportion of network generation 17.3% 15%

Number of municipal districts in which an administrative land system is operating 1 2

Sex-disaggregated land registry data available No Yes

Contingency fund allocations as a percentage of limits established under the PEFM law

140% <100%

Proportion of the contingency fund available for use in responding to natural

disasters 3% 50%

Number of hydrocarbons sector regulations and contract templates jointly

developed by the Ministry of Mines and AOGRA and approved by Cabinet 0 5

Proportion of new projects of over US$7.5 million approved for implementation in

the discretionary development budget than have undergone economic and gender

analysis

75% 100%

Proportion of LTO, MTO and STO clients that make use of e-filing. 35% (LTO)

0% (MTO)

O% (STO)

100% (LTO)

6.5% (MTO)

9.3% (STO)

Budgetary allocations for O&M expenditures included in contingency reserves. 100% 50%

Number of the Mexico Declaration Principles with which the Afghanistan SAO legal

framework complies 2 6

Downloads of the public expenditure database from the Ministry of Finance website 0 100

.


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IDA PROGRAM DOCUMENT FOR A PROPOSED GRANT TO THE ISLAMIC REPUBLIC OF AFGHANISTAN

1. INTRODUCTION AND COUNTRY CONTEXT

1. The proposed 2020 Incentive Program Development Policy Grant (IP-DPG) supports key reforms under the Afghanistan National Peace and Development Framework (ANPDF). Reforms supported by the operation are organized under two pillars: i) strengthening the policy framework to support state effectiveness, private investment, and social inclusion; and (ii) improving the policy and institutional framework for public financial management and fiscal sustainability. The proposed operation will be supported by an IDA grant of SDR 117.3 million (US$160 million equivalent) and a US$240 million grant from the Afghanistan Reconstruction Trust Fund (ARTF). It is the third of three stand-alone operations aligned with Government’s current three-year program of policy reforms. World Bank Board approval is sought for IDA financing in support of the program. The ARTF Management Committee will approve the ARTF grant financing to support the program. 2. Afghanistan faces major challenges and uncertainties in 2020. The global COVID-19 pandemic has had an immediate negative impact on Afghanistan. While the number of confirmed cases and deaths is currently low, Afghanistan is extremely vulnerable to rapid spread of the virus due to low levels of education, limited access to information, constrained access to water and sanitation, and weaknesses in basic health systems. Recent border closures have already severely impacted government customs receipts, and further regulatory responses to contain the spread of the virus are likely to have a strong negative impact on economic growth and government revenues. Poverty remains deep and widespread, and Afghanistan continues to perform poorly against many social indicators. Despite the recent signing of a peace agreement between the United States and the Taliban, active conflict between Taliban and government forces continues, and there is no clear path to a sustained and comprehensive peace. Grants equal to around 43 percent of GDP continue to finance more than 75 percent of total public spending, and around half of budget expenditures. Current civilian aid pledges expire in December 2020 and future levels of grant support are not known, with some donors signaling the likelihood of significant declines, especially in the absence of accelerated anti-corruption and governance reform efforts.

3. Presidential elections were held in September 2019, but recently-announced results are heavily contested. Turn-out for the election was very low, amid serious security concerns (around 1.8 million valid votes cast). Preliminary results were announced on December 22 by the Independent Elections Commission (IEC). Results showed incumbent President winning by a narrow majority (50.64 percent of validated votes), only slightly exceeding the 50 percent threshold required to avoid a second ‘run-off’ election between the incumbent President and his closest competitor, the former Chief Executive. Following allegations of electoral fraud, the Independent Electoral Complaints Commission (IECC) assessed thousands of election complaints. Following a drawn-out process of recounts and audits, final results were announced on the 18th of February, reconfirming the incumbent President’s narrow victory, with only very minor adjustments to initial results. The integrity of the complaints process has been challenged by the former Chief Executive, who has rejected the result, declared himself the winner, and announced the formation of a parallel government. The Government continues to function, with major international partners formally recognizing the incumbent President’s victory. Fears of street protests and broader political destabilization have not been realized to date, but risks remain.


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4. Afghanistan, with its consistently high rankings on the Global Climate Risk Index, is among the most vulnerable countries to the effects of natural hazards and climate change. Climate Change poses a significant threat to Afghanistan’s natural resources, in particular the agriculture sector, on which the majority of Afghans depend for their livelihoods. While floods are the most frequent natural hazard in Afghanistan, droughts cause an average of US$280 million in economic damages to agriculture each year with the potential for an extreme drought event to result in economic losses of up to US$3 billion. Climate change is also expected to increase the frequency of heavy precipitation events, as well as contribute to earlier spring snowmelt, reducing the availability of water over the summer months and making efficient irrigation system even more critical for agricultural productivity.1

5. The proposed operation seeks to help Afghanistan manage current risks and uncertainties further compounded by the immediate impacts of the COVID-19 crisis. The proposed operation builds on the gains achieved under previous IP-DPGs, supporting vital civil service reforms, improvements to the business regulatory environment, improved resilience to natural disasters, and strengthened public financial management and tax administration. Policy reforms supported by the operation are intended to: i) improve the management of public resources and reduce opportunities for corruption, demonstrating progress in this regard to the international community as future grant commitments are considered; ii) ensure continued availability of resources for core government functions and preparedness for declining grants over the medium-term through revenue and expenditure reforms; and iii) support reform momentum and continuity over a period of potentially-difficult political transition. Financing provided through the operation will provide vital fiscal support to Government as it manages revenue shortfalls arising from the initial impacts of the COVID-19 crisis (especially loss of customs revenues in the context of recent border closures).

6. The proposed operation has a similar design to previous IP-DPG operations. Innovative use of decrementing tranches associated with Tranche Release Conditions (to be met after Board approval) proved successful in motivating continued reform progress and catalyzing coordination of donor support around supported reforms. For both operations, Tranche Release Conditions were met by the specified completion dates and the full allocated ARTF financing amounts were disbursed. Innovative design elements from previous IP-DPG are retained under the proposed operation. The operation will be composed of 11 tranches. The first tranche of US$200 million (US$160 million of IDA resources and US$40 million of ARTF) is associated with four prior actions. The tranche associated with the four prior actions will be released immediately and in full after the effectiveness conditions are met. Ten tranches of US$20 million each of ARTF resources are associated with tranche release conditions that are expected to be fulfilled by a specified Completion Date (November 15, 2020). Disbursement amounts associated with tranche release conditions will be timing dependent. Tranches will be released in full if Tranche Release Conditions are met by the Completion Date. Tranches will decrement in amount (at the rate of ten percent of initial tranche value per month) if fulfilment of the tranche release conditions extends past the targeted completion date, providing continued incentives for the fulfilment of agreed reforms by Government. 7. The overall risk rating for the operation is high. Political and governance risks arise from overall weak governance and uncertainties associated with the outcomes of recent presidential elections. Macroeconomic risks arise from the ongoing impact of COVID-19 on the local, regional, and global economy, heavy aid dependence, and uncertainties around future international grant support. Overall

1 Afghanistan Disaster Risk Profile, World Bank, 2017


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institutional capacity for implementation and sustainability is weak, and may further deteriorate in the context of government measures to contain the spread of COVID-19 and election-related personnel changes at senior levels of government. Security risks are high, given the active-conflict environment.

2. MACROECONOMIC POLICY FRAMEWORK

8. Afghanistan remains an undiversified economy, heavily dependent on aid. The private sector is extremely narrow, with employment concentrated in low-productivity agriculture (44 percent of the total workforce works in agriculture and 60 percent of households derive some income from agriculture). Investment since 2001 has focused around the aid-driven contract economy. Private sector development and diversification is constrained by political instability, weak institutions, inadequate infrastructure, widespread corruption, and a difficult business environment (Afghanistan was ranked 173rd of 190 countries in the 2020 Doing Business Survey). Foreign grants currently finance more than 75 percent of public spending, 47 percent of the budget, and 90 percent of security spending.2 Aid flows to Afghanistan were equal to around 43 percent of GDP in 2019. Security expenditures (national security and police) are high at around 28 percent of GDP in 2019, compared to the low-income country average of around three percent of GDP.3 Illicit activity remains central to the Afghan economy.4 The opium economy is driven by weak rule of law, easy access to key trade routes, and absence of alternative livelihood generating activities. The major role of illicit activity in the Afghan economy, including opium production and smuggling, weakens overall governance and deprives government of much-needed revenues. 9. Following a sustained period of impressive development progress after the fall of the Taliban, Afghanistan has faced intensifying and interlinked economic, security, and political challenges. With an influx of aid since 2002, Afghanistan sustained rapid economic growth and improvements against important social indicators for more than a decade. Annual growth averaged 9.4 percent between 2003 and 2012. Since 2012, however, a range of factors have slowed economic and social progress. Aid flows decreased from around 100 percent of GDP in 2009 to 43 percent of GDP in 2019 (with the number of international troops declining from more than 130,000 in 2011, to around 15,000 by end-2014). Reduced aid and security presence led to a rapid weakening of demand, especially in construction and other service sectors, with follow-on impacts across the economy. The security situation deteriorated, with increased activity by anti-government forces leading to a large increase in civilian casualties which reached record levels in the third quarter of 2019.5

2 IDA and ARTF account for around two-thirds of total on-budget civilian grants of US$1.6 billion per year. On-budget civilian grants finance core government costs, including civil servant salaries, and major programs in education, health, community development, and infrastructure. Remaining civilian on-budget grants are provided by the Afghanistan Infrastructure Trust Fund and the EU. Off-budget civilian grants of around US$2 billion a year finance projects in a wide range of sectors and are provided by a range of development partners, including the United States, Germany, EU, United Kingdom, and Japan. 3 This includes off-budget security costs. 4 The UNODC estimates the total value of the opium economy at between US$1.2 – US$2.2 billion in 2018 – up to 11 percent of formal sector GDP. This compares with total formal exports of around US$0.9 billion. Poppy production decreased substantially in 2019, despite reduced eradication efforts, with drought negatively impacting yields and the area of land under poppy cultivation. Declining production may also have been driven by falling prices. Opium prices have collapsed in response to very strong production over recent years, with potentially significant impacts on livelihoods in poppy-cultivating regions. 5 United National Assistance Mission to Afghanistan Protection of Civilians in Armed Conflict Report, October 2019. Annual civilian casualties in 2019 totaled 10,392, slightly lower than the 2018 total of 10,994.


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10. Slow growth, drought, and displacement are driving increasing poverty and hardship. Afghanistan currently faces a humanitarian crisis arising from large numbers of returning migrants (more than 3.3 million since 2012) and a large and growing internally displaced population (4.2 million). Displacement has been driven by both conflict and recent drought. Over recent years, the rate of economic growth has lagged population growth. The poverty rate increased sharply from 38 percent in 2011/12 to 55 percent in 2016/17, with poverty increasing in both urban and rural areas. Although drought conditions are now easing, recent unfavorable weather conditions may have continued negative impacts through driving sub-optimally timed planting and increased risks of flooding.

11. The COVID-19 crisis is expected to have severe negative poverty and welfare impacts. The COVID-19 crisis has led to an accelerated inflow of returnees from Iran and Pakistan and mounting associated humanitarian needs. Disruption to trade is likely to lead to higher prices and shortages of basic household goods. With high reliance on out-of-pocket expenditure for health services, households facing additional healthcare needs will be heavily impacted. Households facing increased health costs, higher prices for basic goods, or reduced incomes due to imposition of social distancing measures may be forced to reduce expenditure on education and food or sell assets, with long-lasting negative impacts on livelihoods and human capital accumulation.

2.1. RECENT ECONOMIC DEVELOPMENTS

12. Despite recovery from drought, already-sluggish growth is likely to have been negatively impacted by the COVID-19 crisis over the first quarter of 2020. Growth is estimated to have accelerated slightly to 2.9 percent in 2019, relative to 1.8 percent in 2018. Recovery from drought conditions in 2018 drove the slight pick-up, with agriculture growing at an estimated 7.5 percent. Strong agricultural growth was offset by weak growth in industry and services (two percent and 1.8 percent respectively), reflecting very weak confidence. Investment and confidence were undermined by multiple overlapping factors, including: i) deteriorating security; ii) political uncertainties around the presidential elections and its disputed outcome; iii) uncertainties regarding ongoing international security and aid support; and iv) the unclear process and timelines for a potential political settlement with the Taliban and the contours of any eventual peace agreement. Growth over the first quarter of 2020 is likely to be substantially impacted by policy measures to contain the spread of the COVID-19 virus, including closure of border-crossings with Pakistan and recent imposition of internal travel restrictions and business closures. Remittances are also likely to be negatively impacted by COVID-19-related deteriorations in economic conditions in remittance-sending countries (Iran, Pakistan, and the GCC).

13. Inflation remains low. Period average inflation for 2019 was 2.3 percent, up slightly from 1.2 percent over 2018. Inflation was mainly driven by increasing cereal prices, reflecting increased world prices and despite significant increases in domestic production. Vegetable prices declined, partly due to increased import duties on exports to Pakistan and resulting increases in domestic supply. Non-food inflation remained low, reflecting declining international energy prices. Fears of border closures and food-shortages drove a short-term spike in retail prices for basic consumer items in mid-March. Prices have now fallen, due to government communications efforts and rapid distribution of grain reserves.


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14. The monetary policy framework is appropriate, but transmission channels are weak. The main monetary policy instruments are capital notes and foreign exchange auctions. A limited policy toolkit together with an underdeveloped financial sector and high levels of dollarization has undermined effectiveness of monetary policy (foreign currency deposits account for around 70 percent of total deposits). Confidence in the banking sector is yet to fully recover from the Kabul Bank crisis of 2010, during which massive fraud led to a run on Afghanistan’s largest bank, necessitating a government bail-out and undermining confidence in the sector. Credit to the private sector continued to contract through 2019, reflecting weak confidence and slow growth (around four percent contraction from 2018). Credit to the private sector was equal to only around 3.2 percent of GDP at end-2019. Non-performing loans increased from 11.3 percent of total gross loans at end of Q2, 2018, to 14 percent at October 2019, reflecting difficult economic conditions and strengthened enforcement of asset classifications by the central bank (still substantially down from 17.9 percent at end-Q2 2017). With very low credit to the private sector, the loan-to-deposit ratio remains low (17.1 percent). Efforts are continuing to strengthen the financial sector, including: i) increased monitoring of weak banks and enforcement of asset classification regulations by the central bank; ii) strengthened corporate governance and IT infrastructure upgrades of state-owned banks; and iv) integration of payment systems, as supported by the proposed operation. There is limited coordination between monetary and fiscal policy. The central bank remains committed to exchange rate flexibility, with limited interventions to smooth volatility.

15. The trade deficit remains large but may have slightly narrowed as a result of recent border closures. The trade deficit narrowed slightly in 2019 to around 31.4 percent of GDP (from 32.7 percent of GDP in 2018). A decline in exports was offset by a larger decline in imports. Negative export growth of around 5.5 percent reflected strengthening of the exchange rate against major regional trading partners and the higher valuation of major exports (pomegranate, apricot, and grapes) imposed by Pakistan amongst mounting trade tensions. Lower imports (seven percent decline from 2018) reflected reduced reliance on imported cereals following recovery from drought and increased domestic cereal production alongside lower energy imports (due to lower prices, higher domestic generation, and the destruction of two international transmission lines by insurgent groups). Border closures over the first quarter of 2020 impacted both imports and exports, likely leading to an aggregate improvement in the trade balance.

16. The current account remains in surplus and the exchange rate has stabilized. Despite the large trade deficit, the current account remained in surplus (around 2.9 percent of GDP) reflecting large aid inflows (around 43 percent of GDP). The Afghani depreciated against the US dollar (3.1 percent depreciation)and appreciated against major regional trading currencies,11.5 percent against the Iranian Toman and 12 percent against the Pakistani Rupee. Overall, it remains in line with the fundamentals. International reserves reached US$8.6 billion, equal to around 13 months of import cover, driven by the improved trade balance and higher market valuation of the central bank’s monetary gold holdings amid increasing global gold prices.

17. After a sustained period of strong growth, revenues have been negatively impacted by recent border closures and economic disruptions arising from the COVID-19 crisis. Revenues reached a new high of 14.1 percent of GDP in 2019. Strong revenue performance, however, largely reflected one-off collections (including transfer to government of depreciation-driven central bank profits) and continued reliance on non-tax revenues. Core tax revenues remained flat, in nominal terms, with poor performance of the large taxpayer office (LTO) and small taxpayer office (STO), and mixed performance at customs


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points. On-budget grants declined from around 14.8 percent of GDP in 2018 to 13.4 percent of GDP in 2019, driven by declines in both security and civilian grants. Total expenditure increased to 19.1 percent of GDP (from 18.4 percent in 2018), driven by increased security expenditures, social transfers, and salary payments. Development budget execution remained strong, at around 90 percent. The overall fiscal deficit reached around 1.1 percent of GDP and was financed from cash reserves. Recent border closures and general disruption of economic activity arising from the COVID-19 crisis have driven a deterioration of revenue performance over the first quarter of 2020. As of late-March, overall revenues were around 20 percent lower than over the same period in 2019. Government is currently managing recent revenue declines through larger-than-expected drawdowns of cash reserves, which have declined by around 20 percent, or US$100 million from the start of the fiscal year.


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Table 1: Selected Economic Indicators

2017 2018 2019e 2020p 2021p 2022p 2023p

Real Economy

Nominal GDP (billion Af) /1 1,376 1,409 1,483 1,493 1,617 1,790 1,960

Nominal GDP (billion US$ ) /1 20.2 19.5 19.1 18.3 18.9 19.9 20.8

GDP per capita (US$ ) 556 524 502 470 474 489 498

Population (million) 36.3 37.2 38.0 38.9 39.8 40.8 41.7

Real GDP growth /1 2.7 1.8 2.9 -3.8 3.3 5.2 4.0

Prices

CPI inflation (period average) 5.0 0.6 2.3 4.5 5.0 5.5 5.5

Fiscal

Total Revenue and Grants 52.7 57.5 56.7 54.0 53.0 51.5 49.6

Domestic revenues 12.3 13.2 14.1 9.8 13.5 15.2 15.7

Grants 40.4 44.3 42.7 44.2 39.5 36.3 33.9

Security grants 23.0 25.0 24.2 25.8 23.6 21.8 20.9

On-budget 5.5 6.0 5.4 6.2 6.1 5.7 5.5

Off-budget 17.4 19.0 18.8 19.7 17.5 16.1 15.4

Civilian grants 17.4 19.3 18.4 18.4 15.9 14.6 13.0

On-budget 7.5 8.8 8.0 7.4 6.4 5.8 5.3

Off-budget 9.9 10.5 10.5 10.9 9.5 8.7 7.7

Total expenditures 51.7 55.6 57.7 53.9 53.6 51.9 50.0

Security spending 25.7 27.2 28.3 27.3 27.0 26.6 26.1

On-budget security 9.7 9.4 9.6 10.6 10.5 10.3 10.4

Off-budget security 17.4 19.0 18.8 19.7 17.5 16.1 15.4

Civilian spending 26.0 28.4 29.4 26.6 26.6 25.3 23.8

On-budget civilian 16.1 17.9 18.9 15.7 17.1 16.6 16.1

Off-budget civilian 9.9 10.5 10.5 10.9 9.5 8.7 7.7

Budget balance -0.5 0.7 -1.1 -2.9 -1.6 -0.2 0.0

Budget balance excl. grants -13.6 -14.1 -14.4 -16.5 -14.1 -11.7 -10.8

External Sector

Exports of goods (million US$ ) /2 784 875 826 700 770 862 992

Imports of goods (million US$ ) /3 6,737 6,596 6,161 5,745 5,935 6,246 6,493

Merchandise trade balance (29.5) (29.4) (27.9) (27.5) (27.3) (27.0) (26.5)

Net current transfers 44.4 46.8 45.0 47.0 41.3 38.4 36.3

Current account balance 2.2 2.7 2.9 5.0 1.1 (0.6) (1.5)

Gross foreign exchange reserves (million. US$ ) 8,053 8,206 8,694 9,587 9,933 10,072 10,136

(months of imports of goods and services) 12.1 13.0 14.7 15.7 15.5 15.1 14.5

External debt 6.2 6.2 6.9 8.8 9.4 9.3 9.8

Exchange rate (AFN/USD, period average) 68.1 72.3 77.6 81.5 85.6 89.9 94.4

Monetary

Broad money (M2) 34.4 34.5 33.7 32.2 30.7 29.2 27.7

Total deposits 18.4 18.9 18.8 19.7 19.1 18.1 17.3

Credit to private sector, commercial banks 3.5 3.2 3.2 3.0 2.9 2.7 2.6

1/ National Accounts data exclude opium value added.

2/ Exclude sales of goods to nonresidents in the country.

3/ Include estimated unofficial trade or smuggling.

Sources: World Bank staff estimates, DAB, MoF, IMF

% of GDP (unless otherwise noted)


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Table 2: Central Government Budget Operations

2017 2018 2019e 2020p 2021p 2022p 2023p

Total revenues 25.3 28.0 27.4 23.4 26.0 26.7 26.5

Domestic revenues 12.3 13.2 14.1 9.8 13.5 15.2 15.7

Direct taxes 5.5 5.9 5.7 4.4 6.1 7.3 7.9

Indirect taxes 2.6 2.5 2.4 1.3 2.5 2.8 2.8

Nontax revenues 4.2 4.8 6.0 4.2 4.9 5.1 5.1

Donor grants 13.0 14.8 13.3 13.6 12.5 11.5 10.8

Security 5.5 6.0 5.4 6.2 6.1 5.7 5.5

Civilian 7.5 8.8 8.0 7.4 6.4 5.8 5.3

Total expenditures 25.9 27.3 28.5 26.3 27.6 26.9 26.5

Recurrent expenditures 18.4 18.4 19.1 20.5 19.5 19.1 19.5

Security 9.7 9.4 9.6 10.6 10.5 10.3 10.4

Civilian 8.7 9.0 9.5 9.8 9.0 8.8 9.1

Wages and salaries 4.6 4.8 5.3 5.7 5.3 5.2 5.4

Operations and maintenance 2.1 1.8 1.6 1.9 1.5 1.5 1.5

Social transfers 1.7 2.0 2.3 2.0 1.9 1.8 1.8

Interest payment 0.1 0.1 0.1 0.0 0.0 0.0 0.1

Other 0.2 0.2 0.2 0.1 0.2 0.3 0.3

Development expenditures 7.4 8.9 9.4 5.9 8.1 7.7 7.1

Discretionary 3.0 3.8 4.1 1.2 3.2 3.2 2.9

Non-dscretionary 4.4 5.1 5.3 4.7 4.9 4.5 4.2

Overall balance -0.5 0.7 -1.1 -2.9 -1.6 -0.2 0.0

Overall balance excluding grants -13.6 -14.1 -14.4 -16.5 -14.1 -11.7 -10.8

Financing 0.5 -0.7 1.1 2.9 1.6 0.2 0.0

Borrowing 0.0 0.0 1.0 1.6 0.9 0.9 0.9

Change in Government Deposits and others 1/ -0.5 0.7 0.0 -1.3 -0.8 0.7 0.9

Memo items

Nominal GDP (billion Af) 1,376 1,409 1,483 1,493 1,617 1,790 1,960

Nominal GDP (billion US$) 20.2 19.5 19.1 18.3 18.9 19.9 20.8

1/ Others include sale of non-financial assets, credit from DAB, and expenditure discrepancy

NB: The Afghanistan fiscal year is December 22 - December 21

Sources: World Bank staff estimates, IMF, MoF

In percent GDP, unless otherwise indicated


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Table 3: Balance of payments financing requirements and sources

2.2. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY

18. Afghanistan’s economy will be hard-hit by the COVID-19 pandemic. Estimates are subject to significant uncertainty as the ongoing COIVD-19 pandemic continues to evolve. Under a baseline scenario, the economy is now expected to contract by around 3.8 percent in 2020, relative to projected 3.3 percent growth in pre-COVID-19 estimates. Major channels through which the COVID-19 virus will impact Afghanistan’s economy include: i) reduced exports due to disruptions at border points; ii) negative impacts on remittances; iii) disruptions to domestic consumption and confidence; and iv) increased fiscal pressures, with declining revenues and increased public expenditure needs. The growth outlook is subject to substantial uncertainty and based on the following assumptions: i) gradual but effective containment of the COVID-19 virus over 2020 and subsequent recovery in growth; ii) absence of further drought or climate-related shocks; iii) improvements in political stability with the current impasse over the outcomes of elections rapidly resolved; iv) no further deterioration in the security situation; v) a gradual decline in donor grants; and vi) steady progress with implementation of business environment and institutional reforms. Under these assumptions, growth is expected recover to 3.3 percent in 2021 and 5.2 percent in 2022, as output recovers to pre-COVID-19 levels. Strong agriculture growth is expected to underpin

2019e 2020p 2021p 2022p 2023p

External Financing Requirements 7,625 7,285 7,130 7,258 7,261

Current account deficit (excl. grant inflows)* 7,588 7,249 7,095 7,225 7,215

Amortization 37 36 35 34 46

Official Loans 37 36 35 34 46

Financing Sources 8,112 8,178 7,477 7,397 7,325

A. Official Grant Inflows 8,150 8,162 7,300 7,100 6,900

B. Capital and Financial Inflows -38 16 177 297 425

Net FDI and Portfolio investment -44 -24 61 120 210

Net Other inflows (excluding loans) -170 -124 -68 -9 5

Loan Disbursments 176 164 185 186 210

Changes in Reserves (- means drawing) 487 893 346 138 64

Foreign exchange reserves (end-of-year) 8,694 9,587 9,933 10,072 10,136

( Reserves in months of imports) 15 16 15 15 15

Sources: World Bank staff estimates, IMF

*Adjusted for the World Bank’s estimates on the imports associated with in-kind transfers and other

international transactions that are currently captured by the errors and omissions under the official BoP

statistics


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recovery, as the sector recovers from drought. Private investment and activity in the services and industry sector are expected to pick up with the removal of social distancing restrictions, the normalization of international trade, and a recovery in confidence, despite no significant changes in the security environment. The recently-announced draw-down of international security forces is expected to have a limited macroeconomic impact given: i) the small number of troops being withdrawn relative; ii) expected continuation of security grant support; and iii) the limited domestic economic impact of the international security presence given heavy reliance on imported supplies and limited integration with the local economy.

19. Inflation is expected to pick up slightly, while the current account moves into deficit. Supply disruption from border closures is expected to lead to a slight increase in inflation (reaching five percent in 2021), with impacts partly offset by increased domestic agricultural production. With declining international grants and a continued high trade deficit, the current account is expected to gradually deteriorate, reaching a deficit of around 1.5 percent of GDP by 2023. International reserves are expected to remain at comfortable levels, however, remaining at around 14 months of import cover by 2023. Credit to the private sector is expected to grow modestly. Impacts of slow growth and weak confidence will continue to constrain credit growth, despite efforts to support financial inclusion and improve financial sector corporate governance. The monetary policy stance is expected to remain unchanged.

20. With a gradual decline in grants and negative fiscal impacts of the COVID-19 virus, deficits are expected to expand. Under a baseline scenario, revenues are expected to fall rapidly to 9.8 percent of GDP in 2020 driven by declining customs revenues and overall deterioration in economic activity. Total grants are expected to decline from around US$8.2 billion to US$6.9 billion by 2024. On-budget grants are expected to decline from around 13.6 percent of GDP to 10.8 percent of GDP over this period. Expenditures are expected to fall to 26.3 percent of GDP in 2020. With increased demand for recurrent basic service expenditures and rigidities in security spending, development spending is expected to decline substantially to 5.9 percent of GDP (from 9.4 percent of GDP in 2019). With pressures on both revenues and expenditures, the fiscal deficit is expected to reach 2.9 percent of GDP in 2020 before narrowing to 1.6 percent of GDP in 2021. The deficit is expected to be financed from: i) external borrowing on concessional terms from regional partners and multilaterals, including accessing of emergency response facilities (around 1.6 percent of GDP in 2020 and one percent of GDP in outyears); ii) issuance of a domestic sukuk debt instrument (around 0.1 percent of GDP per year); and iii) cash reserves, which are expected to fall close to the policy floor of Afs10 billion in 2020.

21. The operation is designed to support necessary fiscal adjustment and recovery from the impacts of the COVID-19 crisis. Current grant pledges to Afghanistan expire in 2020 and the future level of grant support remains uncertain. World Bank analysis shows that gradual expansions of service delivery, growth-enhancing project investments, and post-conflict programs to generate alternative livelihoods are affordable even with a gradual decline in grants.6 However, the trajectory of grant decline will need to be carefully calibrated to fiscal realities to avoid the need for a major fiscal adjustment with negative impacts on service delivery, economic activity, and security. Some development partners have stated that levels of future grant support will reflect the extent and pace of progress with reform and anti-corruption measures. The proposed operation is intended to help manage risks of rapid declines in aid grants and

6 World Bank (2019) ‘Financing Peace: Fiscal Challenges and Implications for a Post-Settlement Afghanistan’, World Bank, Washington DC.


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support progress towards self-reliance over the medium-term. Supported reforms will also support recovery in government revenues and private investment following the negative impacts of the COVID-19 crisis, while strengthening the capacity of public finance systems to respond to future shocks. Effective implementation of the ambitious program of structural and Public Financial Management (PFM) reforms supported by the operation will directly improve efficiency of public resource use and reduce opportunities for corruption (public investment management reforms, tax administration reforms, operations and maintenance (O&M) policy implementation, public service reforms) helping to maintain confidence of the international community. Revenue administration reforms will support improved revenue performance while structural reforms will support increased economic growth, facilitating reduced reliance on grants over the medium-term.

22. Afghanistan is at high risk of debt distress under the World Bank/IMF Debt Sustainability Framework. The most recent World Bank/IMF debt sustainability analysis (December, 2019) finds Afghanistan at high risk of debt distress despite very low levels of public debt (seven percent of GDP), nearly all of which is highly concessional external debt to multilaterals. The “high” risk rating is driven by a gradual decline in grants under the ‘baseline’ scenario, with grant flows decreasing by around 1.5 percentage points of GDP per year beyond the period for which grant support has been firmly committed, and remaining financing needs met through: i) new external concessional borrowing with a grant element of around 35 percent; and ii) domestic sukuk issuance of around 0.1 percent of GDP per year with a seven percent interest rate. Resulting debt accumulation leads to a sustained breach of the present value of debt-to-exports ratio (around 163 percent by the end of the projection period). While there are no breaches of liquidity indicators under the baseline scenario, Afghanistan experiences large and sustained breaches of the debt-service-to-exports and PV of debt-to-exports thresholds under the standard export shock stress test. The analysis shows that Afghanistan’s external debt sustainability remains subject to substantial downside risks, including aid shortfalls, the fragile security situation, political uncertainty, domestic revenue shortfalls, and exchange rate depreciation.

Figure 1: PV of debt-to-exports ratio Figure 2: Debt service-to-exports ratio

23. Afghanistan’s macroeconomic framework is adequate for the operation but exposed to substantial downside risks. Fiscal policy is adequate, even though under any scenario Afghanistan will rely on elevated levels of external assistance until at least 2030. Monetary policy is adequate to ensure price stability. Main macroeconomic risks include: i) more extensive and prolonged impacts of the COVID-19 crisis; ii) a premature withdrawal of aid, which would undermine fiscal sustainability and investor


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confidence, and potentially undermine security sector financing and the capacity of government security services to hold territory against anti-government elements; iii) further deterioration in the security environment, which would undermine confidence and further slow growth; iv) political instability which would have highly unpredictable impacts on the security situation, business confidence, and external support; and v) regional economic or political developments that may see renewed flows of returning refugees and disrupted remittance flows. Realization of any of the risks mentioned above could see: i) substantial reductions in growth from baseline projections; ii) an increase in poverty; iii) the emergence of large revenue shortfalls and associated declines in service delivery; and iv) rapid deterioration of the current account leading to depletion of foreign-exchange reserves. A downside COVID-19 scenario, in which the virus is not effectively contained over 2020, could lead to an economic contraction of up to six percent in 2020, with revenues declining by up to 20 percent below 2019 levels. On the other hand, implementation of a peace agreement with the Taliban may see increased investor confidence, repatriation of off-shore capital, and a return of skilled migrants, supporting private sector development, accelerated growth and stronger government revenues.

2.3. IMF RELATIONS

24. The IMF is planning to commence discussion of a new arrangement with Government. The IMF Executive Board approved a US$44.9 million three-year ECF program for Afghanistan in July 2016 supporting macroeconomic and structural reforms to catalyze donor support. The program included: i) structural reforms for institution building, fiscal and financial reforms, and measures to combat corruption for scaled-up private sector investment; and ii) policies to preserve macroeconomic stability. The sixth and final review of the program was completed in December 2019, with all quantitative performance criteria met and all but one structural benchmarks met. Following the successful 2016-19 ECF, Afghanistan has expressed interest in a follow-up arrangement, potentially including a Rapid Credit Facility program to help manage COVID-19 impacts. The IMF Board welcomed a request for a new program during the December 2019 Article IV consultations. The IMF and the World Bank have been closely collaborating on supporting key economic reform programs, including regular participation of the World Bank in semiannual ECF review missions.

3. GOVERNMENT PROGRAM

25. Government strategy is outlined in the Afghanistan National Peace and Development Framework (ANPDF), while PFM reform priorities are presented in the Fiscal Performance Improvement Plan (FPIP). The main priorities identified in the ANPDF are: i) improving governance and state effectiveness through public sector reform, rooting out corruption and strengthening subnational governance; ii) building social capital and nation building through reforming the justice sector and building national identity; iii) economic growth and job creation through agriculture development, private sector–growth, and mineral and resource development; and iv) poverty reduction and social inclusion through improving the quality of health and education programs. Government’s public finance reform strategy is presented in the Fiscal Performance Improvement Plan (FPIP). The FPIP was developed as a five-year rolling roadmap for PFM reform, with the first five-year rolling plan approved in February 2016, with an objective to deliver: (i) more efficient and effective public services; (ii) significantly improved fiscal discipline; and (iii) more strategic use of fiscal policy as a tool for development. To this end, the FPIP


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targets three key PFM reform areas, including: (i) improving investment performance through strengthened macro-fiscal planning and policy coordination; (ii) ensuring a more accurate, transparent and accountable budget through improving budget preparation and reporting, treasury and procurement functions, and revenue and customs management; and (iii) building capacity to manage reforms in the areas of HR, administration, finance, IT and communications.

4. PROPOSED OPERATION

4.1. LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION

26. The proposed IP DPG operation will support reforms under the national development strategy (ANPDF) and the PFM reform plan (FPIP). This DPG aims to support the Government in improving economic and fiscal self-reliance by supporting: (i) select reform areas of the ANPDF; and (ii) key PFM reforms pursued under the FPIP. Policy actions supported by the operation are part of Government’s 3-year Incentive Program Reform Plan, included as Annex 5, which provides a roadmap for sequential policy reforms and implementation steps in relevant policy areas. Financing provided through the operation is vital for government operations and is equivalent to around 24 percent of civilian recurrent expenditure. 27. The proposed operation is broadly consistent with the design of previous IP-DPGs. The operation will be composed of 11 tranches. The first tranche of US$200 million (US$160 of IDA and US$40 million of ARTF) is associated with four prior actions. Ten tranches of US$20 million each of ARTF resources are associated with tranche release conditions that are expected to be fulfilled by a specified Completion Date (November 15, 2020). World Bank Board approval is sought for the utilization of IDA resources associated with prior actions. The ARTF Management Committee will approve ARTF resources in support of tranche release conditions.

28. Proof of concept for design of the proposed operation has been demonstrated by the success of previous IP-DPGs. All tranche release conditions were met under the 2018 and 2019 IP DPGs and all ARTF-financed tranches were fully disbursed. There have been no policy reversals. Policy reforms and results achieved by previous Incentive Program Development Policy Grants are summarized Box1. The use of tranche release conditions provided sufficient lead times and strong incentives for timely implementation of reforms. By allowing decrementing disbursements for delayed completion of reform actions for a limited period, the risk of disrupting the budget was reduced. The utilization of a similar operation design structured around a similar program of reforms reflects the success of the previous operation in both supporting a program of significant structural and public finance reforms and ensuring a relatively reliable and timely source of financing to meet recurrent expenditure needs.


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Box 1: Results Achieved through previous Incentive Program Development Policy Grants The proposed operation is the third in a series of three non-programmatic IP-DPGs. To date, Government has demonstrated strong commitment to supported reforms. Under the 2018 and 2019 IP-DPGs all TRCs were met without modification by the completion deadline. Timely completion of policy actions allowed full disbursement of ARTF-financed tranches (totaling US$21$20 million in 2018 and US$300 million in 2019). Outcome level progress is being achieved in most policy areas as a direct result of reforms supported by previous IP-DPGs:

• E-money/e-payment: Infrastructure and a regulatory framework has been established for electronic payments, with payment of customs duties from commercial banks to the central bank already occurring.

• Civil service reform. Computerized testing has been implemented for recruitment in grades 1-4, minimizing opportunities for corruption in hiring. Legal changes have allowed female-only advertisements, quotas, and additional scoring in selections for women.

• Business environment reform. Insolvency law reform contributed to Afghanistan achieving the largest improvement in scores of any country in the 2019 Doing Business Report.

• Energy utility reform. DABS has achieved measurable reductions in technical losses. Transaction costs in acquiring connections have declined. Afs. 2.4 billion of electricity bills previously pending with the Ministries have been cleared.

• Land reform. The administrative system of land management is being rolled out in Herat. At least 20,000 occupancy certificates have been issued to informal occupants of government-owned land.

• Public investment management. The public investment framework has been transformed with all projects now required to undergo basic strategic fit screening, and all large projects (over US$7.5 million) required to undergo full economic analysis. This is being effectively implemented with three-quarters of large projects in the 2020 budget having undergone economic analysis.

• Tax reform. Under reforms supported by the IP-DPGs, e-filing and e-payment is being effectively rolled out. All large taxpayers now have the option for e-filing, substantially reducing compliance and transaction costs and reducing scope for corruption.

• Fiscal transparency. MOF is publishing full revenue data on its website every two weeks. Minutes of cash committee meetings are published along with cash reports. This represents an unprecedented level of fiscal transparency.

4.2. PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS

Pillar I: Strengthening the Policy Framework to Support State Effectiveness, Private Investment, and Social Inclusion

Policy Action #1 (Tranche Release Condition): To simplify tax payment procedures Government integrates systems for e-payments (the ATS, APS, ASYCUDA, SIGTAS, and the core banking system / Da Afghanistan Bank (DAB)).

29. Development of e-money and digital payments remains a priority for Afghanistan. Afghanistan has among the lowest rates of financial inclusion in the world, as defined by number of transaction accounts. Most large customs and tax payments are currently cash based and take place at commercial


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banks in Kabul and provinces. Commercial bank systems are not interoperable with the central bank (Da Afghanistan Bank, DAB), customs, and tax systems, which makes the payment process cumbersome and slow. The inability to pay taxes and customs duties digitally increases opportunities for corruption, constrains women’s economic participation (due to cultural constraints to physical travel), and weakens incentives for use of e-money systems, with businesses forced to hold and transact cash. According to the 2017 Global Financial Inclusion Database, only 11 percent of Afghans reported having made or received digital payments in the past year, well below the average of 28 percent for the region.

30. There have been recent improvements in the regulatory framework and financial infrastructure supported by Da Afghanistan Bank. Previous IP-DPG operations have supported the development of e-money and digital payments, including through regulatory reforms and system improvements. Key systems have been established, including: i) the Afghanistan Payment System (APS), a switch for card and mobile wallet transactions, and; ii) the Automated Transfer System (ATS) for processing all electronic payments, both large-value and low-value. The effective implementation of new regulations will require further systems integration to automate the processing, clearing, and settlement of government payments and receipts.

31. As a tranche release condition for the proposed operation, the systems of the Ministry of Finance (SIGTAS and ASYCUDA) will be implemented with those of Da Afghanistan Bank (ATS and APS) as well as the core banking system to enable digital payments of taxes and customs duties. Systems used by the Afghanistan Customs Department (ASYCUDA) and the Afghanistan Revenue Department (SIGTAS) are in the process of being made interoperable with APS and ATS. Initially, both SIGTAS and ASYCUDA will be connected with APS (successful pilots have already been conducted between APS and ASYCUDA). Next, all three systems, SIGTAS, ASYCUDA and APS will be connected to ATS, which would complete the integration of customs and tax systems with the core banking system. The Ministry of Finance (MoF) and DAB will work with their respective vendors for payment processing and information exchanges, based on agreed specifications. Furthermore, integration of ATS and, APS with DAB’s core banking system (CBS) is necessary to finalize upgrades to the payment system architecture and enable interoperable automated payments across the entire banking system and non-bank payment service providers. Integration of electronic systems will be supported by World Bank/ARTF investment projects, including the Fiscal Performance Support Program (FSP) and the Payments Automation and Integration of Salaries in Afghanistan (PAISA) project. All tax types will be payable through e-payment, and e-payment will be available but not compulsory for all taxpayers.

32. Allowing for digital payment of taxes and customs duties will lead directly to increased efficiency and transparency in government finances, reducing opportunities for corruption and leakage. Supported policy reforms are expected to lead to an increased volume of tax and customs dues paid using electronic payments. The volume of tax and customs dues paid using electronic systems is expected to increase from zero percent in 2019 to twenty percent in 2021.

Policy Action #2 (Prior Action): To strengthen expenditure control and combat corruption the Independent Administration Reform and Civil Service Committee (IARCSC) has issued a procedure requiring the rollout of a new HRMIS system.

Policy Action #3 (Tranche Release Condition): To support implementation of the new civil servants law: a) the high-level pay committee approves cadre allowances for procurement and customs cadres based on cadre regulations and pay policy; b) ACD advertises 40 positions for competitive hire under new cadre


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regulations for grades 3-6; c) IARCSC approves a competency pay framework for teachers in accordance with pay policy specifying methods and instruments for competency verification.

33. Efficiency and effectiveness of Afghanistan’s civil service is vital for development. There are approximately 430,0007 civil servants in Afghanistan. While the civil service has grown significantly, most growth has come from much-needed teacher recruitment, with teachers now accounting for around 66 percent of total public servants. Around 75 percent of civil servants are in provinces. Even though public service salaries are, on average, significantly higher than private sector salaries, there is substantial variation across the pay scale. Low rates of base pay have limited the applicant pool for some key skilled civil servant positions and around 30 percent of household members in households headed by a public servant are living below the poverty line. Expenditures on civil servant remuneration are relatively high but stable as a share of GDP (around 12 percent). With a large share of public resources devoted to civil service salaries and the civil service accounting for a significant share of formal-sector employment (especially for those with higher skills and for women), efficiency and effectiveness in the public sector is vital for development. 34. The public sector faces major issues of corruption and in the retention and progression of skilled staff. Corruption and patronage are widespread within the Afghanistan public service. Hiring and promotion is often politicized and driven by nepotism, including civil servants being hired based on special orders or decrees rather than through competitive processes. The lack of a functional Human Resource Management Information System (HRMIS) constrains strategic prioritization and alignment of resources with policy objectives, and the equitable allocation of human resources. Fragmented and mostly manual payroll verification and management increases vulnerability to misuse of public funds, adding to concerns regarding ghost employees (especially teachers), and continues to obstruct efforts towards establishment of an integrated and automated payroll system. The pay and grading framework has previously been rigid, constraining adequate compensation for skilled and qualified staff. Declining base pay has led to a proliferation of special allowances, overtime, and other ad hoc arrangements, undermining the consistency and coherence of remuneration. Women remain heavily under-represented in the civil service, particularly in senior level positions. Women account for approximately 21.9 percent of the civil service and less than six percent of Senior Management Group (SMG) positions. This reflects both active discrimination against women and the existence of important structural barriers, such as a lack of experienced female candidates and working conditions that are not conducive to women’s participation.

35. Recent reforms have begun to address pressing weaknesses in civil service management, supported by the World Bank TAGHIR project. To ensure integrity of payroll and facilitate effective civil service management, IARCSC has made considerable progress in the establishment of a national HRMIS that can be integrated with the Treasury Financial Management Information System (AFMIS). Supported by the 2018 IP-DPG, a new Civil Servants Law was passed in 2018, introducing a cadre system for civil service management. Under this law, cadre regulations have been approved by Cabinet for customs officer and procurement specialist cadres. These regulations establish a competency framework for cadres, allowing recognition of specialist skills and establishing a career path, addressing attrition, and allowing transfer and rotation within cadre groups. Competitive selection based on qualifications and skills

7 Approved Tashkeel


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is a core element of the cadre system. A pay policy has been introduced, providing for pay reform based on provision of allowances to staff with specialist skills and competencies within various cadres.

36. As a prior action for the proposed operation, IARCSC has issued a procedure requiring the rollout of a new HRMIS system. The procedures requires the establishment of an HRMIS in which all records are unique and associated with a living person to support the detection, verification, and elimination of ‘ghost’ staff. As a key step towards ensuring the integrity of the HRMIS, IARCSC is prioritizing collection of biometric data. Biometric and biographic data of more than 338,000 civil servants of 52 LMAs across 34 provinces has been collected of which biographic data of around 150,000 civil servants, including over 120,000 of Ministry of Education (MoE) staff and teachers, has been uploaded. Utilization of biometric and biographical data will curtail ad hoc arrangements outside of the authorized Tashkeel, especially for the MoE, which is currently unable to accurately determine the number of teachers per province or district. Work towards establishment of biometric verification systems for public sector employees is being supported through several World Bank/ARTF programs, including the Tackling Afghanistan’s Government HRM and Institutional Reforms (TAGHIR) Project, FSP, and PAISA. Under these programs, the World Bank will support Government to establish appropriate technical and design features to protect privacy and data protection rights of civil servants, including principles of proportionality and minimum data collection and disclosure, network security, and transparent and accountable data management and sharing.

37. As a tranche release condition for the proposed operation, key elements of the cadre-based system and new pay policy will be rolled out. The high-level pay committee will approve cadre allowances for procurement and customs. This will ensure compensation in line with qualification and skills, reducing incentives for corruption and ensuring retention of qualified staff. The Afghanistan Customs Department (ACD) will commence the hiring of staff in accordance with new customs cadre regulations, including requirements for computerized testing, imposition of qualification requirements, and polygraph testing for some key roles. This will constrain possibilities for patronage and corruption in hiring while ensuring a better-qualified and trained workforce in vital customs and procurement roles. Finally, ARCSC will approve a competency pay framework for teachers in accordance with pay policy. This will enable MoE to assess teacher competencies, develop a corresponding pay framework, and mobilize better qualified teachers.

38. Rollout of the new HRMIS and implementation of the new Civil Servants Law is expected to help address corruption and improve performance in the civil service. This will be achieved through: i) elimination of ‘ghost’ staff and ensuring integrity of payroll management; ii) curtailing current ad hoc hiring processes through implementation of competitive recruitment under the cadre system; and iii) a more-rational pay and remuneration structure that reduces incentives for corruption and ensures the retention of qualified staff. Supported reforms are expected to lead to: i) an increase in the proportion of civil servants included on the HRMIS increasing from 25 percent to 100 percent; and ii) the proportion of customs and procurement cadre staff receiving cadre allowing increasing from zero percent to 25 percent.

Policy Action #4 (Tranche Release Condition): To support private sector development, MoF and the MoIC will create a link between SIGTAS (ARD’s IT system) and ACBR’s database to facilitate the digital issuance of TCCs and their utilization for business license renewals.


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39. Complexity and bureaucracy involved in paying taxes is one of the major hurdles for the private sector in Afghanistan. The country ranks 178th out of 190 economies and scores 42.2 in the Doing Business 2020 report, well below the regional average. Further facilitation of taxpayers is critical in improving the business climate, including improved processes for issuance of Tax Clearance Certificates (TCCs). Obtaining a TCC from the Ministry of Finance can take several months. Current paper-based systems provide opportunities for corruption. Because businesses require a TCC before they can obtain a business license renewal from the Afghanistan Central Business Registry (ACBR), delays in obtaining TCCs can undermine the capacity of business-owners to legally operate their businesses. Slow and unreliable processes for obtaining a TCC are therefore commonly cited as a major constraint to doing business. 40. In 2015, The Afghanistan Revenue Department (ARD) introduced a regulation which set a 21-day limit on the issuance of TCC. However, this procedure remains lengthy and cumbersome in practice. With the recent introduction of e-filing, this process has become somewhat smoother for those taxpayers that use e-filing and are compliant with the requirements of the tax administration. Upon receiving the TCC, however, several paper forms still need to be transferred between the ARD and the ACBR before TCCs are recognized by ACBR and business license renewals can be processed, introducing further discretion and delays. 41. As a tranche release condition for the proposed operation, the MoF and the MoIC will create a link between SIGTAS (ARD’s IT system) and ACBR’s database to facilitate the digital issuance of TCCs and their utilization for business license renewals. With this reform, ARD will issue digital TCCs to all taxpayers using e-filing and who are in compliance with their taxpayer obligations within 21 days. Digital TCCs will be electronically provided to ACBR via a new integrated system, eliminating the need for transfer of paper forms and substantially expediting the process. As the ARD expands e-filing, the number of firms able to access digital tax clearance certificates should also expand, eventually making this option available for most taxpaying firms. In parallel, a case management system will be introduced by ARD and MoCI to track delays and verify that the 21-day timeline is enforced in practice, with an initial focus on firms using e-filing. 42. Easing the issuance of TCCs will significantly ease doing business in Afghanistan. Utilization of digital TCCs will reduce the time and costs associated with obtaining both a TCC and renewing a business license while reducing scope for discretion and corruption. The supported reform is expected to lead to an increase in the proportion of business license renewals issued based on ACBR receipt of digital tax clearance certificates from 0 percent to 20 percent by 2021.

Policy Action #5 (Prior Action): To support private sector development Kabul Municipality (KM) has approved rules of procedures under the Kabul Urban Design Framework (KUDF) and new Municipalities Law to significantly reduce the time required to obtain a construction permit.

43. Obtaining construction permits for commercial buildings in Afghanistan is complex, costly, and cumbersome. The cost of obtaining construction permits in Afghanistan is five times higher than the regional average (75.6 percent of warehouse value8), driven primarily by requirements to construct private water sources and septic tanks due to lack of water infrastructure in the country. According to the

8 For more information, refer to: https://www.doingbusiness.org/en/data/exploreeconomies/afghanistan#DB_dwcp,

https://www.doingbusiness.org/en/data/exploreeconomies/afghanistan#DB_dwcp


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most recent Afghanistan Enterprise Survey (2014), around 60 percent of the firms are expected to give gifts (bribes) for obtaining construction permits. The laws and regulations that govern construction permitting in the country are unclear and fragmented, with different government agencies involved in the process of construction permitting9. Afghanistan currently ranks 183rd among 190 countries in the Doing Business Survey score against ‘obtaining construction permits’. It takes between 96 and 199 days to obtain a construction permits for commercial properties in different provinces, going through 13 to 23 steps, and costing up to 76 percent of warehouse value. High compliance costs have led to very low levels of compliance, undermining effective enforcement. Consequently, 70 percent of the buildings in Kabul are built illegally outside the area approved by the city master plan, without observing any construction standards or holding construction permits. 44. To begin to address some of these issues, the Government enacted the new Municipalities Law in 2018 and introduced a new master plan for Kabul, the Kabul Urban Development Framework (KUDF). Enacted by presidential decree, the Municipalities Law mandates the issuance of regulations/rules of procedures by the municipalities for detailing the articles under the Law. The new Law sets binding time limits for construction permits applications.

45. As a prior action for the proposed operation, rules of procedures are to be approved by KM and to support the effective implementation of the KUDF and new Municipalities Law. Approval of the rules of procedures under the KUDF and new Municipalities Law by the KM will simplify and streamline construction permitting at the national and sub-national level. The rules of procedure have been developed with World Bank technical assistance and are expected to significantly reduce the time for obtaining construction permits for all types of commercial properties while maintaining and strenghtening vital environmental protections. 46. Adopting the issued rules of procedure is expected to improve building safety while significantly easing regulatory constraints to private sector investment. The revised rules of procedure will reduce the time (and hence the cost and number of procedures) for the private sector to obtain a construction permit. Reforms are expected to lead to an improvement in Afghanistan’s Doing Business score against the indicator for ‘dealing with construction permits’ from 34.5 at end-2019 to 40 at end-2021.

Policy Action #6 (Tranche Release Condition): To improve land administration: i) Cabinet approves and submits to the National Assembly a new Land Survey Law; ii) the Minister of Urban Development and Land approve new cadaster procedures; and iii) the Minister of Urban Development and Land approves specifications for a new land information system, including requirements for gender-disaggregated recording of data.

47. Afghanistan is pursuing its medium-term goal of establishing a modern land administration system that will secure land tenure rights for all citizens and the state. To date, land management has been the responsibility of the courts across most of Afghanistan. This has led to negative outcomes, including a lack of unified records, substantial delays and opportunities for corruption when processing land transactions, and weaknesses and ambiguity in land property rights contributing to widespread problems of land-grabbing and land-related contestation and conflict. These issues have had particularly

9 Subnational Doing Business report on Afghanistan (2017) available at http://www.doingbusiness.org/Reports/Subnational-eports/afghanistan

http://www.doingbusiness.org/Reports/Subnational-eports/afghanistan


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adverse effects for women. Under the court-based system, the narrow range of documents recognized as evidence of land ownership and systemic discrimination against women through the court process, has led to under-recognition of women’s land rights with negative impacts in terms of access to services, access to finance (by using land as collateral), and economic empowerment. Formal land registration remains low in Afghanistan, with only 30 percent of urban properties and 10 percent of rural properties formally registered. Almost all land in Afghanistan is registered in the name of the male head of households and less than two percent of women own land, most of whom are widows. The time taken to register property in Afghanistan is 250 days, well above the South Asian average of 114 days, with access to land commonly cited as a major constraint by investors. 48. Since 2017, substantial progress has occurred in transitioning to an administrative system of land management. Supported by a World Bank Development Policy Grant, Afghanistan established a legal framework for a modern, administrative system of land management in 2017 with passage of the Land Management Law. Responsibility for land administration has been consolidated in a new agency, ARAZI, now part of the Ministry of Urban Development and Land (MUDL). Supported by the 2019 IP-DPG, practical implementation of the new administrative system began with a protocol signed transferring responsibility for deed registration from the Supreme Court to MUDL, with initial implementation in Herat city. As MUDL takes over deed registration in agreed areas, it will improve registration services while the deed system is replaced with a title registration system over time. The use of a centralized administrative system based on modern processes and electronic systems (including a land registration database to be established at MUDL) will allow for strengthened centralized verification, reduced discretion of decentralized actors within the court system, faster and lower transactions costs associated with land transactions, and greater certainty of land property rights.

49. As a tranche release condition for the proposed operation, additional vital steps will be taken in the transition to an administrative system. These steps are:

• Cabinet will approve and submit to the National Assembly a new Land Survey Law and MUDL will approve new cadaster procedures under this law to: i) facilitate the introduction of modern surveying and mapping standards and processes into the existing system; ii) rationalize the survey authentication procedures and ensure that the procedures for demarcation and surveying for settlement purposes are conducted in a more participatory manner; iii) establish settlement (adjudication) processes and create an enabling environment to establish a national cadaster; and iv) ensure accountability and professional and ethical standards in land surveying.10

• MUDL will approve new specifications for a new Land Information System that responds to the needs, priorities and requirement of users and the country in general, while being consistent with good practice and international standards. The LIS will increase transparency and accountability of the land administration system while also providing gender disaggregated data. Accordingly, the LIS will be designed as an integrated and centralized, web-based system for storing, managing, processing, and distributing land and property information. At its core, the LIS will comprise an

10 The World Bank has recently conducted a legal assessment of land laws. This assessment found that the main law, the 2017 Land Management Law, is comprehensive while reflecting international experience. The development of key specific laws, needed to complement the Land Management Law, such as the Cadaster Land Law and the Property Registry Law, is supported under the World Bank Afghanistan Land Administration Strengthening Project. The new legal framework will be implemented progressively, first in Kabul and Herat, where the land information system is expected to be deployed initially.


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integrated database containing land registry data and geospatial cadastral data. cadaster procedures under this law, allowing its effective implementation.

50. The implementation of an administrative system is expected to reduce opportunities for predation and corruption. The use of a centralized administrative system based on modern processes and electronic systems (including a land registration database to be established at MUDL) allows for strengthened centralized verification and reduces the discretion of decentralized actors within the court system. Progress will continue towards roll-out of the administrative land management system during 2020 through the transfer of responsibility for deed registration from the Supreme Court to MUDL in the city of Kabul. The pace and extent of roll-out to other areas in the country will be informed by the pace with which enabling institutional and technological platforms can be established and the presence of the necessary underpinning governance and security environment. Nationwide roll-out is therefore viewed as a long-term objective. 51. Transition to an administrative system will lead to reduced compliance costs and greater certainty or property rights, facilitating – over time – increased investment and land productivity. Supported policy reforms are expected to lead to: i) an increase in the number of municipal districts in which an administrative land system is operating and land transactions are recorded on the land information system from one to two; and ii) availability of sex-disaggregated land registry data.

Policy Action #7 (Tranche Release Condition): To support improved institutional arrangements in the hydrocarbons sector: i) Cabinet approves the Administrative Regulation under Chapters II and III of the 2017 Hydrocarbons Law regarding the roles and responsibilities therein assigned to Ministry of Mines and Petroleum (MoMP) and the Afghanistan Oil and Gas Regulatory Authority (AOGRA); ii) AOGRA is operationalized through the appointment of its CEO.

52. Hydrocarbons could contribute substantially to Afghanistan’s development, playing an

important part in its energy transition and in improving energy access. Development of the sector will

require an adequate legal and institutional framework. Afghanistan enjoys substantial endowments of

natural resources, including extensive hydrocarbon deposits. Energy access is at 31 percent of the

population the lowest in South Asia. Gas can play an important role in increasing energy access in an

environment where even those connected to the grid frequently experience outages, reflecting high levels

of suppressed demand. As the Government is embarking on an energy transition, which increasingly

focuses on intermittent renewable resources such as solar energy, gas-fired power can help maintain grid

stability and ensure that solar power can be dispatched to Afghan customers. To date, investment in the

sector has been constrained by an unstable and incomplete regulatory and legal framework and a lack of

clarity regarding the roles of respective government agencies in governing the sector.

53. Progress has recently been achieved in establishing a legal framework to improve sector

governance, but important gaps remain. The 2017 Hydrocarbons Law establishes an adequate high-level

legal framework to govern the hydrocarbons sector and provides for the creation of the new independent

Afghanistan Oil and Gas Regulatory Authority (AOGRA) “to control and monitor the extraction of

hydrocarbons and manage the hydrocarbons sector”. Chapters II and III of the Law establish the roles and


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responsibilities to be discharged by MoMP and the new independent Regulator. AOGRA was formally

created through Presidential Decree of August 13 2018, but is not yet operational.

54. As a tranche release condition for the proposed operation, key steps will be taken to improve

the legal and institutional context for hydrocarbons governance. Firstly, an Administrative Institutional

Regulation clarifying the roles and responsibilities of the Ministry and AOGRA and outlining coordination

processes and corresponding procedures to discharge their respective functions will be approved by

Cabinet, with immediate effect. Consistent with international good practice, the regulation provides for a

range of interinstitutional checks and balances between the ministry and the regulator throughout all

stages of policy development, contracting, and licensing, in order to ensure rigorous oversight, limit

discretion, and curtail opportunities for regulatory manipulation and corruption. Secondly, as a vital step

towards operationalizing AOGRA, a CEO will be appointed by Presidential Decree following a competitive

selection process.

55. Improved regulatory and institutional arrangements are expected to strengthen overall governance of the sector. The supported policy actions are expected to lead to at least five regulations and contract templates being jointly developed by MoMP and AOGRA and approved by Cabinet by end-2021.

Pillar II: Improving the Policy and Institutional Framework for Public Financial Management and Fiscal Sustainability

Policy Action #8 (Tranche Release Condition): To improve the sustainable operations of the National Energy Utility of Afghanistan (DABS): i) the Minister of Finance approves the conversion to equity of DABS outstanding debt to MOF; ii) Cabinet approves new articles of incorporation for DABS to strengthen governance; and iii) DABS board approves revisions to the tariff structure.

56. Afghanistan’s power utility faces serious constraints to financial sustainability. Da Afghanistan Breshna Sherkat’s (DABS) financial performance has deteriorated sharply in recent years, moving from a profit of 6.5 percent in FY2014 to an operating loss of 18.6 percent in FY2018, with anticipated losses of the same order of magnitude in FY2019.11 Weak financial performance threatens the capacity of the utility to maintain and expand provision of reliable electricity to firms and households, with implications for private sector development and perceptions of state effectiveness. Weak financial performance has several causes, including:

• High levels of indebtedness. Under prior on-lending agreements with the Ministry of Finance, DABS is expected to pay interest and financing charges averaging US$16-17 million per year over the next decade, peaking at US$22 million in 2022. Debt service obligations risk undermining sustainability and squeezing out room for necessary maintenance and investment;

• Weak governance. The DABS Board currently includes only public sector representatives from shareholding ministries. The Board often lacks necessary financial, management, and business skills to effectively address DABS’s current financial challenges;

11 DABS is the state-owned national energy utility.


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• Unsustainable tariff structure. The electricity tariff has not been adjusted since 2015 while unit costs of supply have risen dramatically owing both to the need to access higher-cost sources and the long-term depreciation of the Afghani against currencies in which energy imports are denominated. The current tariff structure is inequitable, unsupported by any cost analysis, and cumbersome with respect to its multiple tariff categories. This has led to regional resentments, as well as frequent confusion and complaints about customer billings.

57. Government has taken important reform measures that could safeguard the sustainability of DABS. Firstly, the government approved a new State-Owned Corporations (SOCs) Law in September 2018 aiming to improve efficiency, transparency, fiscal sustainability in state-owned entities and ensure better public services. Under this law, DABS’s Board is to be reconfigured to include a broader range of stakeholders, including competitively selected individuals bringing key financial management skills. Secondly, supported by the 2018 IP-DPG, DABS entered into a Partnership Agreement with the Ministry of Finance under which DABS debt to MOF will be gradually reduced to sustainable levels, conditional upon a number of key reform actions to improve DABS financial and operational performance. Finally, work is underway to revise DABS’s tariff setting procedure. In line with the new approved tariff procedure, DABS has developed a tariff adjustment proposal including: i) introduction of a unified tariff with two-slab structure for grid-connected residential customers to be implemented nationwide; ii) adequate pricing of electricity to allow for cost recovery of services and operations; iii) adjustment of tariff rates to cover losses due to currency exchange fluctuations; and iv) introduction of a lifeline tariff for low income consumers. 58. As a tranche release condition for the proposed operations, key steps will be taken to safeguard DABS ongoing sustainability and financial performance. Firstly, the Minister of Finance will approve the conversion of existing DABS debt to MOF into equity, in line with the Partnership Agreement and reflecting adequate progress by DABS against agreed reform actions. Secondly, Cabinet will approve new Articles of Incorporation for DABS, effectively implementing governance provisions of the new SOC’s law and strengthening the capacities of DABS’s board. Thirdly, DABS Board will approve a tariff adjustment to ensure full cost recovery and more-equitable electricity costs for consumers.

59. Improved governance and financial management of DABS is expected to lead to financial sustainability and improved access to electricity over time. Improved financial management and sustainability of DABS is expected to contribute to increased resilience to climate change impacts through: i) enabling adequate maintenance of the transmission network to increase its resilience to extreme weather events; and ii) ensuring adequate financial capacity to mobilize generation from a range of sources in the context of potential drought-induced disruptions to low-cost hydro energy. Improved maintenance and network expansion is also expected to support improved access to electricity and reliability of supply. Supported policy actions are expected to lead to: a reduction in technical losses from 17.3 percent at end-2019 to 15 percent at end-2021.

Policy Action #9 (Tranche Release Condition): To strengthen resilience to climate change shocks, new regulations are gazetted governing utilization of the existing contingency funds establishing standard operating procedures, clearly defining eligible expenditures, including for weather-related events, and establishing reporting requirements.


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60. Afghanistan’s capacity to respond effectively to natural disasters is being constrained by weak management of existing contingency reserves. Afghanistan is highly exposed to natural disasters, especially flooding and drought. Climate change is expected to lead to increased frequency and worsening severity of natural disasters over time. Government’s capacity to respond effectively to natural disasters, including through mitigation and recovery activities, has important implications in terms of human costs, economic damages, and pace of recovery. Government response to natural disasters has been constrained over recent years by the slow disbursement or non-availability of contingency resources from the national budget. While a substantial contingency reserve is established through the annual budget, only a small proportion of reserves are available to support response to natural disasters. Current regulations curtail timely or preemptive allocations due to a requirement for declaration of a “state of emergency” before funds can be accessed. 61. Current management of contingency reserves has also raised concerns regarding control and transparency. The Public Finance and Expenditure Management (PFEM) Law allows up to three percent of the total budgeted expenditures to be allocated to a single-year contingency reserve. Over recent years, allocation to the contingency reserve has exceeded this limit, with further increases appropriated during the budget mid-year review. Further, contingency reserves have been distributed across up to 60 narrow expenditure purposes, with only around three percent of contingency reserves available for response to natural disasters, and with many expenditure categories not representing genuinely unforeseeable needs. Current budget and expenditure management systems do not allow the effective tracking or reporting of expenditures authorized under the contingency reserve, and data regarding the use of contingency reserves is not published.

62. As a Tranche Release Condition for the proposed operation, Cabinet will approve new regulations under the PFEM Law to improve management of contingency reserves. These regulations will: i) clearly define eligible purposes for which the annually-appropriated contingency reserves can be utilized; ii) include provisions allowing for early or pre-emptive responses to natural disasters, especially drought; iii) establish full reporting requirements, including publication of data regarding utilization of all contingency reserves by expenditure category. New regulations will also ensure that allocations following natural disasters are utilized in ways that are pro-poor, prioritizing the use of funds to support vulnerable populations.

63. New regulatory arrangements are expected to lead to improved capacity to respond to natural disasters and strengthening financial management of the contingency reserve. The supported policy action is expected to lead to: i) a reduction in the proportion of budgeted expenditures allocated to the contingency fund from five percent to three percent; and ii) an increase in the proportion of contingency reserves that can be used to respond to natural disasters from three percent to 50 percent.

Policy Action #10 (Tranche Release Condition): To improve public investment management new Public Investment Management regulations are gazetted establishing a regulatory framework for project appraisal and approval based on economic, strategic fit, and gender analysis.

64. Strengthened public investment management (PIM) is central to long-term economic growth of Afghanistan. With expected reductions in grant support, Afghanistan faces difficult fiscal adjustments over coming years. With a shrinking resource envelope, optimizing public expenditure towards the


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greatest development needs remains a key challenge. Political considerations have historically dominated project selection, undermining both project quality and policy alignment. Lack of thorough project appraisals led to major challenges with budget execution, with projects often encountering delays and avoidable cost overruns. Lack of an integrated PIM-PPP framework led to very low or no mobilization of private financing for investment projects. Finally, the selection process for projects was gender-neutral and failed to reflect and address the different and often more-serious constraints to service access and economic empowerment faced by women. 65. To further improve the quality of public investment management and better alignment of public resource use with development and policy priorities, the government has been pursuing an ambitious program of Public Investment Management reform. Supported by the previous IP-DPGs, Government has consolidated roles and responsibilities of project evaluation through the expansion of Project Evaluation Committee (PEC), issuing standardized project concept notes with guidelines to enable better alignment of projects via a process of strategic fit screening and bifurcating the project cycle from the budget cycle. MOF also implemented a review of existing development projects, rationalizing the project pipeline. The budget circular for the 2020 budget mandated that no large project (with a value of more than US$7.5 million) could be cleared for further appraisal without first undergoing strategic fit analysis and obtaining clearance to proceed for further preparation. The budget circular further mandated that no large new project could proceed to implementation under the national development budget without first undergoing appraisal including an economic analysis. As a result, all new large discretionary development projects were reviewed before being recommended for implementation in FY 2020. 66. As a tranche release condition for the proposed operation, Cabinet will approve a new Public Investment Management Regulation to formalize and institutionalize recent PIM improvements. The adopted PIM regulations will further formalize the framework for project appraisal and approval based on economic, strategic fit, and gender analysis. Regulations will clarify institutional responsibilities throughout the project cycle and establish consistent criteria for project assessment prior to approval. For all on-budget projects, the regulation will: i) harmonize PPP and public investment projects’ appraisal process at pre-investment stage; ii) clarify roles of PEC members and consolidate project review and evaluation responsibilities; iii) bifurcate the project cycle from the budget cycle; iv) define specific criteria for policy alignment and economic and gender analysis of project proposals (while also establishing requirements for social and environmental impact assessment); and v) clarify mandates for monitoring and evaluation of projects during implementation and economic and development impact assessment after project completion. 67. Adoption of PIM regulations and strengthening the capacity of stakeholders of the PIM process to play their respective roles is expected to lead to improvements in efficiency and effectiveness of development expenditures. Supported policy reforms are expected to contribute to an increase in the number of large projects (over US$7.5 million) in the discretionary development budget that have undergone full economic and gender analysis from 75 percent to 100 percent by end-2021.

Policy Action #11 (Prior Action): To improve tax administration ARD issues a circular mandating e-filing for all large taxpayers and selected sectors in MTO and STO


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68. Further automation of tax collection is needed to strengthen domestic revenue collection and improve the business climate. Fast-track filing is one of the automation efforts the Afghan Revenue Department (ARD) is undertaking, contributing to easier filing and payment of taxes. In the 2020 Doing Business Index, Afghanistan was ranked 178th on the paying taxes measure and further facilitation of taxpayers is critical in improving the business climate.

69. In 2019, the ARD initiated mandatory fast-track tax filing for banking and telecommunication sectors in the large taxpayer office (LTO) and made it available for optional use in the medium taxpayer office (MTO). This was an important step towards improved ease of filing and payment of taxes. In fast-track tax filing, all steps are electronic, except a final printed submission form that also serves as a receipt for the taxpayer. This receipt is submitted when the taxpayer makes a payment at Da Afghanistan Bank (DAB). While this initial step towards electronic filing for a subset of large taxpayers is an important one, the ultimate aim is to expand this to a significantly larger group.

70. The expansion of fast-track filing to all large taxpayers is of particular importance in the context of introducing the VAT at the end of 2020. All Value-Added Tax (VAT) registrants in the initial phase of VAT implementation are located in the LTO, as the LTO and VAT turnover threshold are harmonized. This will allow the VAT implementation to exclusively make use of electronic filing systems, ‘leapfrogging’ the use of paper-based processes and forms. By making use of fast-track filing, taxpayers will already have experience with electronic filing, which will ease the introduction of the VAT which will also be based on e-modules.

71. As a prior action for the proposed operation, fast-track filing has been made mandatory for all large taxpayers (estimated at roughly 1200 taxpayers), and selected sectors in the medium taxpayer office (MTO) and the STO. The sectors covered in MTO are health, education/universities, NGOs, hotels, industries and travel agents (roughly 6.5 percent of active MTO taxpayers). The sectors covered in the STO are doctors and companies that have a turnover between 30-50 million Afs in 2018. The formalization of fast-track filing across the tax base is an important step towards facilitating tax payment, and through that, improving the business climate and raising additional revenues. It will also facilitate implementation of the VAT, as indicated above.

72. The expansion of mandatory fast-track filing is expected to reduce the time and cost associated with paying taxes. As a result of supported policy actions, all active large taxpayers will use fast-track filing by the end-2021, an increase from 35 percent at the end of 2019. In addition, 6.5 percent of medium taxpayers, and 9.3 percent of small taxpayers will use fast-track filing.

Policy Action #12 (Tranche Release Condition): To underpin implementation of the new O&M policy, Cabinet approves a 2021 executive budget in accordance with the budget norms and guidelines for three asset categories in at least five ministries.

73. Effective and adequate O&M spending is vital for Afghanistan. Over the past two decades, development partners and government have invested intensively in public infrastructure. Assets financed by development partners are being progressively transferred to government management, bringing increased requirements for adequate operation and maintenance spending. At the same time, resources available for required O&M expenditure are increasingly constrained in the context of declining grant support and expectations that government takes on an increased share of security sector spending.


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74. Progress has been achieved in strengthening policies to guide O&M expenditures. Supported by the 2019 IP-DPG, Government approved an ambitious new O&M policy to ensure sufficient and sustainable O&M allocations. Key elements of the new policy include: i) setting realistic targets for service delivery levels taking into account the available budgetary resources (budget ceilings); ii) establishing norms for the O&M costs for each main line of service delivery (object codes); iii) aligning budget allocation process with pre-agreed norms for each line of service delivery; iv) establishing an asset management information system; and v) development of robust procedures for identification, appraisal and approval of proposed capital investments (including donor funded projects) which incorporate full estimates of recurrent O&M costs associated with utilization and maintenance of new assets. Under the policy, the ongoing costs of existing asset portfolios is also recorded and used to inform medium-term expenditure profiles under the medium-term fiscal framework. The new policy is now being rolled out in incremental steps, with work currently progressing on establishment of a national asset register, preparation of budget norms and guidelines (BNGs), and revisions to MOF systems to allow for proper budgeting and monitoring of O&M expenditure. Supported by the 2019 IP-DPG, new O&M norms for vehicles and buildings were used by four pilot ministries in preparing their 2020 budget submissions. 75. As a Tranche Release Condition for the proposed operation, additional elements of the new O&M policy will be rolled out through the executive budget. Newly-developed BNGs for highways will be applied, alongside existing norms for vehicles and buildings, by five pilot ministries in preparing their 2021 budget submissions. These pilot ministries will include the four ministries that piloted norms for vehicles and buildings in 2019 (Ministry of Finance, Ministry of Higher Education, Ministry of Public Health, and Ministry of Public Works) plus the Ministry of Transport. Inclusion of the Ministry of Transport as an additional pilot ministry reflects portfolio responsibility for highway construction and maintenance. Budget submissions from the five pilot ministries, based on application of new BNGs, will be reflected in the 2021 executive budget submitted to the National Assembly. 76. Progressive rollout of the O&M policy is expected to lead to greater efficiency in O&M expenditure. Effective application of this reform is expected to lead to appropriate allocation of O&M budgets to line ministries through the budget process, rather than through accessing contingency reserves throughout the year. The implementation of supported reforms is therefore expected to lead to a reduction in the proportion of O&M expenditure allocated through contingency reserves from 100 percent to less than 50 percent.

Policy Action #13 (Tranche Release Condition): To strengthen audit independence, Cabinet approves and submits to the National Assembly a revised Supreme Audit Office (SAO) law in line with international good practice and consistent with relevant provisions of the constitution and the public finance and expenditure management law

77. Corruption is widespread in Afghanistan, including in the public sector. Afghanistan is ranked 177th in the Transparency International Perceptions of Corruption Index. In the latest 2019 Asia Foundation Survey of the Afghan People, 97 percent of respondents believed that corruption was a problem for Afghanistan (up from 94 percent in 2006) and 91 percent believed that corruption was a problem in daily life (up from 73 percent in 2006). In this context, it is vital that oversight institutions are


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able to operate independently and free from interference. 78. The Supreme Audit Office currently faces important limits to its independence when compared against international good practice. The 2017 INTOSAI-IDI SAI-Performance Measurement Framework Assessment for Afghanistan the notes that: i) the Afghanistan SAO enjoys no explicit provision for independence from the executive; ii) its financial resources are subject to MoF-determined ceilings and cuts; iii) its organizational structure and HR practices are subject to executive control; and iv) the Auditor General is not provided with immunity against prosecution for carrying out official duties. The 2018 Afghanistan Public Expenditure and Financial Accountability Assessment gives a score of “D” under SAO independence, citing lack of constitutional provisions relating to external audit of the SAO, SAO’s budget being subject to the MoF’s review and cuts, and its organizational structure and HR matters being subject to decisions of the Independent Administrative Reform and Civil Service Commission.

79. Government is committed to addressing corruption and strengthening audit functions. Government adopted a dedicated anti-corruption law in 2018, providing a sound legal basis for anti-corruption bodies including the Anti-Corruption Commission and the Anti-Corruption and Justice Center. A dedicated anti-corruption strategy was adopted in 2017 and updated in 2018. Government has recently developed a detailed plan to accelerate progress against corruption, including benchmarks related to prosecution of corrupt officials, strengthening anti-corruption capacities of the police and attorney general’s office, and further strengthening the legal framework. Strengthening of the audit office is a core priority among wider anti-corruption efforts, with a functional review of the Supreme Audit Office and a review of the existing audit law recently completed, and an external financial audit and restructuring of SAO planned.

80. As a Tranche Release Condition for the proposed operation, Cabinet will approve and submit to the National Assembly a revised SAO Law. The revised SAO Law is expected to address key weaknesses in the existing legal framework, especially in relation to external audit independence. The new law will incorporate international standards and good practices for independence of SAIs in terms of: i) ensuring protection of SAO staff and leadership against prosecution for activities related to performance of formal duties; ii) increased budgetary autonomy; and iii) increased autonomy over HR practices. 81. A strengthened legal framework is expected to support increased external audit independence and effectiveness, resulting in enhanced oversight across the public sector. Supported policy reforms are expected to lead to Afghanistan’s legal framework for SAO complying with at least six of the eight Mexico Declaration principles on SAI Independence, compared to two at the end-2019.

Policy Action #14 (Prior Action): To improve fiscal transparency and accountability, the Ministry of Finance publishes on its website full data on expenditures over the past five years at the line-item level.

82. Afghanistan faces important shortfalls in fiscal transparency. Accountability to the public over the utilization of public resources has been associated with increased state legitimacy and improvements in tax compliance. Public accountability requires full transparency over the utilization of public resources. Afghanistan’s development partners are increasingly calling for improved efforts to ensure effective and transparent utilization of public resources as they consider future grant financing levels. Afghanistan’s fiscal transparency performance is mixed. Afghanistan’s overall Open Budget Index score is 49, placing it


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around the global average (45) and regional average for South Asia. An important current weakness is that accurate and timely information is not available to the public or development partners on actual government expenditures at the line-item level. Budget documents only include budgeted estimates of previous-year expenditures and at a high level of aggregation, despite evidence that variance between budget and actual expenditures is often considerable. 83. Government has taken important measures over recent years to improve fiscal transparency. From 2018, presentation of budget documents has improved, including through the utilization of Government Fiscal Statistics standards and increased budget comprehensiveness. Supported by previous IP-DPGs, from 2019 Government has published regular fortnightly reports on revenue performance, tracking revenue receipts against revenue targets and previous-year receipts. Government has also published the minutes of monthly cash-management meetings, including detailed data on cash reserve levels and changes. Publication of this data has supported enhanced dialogue with development partners and civil society on fiscal trends and public resource allocation.

84. As a prior action for the proposed operation, the Ministry has implemented online publication of full data on expenditures over the past five years at line-item level. With technical support from the World Bank, the Ministry of Finance has developed a user-friendly database including line-item expenditure data from the past five years. This provides any individual or organization with the capacity to examine actual resources use across administrative units, economic classifications, and functional classifications. It also provides full transparency regarding divergences between annual budget allocations and actual expenditures. Publication of this data is expected to bring immediate benefits in supporting dialogue between Government and international partners over quality of expenditure and ongoing expenditure needs in the lead up to the 2020 Pledging Conference.

85. Publication of full expenditure data is expected to support enhanced accountability over use of public resources and stronger dialogue between Government, development partners, and civil society. The supported reform is expected to lead to the number of downloads of the full expenditure database from the Ministry of Finance website increasing from zero to 100 by end-2021.

Table 4: DPF Prior Actions/Tranche Release Conditions and Analytical Underpinnings

Prior Actions/Tranche Release Conditions

Analytical Underpinnings Parallel Support Program

Operation Pillar 1: Strengthening the Policy Framework to Support State Effectiveness, Private Investment, and Social Inclusion

To simplify tax payment procedures the government has integrated systems for e-payments (the ATS, APS, ASYCUDA, SIGTAS, and the core banking system / DAB).

WB (2018) “Developing Afghanistan’s Mobile Money and Financial Technology” - Highlighted potential for e-money to address financial inclusion in Afghanistan, emphasized the importance of interoperability as an enabling condition.

Payments Automation and Integration of Salaries in Afghanistan (PAISA) (P168266) WB Fiscal Performance Improvement Plan Support Project (FSP): IPF TA support WB FPIP Advisory Facility: Programmatic Analytical Services and Advisory


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To strengthen expenditure control and combat corruption IARCSC has issued a procedure requiring the rollout of a new HRMIS system.

WB (2018) “Discussion Note: New Civil Service Program.” WB (2016-17), “Wage Bill Analysis and Modeling”, WB (on-going), “Assessment of Human Resource Management Information System” WB (2017-), “Functional Reviews” – Highlighted reliance on unsustainable NTA positions, highlighted the need for remuneration and hiring policies that enabled retainment of skilled staff within the core civil service structure.

WB, Tackling Afghanistan’s Government HRM and Institutional Reforms (TAGHIR) Project

To support implementation of the new civil servants law: a) the high-level pay committee approves cadre allowances for procurement and customs cadres based on cadre regulations and pay policy; b) ACD advertises 40 positions for competitive hire under new cadre regulations for grades 3-6; c) IARCSC approves a competency pay framework for teachers in accordance with pay policy specifying methods and instruments for competency verification. To support private sector development, MoF and the MoIC will create a link between SIGTAS (ARD’s IT system) and ACBR’s database to facilitate the digital issuance of TCCs and their utilization for business license renewals.

WBG (2018) Doing Business Reform Memorandum – Highlighted constraints to accessing finance associated with collateral requirements and limited coverage of the Public Credit Registry (PCR).

USAID funded Trust Fund - Investment Climate Program Afghanistan

To support private sector development Kabul Municipality (KM) has approved rules of procedures under the Kabul Urban Design Framework (KUDF) and New Municipalities Law to significantly reduce the time required to obtain a construction permit. To improve land administration: i) Cabinet approves and submits to the National Assembly a new Land Survey Law; ii) the Minister of Urban Development and Land approve new cadaster procedures; iii) the Minister of Urban Development and Land approves specifications for a new land information system, including requirement for gender-disaggregated data.

World Bank (2013) Land Governance Assessment Framework Afghanistan: Final report. – Highlighted shortcomings of the current court-based system of land management.

Afghan Land Administration System Project (P164762)

To support improved institutional arrangements in the hydrocarbons sector: i) Cabinet approves the Administrative Regulation under Chapters II and III of the 2017 Hydrocarbons Law regarding the roles and responsibilities therein assigned to MoMP and AOGRA; ii) AOGRA is operationalized through the appointment of its CEO.

WB (2018) Afghanistan to 2030: Priorities for Economic Development under Fragility – Highlights the vital role that can be played by extractives development

WB Extractives Sector Development Project: IPF TA Support (P170179)

Operation Pillar 2: Improving the Policy and Institutional Framework for Public Financial Management and Fiscal Sustainability To improve the sustainable operations of DABS: i) the Minister of Finance approves the conversion to equity of DABS outstanding debt to MOF; ii) Cabinet approves new articles of incorporation

WB (2017), “Financial Evaluation of DA AFGHANISTAN BRESHNA SHERKAT-DABS” – Highlighted requirements for financial sustainability at DABS, including potential

“DABS Planning and Capacity Support Project”, and “Afghanistan Energy Study”


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for DABS to strengthen governance; and iii) DABS board approves revisions to the tariff schedule.

savings from review of international PPAs.

To strengthen resilience to climate change shocks, new regulations are gazetted, governing utilization of the existing contingency reserve funds, establishing standard operating procedures, clearly defining eligible expenditures, including for weather-related events, and establishing reporting requirements.

WB (2018) Climate Change Impacts on Hydrology and Agriculture (P162117) – Highlighted the need for improved irrigation coverage to manage climate and natural disaster risks.

Payments Automation and Integration of Salaries in Afghanistan (PAISA) (P168266) WB Fiscal Performance Improvement Plan Support Project (FSP): IPF TA support WB FPIP Advisory Facility: Programmatic Analytical Services and Advisory

To improve public investment management new Public Investment Management regulations are gazetted establishing a regulatory framework for project appraisal and approval based on economic, strategic fit, and gender analysis.

WB (2017), “Afghanistan: Developing an Efficient PIM System”, WB (2017), “PIM Conceptual Framework in Afghanistan”, WB, (forthcoming), “Assessment on Afghanistan’s PIM system” – Highlighted weaknesses in the current PIM framework and the need for improved economic analysis in project selection.

WB Fiscal Performance Improvement Plan Support Project (FSP): IPF TA support WB FPIP Advisory Facility: Programmatic Analytical Services and Advisory

To improve tax administration ARD issues a circular mandating e-filing for all large taxpayers and selected sectors in MTO and STO

WB (2015) “ARD Functional Review”, WB (2016) “LTO Business Process Mapping” ARD (2016) “ARD Tax Administration: Re-Organization and Modernization Proposal 2016-2021” – Highlighted the need for streamlined processes in paying taxes and additional dispute resolution mechanisms.

WB FSP: IPF TA support WB FPIP Advisory Facility: Programmatic ASA

To underpin implementation of the new O&M policy, Cabinet approves a 2021 executive budget in accordance with the budget norms and guidelines for three asset categories in at least five ministries

WB (2018), “Public Expenditure and Financial Accountability (PEFA) Assessment” – Highlights current weaknesses in O&M policy and associated inefficiencies in public resource sue.


To strengthen audit independence, Cabinet approves and submits to the National Assembly a revised SAO law in line with international good practice and consistent with relevant provisions of the constitution and the public finance and expenditure management law

WB (2018), “Public Expenditure and Financial Accountability (PEFA) Assessment” – Highlights current weaknesses in O&M policy and associated inefficiencies in public resource sue.


To improve fiscal transparency and accountability, the Ministry of Finance publishes on its website full data on expenditures over the past five years at the line-item level.

WB (2018), “Public Expenditure and Financial Accountability (PEFA) Assessment” – Highlights current weaknesses in fiscal transparency, including expenditure data. International Budget Partnership ‘Open Budget Index 2017’ – Assesses Afghanistan’s overall budget transparency performance.


4.3. LINK TO CPF, OTHER BANK OPERATIONS AND THE WBG STRATEGY


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86. The proposed operation is fully consistent with the priorities and approach established in the World Bank Group’s Country Partnership Framework (CPF) (FY17-FY20) discussed by the Board on October 27, 2016 (Report #108727-AF). Building on a Systematic Country Diagnostic completed in 2016, the CPF is structured around three pillars: i) building strong and accountable institutions; ii) supporting inclusive growth; and iii) social inclusion. Reforms supported under both pillars of the proposed operation directly contribute to all three pillars of the CPF, through an emphasis on institutional, legal, and regulatory reforms that both expand access to economic opportunities to disadvantaged groups and support private sector development. Actions to improve the business environment are also complementary to ongoing IFC and MIGA activities intended to mitigate risks faced by private sector investors in fragile contexts through risk sharing and guarantee facilities. 87. The operation is designed to complement World Bank/ARTF investment project engagements. Development policy financing and investment project financing are aligned under the World Bank Afghanistan program. All policy actions supported by the proposed IP-DPG operation will be implemented with technical assistance support provided through World Bank/ARTF investment projects. Policy reforms under the IP-DPG have been selected to maximize the impact of investment projects by addressing key policy and institutional constraints in sectors where the World Bank has investment project engagements.

4.4. CONSULTATIONS AND COLLABORATION WITH DEVELOPMENT PARTNERS

88. Reforms supported by the operation have benefited from wide consultation undertaken by government. Reforms supported by the operation are aligned with the ANPDF, which was developed through extensive consultations with civil society and the private sector. Private sector reforms, including financial inclusion measures, tax administration, and energy were subject to extensive private sector consultations through the Private Sector Executive Committee, co-chaired by the Ministry of Commerce and Industry (MOCI), Office of the Chief Executive, and the World Bank. Land actions were subject to extensive community consultation through reviews of the Land Management Law, led by MUDL. In revising the Civil Servants Law, the IARCSC carried out extensive upfront consultations across Government, including within the relevant Development Council “the High Council for Good Governance and Administrative Reforms” - including the Administrative Office of the President, MOF, Ministry of Economy, Ministry of Labor and Social Affairs, and with the Ministry of Justice (MOJ). 89. This operation has been developed in close collaboration with development partners, particularly through the ARTF donor group. Donor aid coordination in Afghanistan is strong and frequent. Policy reforms and technical assistance efforts are coordinated through different donor-government platforms, among others the Joint Coordination Monitoring Board, heads of agency meetings, the ARTF Strategy Working Group, and other technical working groups. During the preparation phase of this operation, discussions have been held with the IMF and all ARTF development partners, including multilaterals such as European Union (EU) and Asian Development Bank (ADB) as well as bilateral partners participating in the ARTF. Overall strategic coordination has been supported through the ARTF Incentive Program working group. The World Bank team has been also closely cooperating with the IMF, including regular participation in IMF ECF quarterly reviews and day-to-day collaboration on macro-monitoring and assessment.


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5. OTHER DESIGN AND APPRAISAL ISSUES

5.1. POVERTY AND SOCIAL IMPACT

90. Assessment of the policy and institutional reforms supported by the operation suggest significant positive or neutral poverty and social effects. 91. The development of a regulatory framework for e-money (PA#1) is expected to have positive poverty effects over time by facilitating the use of e-money and deepening financial inclusion. Integration of payment systems should support the use of e-money and e-payments, not only by providing businesses and customers with more options to conduct transactions, but also by supporting financial inclusion, by facilitating access to bank accounts, and thereby increasing options for saving and borrowing. This may have significant benefits for the poor and most vulnerable over time, with low levels of current financial inclusion driving heavy reliance on harmful coping mechanisms in the context of economic shocks. While access to the internet is limited in Afghanistan,12 almost three quarters of the poor have access to a mobile phone, suggesting facilitating access to e-money and electronic payment systems could benefit this group.13 In addition, about 11 percent of the employed Afghans work as salaried employees in the public sector and could also benefit from easier access to e-money and e-payments, moving them away from relying on payment agents who often charge significant commissions. Though civil servants have a higher representation in the top two quintiles, seven percent of the employed of the bottom three quintiles are civil servants and could benefit from the recommended reforms. Facilitating the use of e-money and e-transactions, including for the payment of taxes, may ease women’s participation in the formal business sector, especially in the context of cultural constraints to women traveling and queueing in some areas. 92. Implementation of the Civil Servants Law (PA#2 & PA#3) is not likely to have any adverse poverty or social impacts. Implementation of a cadre system is expected to increase the productivity and efficiency of government services and increase accountability. The supported policies, procedures, and regulations are not associated with public sector redundancies or reductions in civil service pay and, therefore, not expected to have negative effects on the poor or the most vulnerable. 93. Several policy actions supported by the proposed operation could potentially have positive poverty effects through facilitating investment and private sector development. Afghanistan’s private sector primarily consists of small and micro enterprises and most Afghans work as own account workers, the majority of which are in the informal sector. Business environment reforms, such as reducing the time for receiving digital tax clearances (PA#4) or reducing the time required to obtain a construction permit (PA#5), are expected to contribute to entrepreneurship and investment of small and micro enterprises. To the extent that improvements in the business environment lead to increased productivity, employment growth, and increased wages, overall poverty effects are expected to be positive.

12 Only 10 percent of households have at least one household member who used the internet in the past 12 months (27 percent in urban and five percent in rural areas) and on average, only 11 out of 100 Afghans use the internet (ALCS, 2016-17). 13 About 80 percent of households have at least access to one mobile phone (96 percent in urban and 75 percent in rural areas) (ALCS 2016-17).


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94. Actions to strengthen the regulatory framework for land registration and continuing transferring the responsibility for deeds registration to MUDL is likely to have positive poverty effects subject to MUDL’s implementation capacity (PA#6). The passing of the new Cadaster Law creating a government-maintained register and deeds registration system may have significant benefits for the poor if it is effectively implemented. An administrative land system will, over time, strengthen property rights facilitating tenure security, access to credit, and investment. The transfer to an administrative system with gender-disaggregated information may bring particular benefits to women, with measures in place to ensure that women’s land rights can be more-effectively recorded and enforced than under the court-based system. Risks, however, also exist and need to be managed. Firstly, formal titling processes may enable expropriation, with state institutions and vested interests being empowered to distribute land rights to special interests. Secondly, formal land titling processes may fuel corruption, if governance is weak within new institutions established to manage disputes. Thirdly, new processes may lead to frustration if processes for issuing rights are slow or viewed as unfair. Several factors mitigate these risks. Firstly, processes are in place to control land grabbing. MUDL has detailed information on instances of land grabbing, and the practice has been criminalized through recent legislative reforms. Secondly, the transfer to an administrative system is being piloted in urban centers (Kabul is targeted for the current year) where government administrative reach and oversight arrangements are strongest. Thirdly, the land authority – MUDL – is a relatively high capacity agency with established administrative dispute resolution processes. Finally, the use of a centralized and electronic system is expected to substantially reduce scope for corruption while reducing administrative costs. A grievance mechanism is being established, with World Bank support, through which any abuses of the new system can be reported and addressed. Traditional customary tenure rights are recognized under the 2017 Land Management Law and the law increases the number of acceptable documents that can be used as evidence to assert traditional ownership rights. The World Bank is now undertaking an analysis of traditional customary rights and identifying lessons from similar contexts on effective ways to integrate the recognition of these rights into a modern land administration systems. 95. Measures to improve the institutional framework for the hydrocarbon sector (PA#7) are unlikely to have adverse or positive effects on poverty. Measures to clearly define the institutional responsibilities of the MoMP and AOGRA are not expected to have significant poverty or social impacts. However, the establishment of a strong and stable regulatory framework can potentially have positive poverty impacts over time, by encouraging investment and ensuring adequate regulatory oversight of operators.

96. Measures to improve the sustainable operation of DABS are not expected to have significant negative poverty and social impacts (PA#8). Reforms aimed at strengthening the financial standing and governance structure of DABS will benefit the utility in the short and medium term, and eventually through a more efficient and effective operation will benefit the overall population by an increased and more reliable provision of electricity to businesses and households. In the immediate term, proposed changes to the tariff structure may have some adverse impacts on the poor in urban areas, but these are expected to be small as the reform will affect mostly urban well-off households. Estimated impacts on urban poverty vary between 0.6 and 1.5 percentage points, depending on the tariff scheme implemented. At the national level, this would translate into increases in poverty from 54.5 to 54.6-55.0 percentage points. The impacts are limited due to the relatively low penetration of the electric grid in rural areas,


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where poverty is higher, and the utilization of a ‘lifeline tariff’ for small-users, who are concentrated at the bottom of the distribution and will pay only a small tariff. Moreover, since the tariff reform could help to improve the financial situation of DABS, which could translate into a faster expansion of the electric grid, these impacts are likely to be short-lived.

97. New regulations to strengthen the existing mechanisms to respond to weather-related shocks are expected to have positive poverty impacts in the medium- to long-term (PA#9). New regulations governing utilization of contingency funds, clearly defining eligible expenditures, and establishing reporting requirements can benefit the less well-off in the medium to long-term. Natural disasters, including drought and water shortages, are currently the most-common negative shock impacting poor households in Afghanistan, with survey data suggesting that harmful coping strategies are common, including reducing investment in education and sale of assets. Moreover, a higher occurrence of droughts or floods over time because of climate change can further stress these families, making it more difficult for them to break the inter-generational cycle of poverty transmission. Actions to strengthen government capacity to respond to shocks affecting these families will disproportionately benefit the poor. 98. Measures to improve public investment management (PA#10), O&M expenditure management (PA#12), tax and customs administration (PA#11), and fiscal transparency (PA#14) are likely to have neutral or positive effects on poverty. Strengthening public investment management can potentially have positive benefits through increased efficiency and effectiveness in public-sector spending. A stronger regulatory framework for project appraisal and approval is likely to ensure that projects funded through the budget are aligned with government’s pro-poor priorities and that projects are well-designed and viable. The new requirement for gender analysis will ensure that public investment projects reflect the different and often more-serious constraints to accessing services and economic opportunities faced by women. Improvements in taxes and customs administrations are unlikely to have adverse impacts on poverty. These measures will primarily reduce the transaction costs associated with paying taxes and crossing borders. They do not involve any changes in tax policy or changes in customs rates.

5.2. ENVIRONMENTAL, FORESTS, AND OTHER NATURAL RESOURCE ASPECTS

99. Generally, the prior actions and tranche release conditions supported by this operation are not expected to have significant negative effects on the environment, forests, or other natural resources. Some positive environmental effects might occur as a result of some policy actions. Strengthening resilience to Climate Change shocks through adequate allocation for emergency expenditure will support the adaptive capacity of the country to weather related shocks and events (PA#9). The strengthening of the functionality of ARAZI by supporting the transitioning to administrative land management will help improve land use planning (PA#6). The reforms to land management are expected to facilitate investment and development (of urban land in the short-term, where reforms are initially being implemented) with the potential for intensified use bringing negative environmental consequences. Negative impacts will be mitigated through continued efforts to develop the regulatory framework for management of environmental harms, and to build the capacity of the National Environmental Protection Agency (NEPA) (discussed below). On the other hand, clearer land property rights may generate incentives for more-sustainable land use practices, with secure and long-term ownership encouraging owners to preserve the long-term economic and productive value of land holdings by avoiding pollution or over-exploitation. Effective implementation of the Kabul Urban Development Framework (PA#5) through the enforcement


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of building permits will improve health and safety aspects of construction management, including controls over environmental harms and hazards arising from pollution. Entities applying for permits must include information on environmental impacts, which will be considered by the Kabul Municipality in cooperation with NEPA before permits are issued. This policy action will also support and reinforce the aspects of PA#5 ensuring that land zonation for different purposes are strengthened. Public Investment Management regulations (PA#10) will include requirements for environmental impact assessment of new large projects. 100. A basic legal framework is in place in Afghanistan to safeguard against potential environmental effects of new public and private sector investments. The Environmental Law (2007), the Water Law (2019), and the Forest Law (2013) provide a legal framework to manage negative environmental effects, including from intensified land use and construction activities. NEPA is currently going through a phase of capacity strengthening to be able to carry out its mandate of enforcing the regulatory requirements for environmental impacts. At the same time, the new PPP policy and law directly mandate an environmental and social impact assessment (ESIA) of for all large PPP projects. The legal framework requires environmental impact assessments and public consultation for projects, policies, and plans for which substantial environmental effects are anticipated. These aspects are being reinforced by the ESIA regulation approved by the Cabinet. 101. The Government has stepped up efforts to improve natural resource and environment management, with support from the World Bank and other development partners. With support from the World Bank, NEPA is receiving Capacity building and technical assistance to enable NEPA to properly implement the ESIA Regulation. Recently, the Government adopted the Natural Resource Management Strategy, which gives priority to using forests, pastures, and other natural assets sustainably. The Ministry of Agriculture Irrigation and Livestock is also being supported to develop a roadmap to mainstream Integrated landscape management approaches in investment programs. This is a key step to address the possible environmental effects of the of the land management reforms.

5.3. PFM, DISBURSEMENT AND AUDITING ASPECTS

102. Afghanistan is a unitary government and has a centralized PFM architecture. The PFEML sets out the responsibilities, authorities and obligations related to the management of public finance in the country. MOF has a dominant role in preparing and managing the annual government budget. It is also responsible for treasury functions, government financial reporting as well as tax policy and administration. At the provincial level, Mustofiats as MOF representatives, perform treasury functions. The central line ministries have the mandate of country wide public service delivery. The Supreme Audit Office Law 2013 requires the Auditor General to conduct annual audit of the government accounts.

103. The PEFA assessment - July 2018 - noted that the government maintained aggregate fiscal discipline by controlling expenditure within available resources, but budget credibility remains low and the overall control environment is weak. MOF uses the Afghanistan Financial Management Information System (AFMIS) to manage budget execution, including control over spending. The expenditure authorities are centralized, which creates spending rigidities and hampers innovations in service delivery. The service delivery units have virtually no role in budget planning and execution. Although the prescribed internal control framework is reasonably detailed, compliance is varied. The control systems for payroll are insufficient and represent a major weakness for a significant proportion of expenditure.


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The asset and liability management and monitoring of fiscal risks displayed considerable gaps. Historically weak budget expenditure execution has been driven by poor project selection and inadequacies in the entire public investment management cycle—project preparation, project appraisal, execution and monitoring and evaluation. The budget documents lack the required performance information. The Chart of Accounts does not facilitate information availability to the service delivery units; and there are no performance plans for service delivery. Consequently, the performance orientation of the entire budget formulation and execution process is undermined.

104. Government exerts strong leadership and ownership over the PFM reform process. The current FPIP approach has full buy-in across Government, including the President. Commitment to PFM reform is stated in the current national development plan, the Afghanistan National Peace and Development Framework (ANPDF). Government has consistently emphasized the importance of PFM reform to increase confidence in government systems, bring a greater share of aid on-budget, and – eventually – underpin self-reliance through effective revenue mobilization and efficient utilization of public resources.

105. PFM systems have displayed the ability to track and report expenditure within budget which has contributed to aggregate fiscal discipline. The revenues, expenditures and financial position of the Government are publicly available and the National Assembly reviews the fiscal reports of the executive and the audit reports. Budget documents are publicly available once approved by the National Assembly. The Government’s commitment and efforts to implement PFM reforms is improving PFM performance including budget reliability, cash management, and avoidance of arrears.

106. The fiduciary risk is substantial, mostly due the volatile and fragile country environment and concerns related to capacity challenges. The fiduciary risks are mitigated by the self-reinforcing actions committed to under the FPIP and the World Bank-financed FPIP Support Program. The actions include (i) strengthening the budget in driving effective delivery of key priority outcomes; (ii) improving budget execution, and (iii) strengthening accountability and transparency. 107. The operation design allows for additional fiduciary protections through the ARTF Third-Party Monitoring Agent (TPMA) mechanism. ARTF resources associated with prior actions and tranche release conditions remain subject to ARTF fiduciary controls. Total ARTF disbursements under the program will be the lesser of: i) the value of tranches, after decrementing, associated with all tranche release conditions; or ii) total eligible expenditures estimated by the TPMA. If assessed eligible expenditures verified by the TPMA fall below the level of planned disbursements under the program, ARTF funds will not be available for withdrawal. This creates strong incentives to maintain and strengthen fiduciary performance while providing assurance to ARTF partners.

108. The IMF completed its most recent safeguards assessment of DAB in December 2017. It found that DAB had strengthened some elements of its safeguards framework since the previous assessment (2008), but an effective internal audit mechanism had not been established. The assessment made recommendations to address the risks emerging from the Kabul Bank fraud, including related to central bank autonomy and recapitalization. Since that time, some of the 2011 safeguards recommendations have been implemented, albeit with delay. Amending the law has been difficult, however, and the recommendation concerning the DAB’s legal structure remains outstanding. DAB has continued to publish on its website DAB’s financial statements audited by an international audit firm. In this regard additional


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fiduciary measures on disbursement and audit are proposed for risk related to the foreign exchange control environment.

109. Funds flow and disbursement arrangements. A dedicated foreign currency account in dollars will be established at DAB and will form part of the country’s official foreign exchange reserves. Upon notification by IDA of grant effectiveness, and with the submission by the recipient of a withdrawal application, the proceeds of the grant will be deposited by IDA into the dedicated Government dollar account in DAB. Upon receipt of funds from IDA, an amount equivalent to the grant proceeds will be credited to Government’s Treasury Single Account in Afghanis and will become a part of the government’s budget resources. The ARTF grant will be disbursed based on compliance/fulfillment of the tranche release conditions. The Bank will verify fulfillment of each of the tranche release conditions and if satisfied will approve the tranche releases (conditional upon sufficient eligible expenditures as verified by the TPMA). Subsequently, the recipient can submit withdrawal application equivalent to the amount of tranche releases and the ARTF grant will be deposited into the Government dedicated dollar account in DAB. Upon receipt of funds from ARTF, an amount equivalent to the grant proceeds will be credited to Government’s Treasury Single Account in Afghanis and will become a part of the government’s budget resources. The receipt of the IDA and ARTF grants would be promptly accounted for in the government’s budget system; transactions and balances of the government account will be fully incorporated into the government’s accounting records and financial statements, via the AFMIS.14 110. Disbursement will be phased against completion of policy actions. Disbursement of the operation’s first tranche (associated with four prior actions) will take place following effectiveness. Disbursement of the subsequent ten tranches (associated with the nine tranche release conditions) will take place following the completion of tranche release conditions. Disbursements against tranche release conditions completed prior to the completion date are scheduled for July 15 and August 30. The final completion date is 15 November 2020. Additional disbursements may occur to June 2021 if completion of some tranche release conditions is delayed beyond the 15 November completion date. Disbursed amounts against tranche release conditions that are not completed by the 15 November completion date will be discounted at the rate of ten percent per month. 111. The proceeds of the grant cannot be used for ineligible expenditures (i.e., to finance goods and services from IDA’s standard negative list as reflected in the financing and grant agreements). If the proceeds of the IDA and ARTF grant are used for ineligible expenditures, the Bank will require the Government to refund the amount directly to IDA or ARTF. Amounts refunded to IDA or ARTF shall be cancelled.

112. Confirmation of Receipt and Audit. Within 30 days of receipt of the IDA and ARTF grants, the government will provide to the Bank: (a) a written confirmation that this transfer has been completed; (b) any other relevant information relating to these matters, including the exchange rate of the conversion from US dollars to Afghanis; and (c) any other information that the Bank may reasonably request. Disbursements will not be linked to specific purchases and no procurement requirements will be

14 The full US$300 million of ARTF resources is not currently available in the ARTF. The initial Grant Agreement for the ARTF therefore reflects an amount of $60 million for the first two ARTF withdrawal tranches. Once further funding becomes available in the ARTF, the Grant Agreement will be amended to reflect the full US$300 million amount and the remaining withdrawal tranches.


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necessary. IDA reserves the right to seek an audit of the dedicated foreign currency account by independent auditors acceptable to the World Bank. The result of such an audit will be furnished to the Association within four months of the request and in accordance with the Terms of Reference satisfactory to IDA. All audit costs will be borne by the Government.

5.4. MONITORING, EVALUATION AND ACCOUNTABILITY

113. The Ministry of Finance is the delegated implementing agency and will be responsible for the overall monitoring and evaluation of the program. MOF has previous experience with monitoring results of World Bank Development Policy Operations and will work closely with specific agencies with key policy responsibilities under the program, including: MUDL, MOF, DABS, DAB, and the Ministry of Energy and Water. Results indicators for the program have been selected based on data availability and generally rely on currently-available data sources. 114. Performance of the operation will be assessed in terms of progress with the overall Government program, which is supported by both IDA and ARTF grants. Accordingly, the operation’s performance will be assessed against the full range of results indicators, including those associated with both prior actions and tranche release conditions. 115. Grievance Redress. Communities and individuals who believe that they are adversely affected by specific country policies supported as prior actions or tranche release conditions under a World Bank Development Policy Operation may submit complaints to the responsible country authorities, appropriate local/national grievance redress mechanisms, or the WB’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address pertinent concerns. Affected communities and individuals may submit their complaint to the WB’s independent Inspection Panel which determines whether harm occurred, or could occur, as a result of WB non-compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the World Bank's attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate Grievance Redress Service (GRS), please visit http://www.worldbank.org/GRS. For information on how to submit complaints to the World Bank Inspection Panel, please visit www.inspectionpanel.org.

6. SUMMARY OF RISKS AND MITIGATION

116. The overall risk rating for the operation is high. Risks in four areas are most pronounced and could potentially jeopardize the achievement of program outcomes. These risk areas, discussed below, are: i) political and governance risks; ii) macroeconomic risks; iii) institutional capacity for implementation and sustainability risks; and iv) security risks. 117. Political and governance risks are high. Ongoing disputes regarding the outcomes of the 2019 Presidential Election present important risks to the operation in terms of potential ongoing political instability, with negative impacts on administrative capacity to complete policy actions. The outcome of the 2014 Presidential election was contested amid widespread electoral fraud accusations. Competing

http://www.inspectionpanel.org/


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claims of victory were only peacefully resolved through international brokering of a power-sharing agreement. The process of negotiating the power-sharing agreement and subsequent political competition over key Cabinet roles and administrative appointments between the President and newly-created Chief Executive role disrupted government business for several years. Similar outcomes surrounding the elections would likely weaken the capacity of government to complete administrative procedures and approval processes. This risk is only partly mitigated through the innovative program design, allowing for delayed implementation of tranche release conditions up to May 2021 (with associated disbursement in June 2021). 118. Macroeconomic risks are high. Afghanistan’s macroeconomic outlook is subject to substantial downside risks. More severe and protracted economic impacts of the global COVID-19 crisis would have serious implications for growth, revenues, and – potentially – international grant support. If political instability or disruptions associated with the COVID-19 outbreak undermines the implementation of reforms, it is possible that associated reductions in budget support could pro-cyclically contribute to fiscal management challenges. Macroeconomic risks are further exacerbated by weaknesses in the financial sector including potential fiscal risks arising from state-owned banks. To help manage the risks of pro-cyclical reductions in budget support, the World Bank and ARTF partners have agreed that Tranche Release Conditions of the proposed operation can be modified through submission of a waiver request to the ARTF Management Committee on mutual agreement between Government and ARTF partners, in the context of large unforeseen shocks or a serious deterioration of economic conditions related to the COVID-19 virus. Financial sector risks are partly mitigated through ongoing World Bank technical assistance to reform state-owned banks. Risks are also partly mitigated by Government’s previously demonstrated capacity to maintain overall macroeconomic stability in the context of revenue declines, through effective expenditure control and maintenance of the monetary policy framework. 119. Risks associated with institutional capacity for implementation and sustainability are high. The public sector in Afghanistan is characterized by highly uneven and thinly spread technical capacity and frequent turnover in senior staff. The context of long-term aid dependency had left some agencies and reform processes heavily dependent on international technical assistance, and vulnerable to associated delays, discontinuities, and coordination problems. Capacity is also likely to be highly overstretched as Government works towards managing the current COVID-19 crisis, potentially including through partial Government shut-downs and restrictions on mobility. Lack of capacity is a particular constraint in the Ministry of Justice, which has important implications for policy actions requiring the issuance of new laws. To mitigate these risks, all policy reforms are being supported by technical assistance from the World Bank Group or other development partners.

120. Security risks are high. Continued insurgent activity represents another source of risk to achievement of program outcomes. Deterioration in the security situation could divert government capacity and policy attention from supported reforms, impede the provision of technical assistance, disrupt monitoring arrangements, or undermine the expected impact of supported reforms. These risks are somewhat mitigated through the program’s focus on policy actions that should show positive impact even in the context of ongoing conflict. Previous experience has shown that the Bank can successfully monitor and support implementation of reform programs even in a difficult security environment.


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121. Environmental and social risks are high. While positive social outcomes are expected from the transition to an administrative system of land management, associated risks are high. Previous experience with land reforms in fragile states has highlighted how institutional reforms can be coopted by elites and benefits monopolized. Social risks are mitigated in areas under Government control by: i) relatively strong capacity in MUDL; ii) substantive World Bank technical assistance engagements in land management; and iii) the focus of land reforms on urban areas where implementation capacity is relatively strong and government control is assured. Risks cannot be mitigated in areas beyond Government control given that: i) it is not known how or whether new institutional mechanisms would be utilized by anti-government elements; and ii) Government and the World Bank are unlikely to be able to effectively implement mitigation measures in areas beyond Government control. 122. In addition, risks in several areas are rated substantial, including:

123. Sector strategies and policies risks. Sector strategy and policy risks are substantial due to the inherent complexity of land management reform in fragile state contexts. This risk is mitigated by: i) the provision of World Bank technical assistance support to MUDL; ii) recent improvements in administrative arrangements and the legislative framework for managing risks of land-grabbing, including the establishment of a database of grabbed lands and new legal provisions criminalizing the practice; and iii) relatively strong capacity at MUDL and the existence of an administrative dispute resolution process at the agency.

124. Fiduciary risks. Fiduciary risks are substantial despite good progress in most phases of budget operations. Previous DPF and investment operations (e.g., Public Financial Management Reform Project II) have helped to put in place adequate processes and practices for financial management, procurement and control. However, fiduciary risks remain substantial due to low compliance with PFM rules and limited internal and external controls. Fiduciary risks may be exacerbated if the COVID-19 crisis impedes the operation of safeguard measures, including the work of the ARTF Third-Party Monitoring Agent. For the most part risk mitigation relies on the self-reinforcing actions committed to under the Government’s FPIP, the ARTF Incentive Program and the proposed IP DPG, the planned IMF ECF and the FSP. The FSP, in particular, is heavily focused on the timely implementation of PFM measures across the whole range of the PFM cycle in parallel with the PFM reforms supported by the proposed IP-DPG. The World Bank has also worked with the Third-Party Monitoring Agent to ensure that oversight arrangements are durable to disruptions associated with the further spread of the COVID-19 virus and associated restrictions on travel and disruptions to Government operations. 125. Stakeholder risks. Vested interests negatively affected by the provisions of various reforms could exercise undue influence on decision-makers in the government and the National Assembly, undermining the effective implementation of the reforms. Energy tariff reforms may mobilize political opposition. The intent and likely outcomes of reforms in land may also be subject to misunderstanding and communication. Through a range of technical assistance activities and its broader engagement, and throughout the implementation of the reforms, the World Bank will continue conducting informed discussions on these issues, carrying out adequate consultations with the affected social groups, the private sector and civil society, and in identifying risks and mitigation measures. This will also involve assistance with media strategies and campaigns to ensure that Afghan citizens and investors are made aware of the rights extended to them through the changes in the different legislation.


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126. Technical design risks. Innovative design elements proved successful in implementing the 2018 and 2019 IP-DPGs, and the program represents a simple mechanism for the provision of recurrent cost support. However, there remains scope for misunderstandings and dissatisfaction regarding decision-making processes around selection, monitoring, and verifying completion of policy actions which may manifest if the revised operation design leads to non-disbursement of an important source of recurrent cost financing during a sensitive political period or amidst a negative economic shock. This risk can be partly mitigated through regular consultation with Government and the ARTF IP working group.

Table 5: Summary Risk Ratings

Risk Categories Rating

1. Political and Governance ⚫ High

2. Macroeconomic ⚫ High

3. Sector Strategies and Policies ⚫ Substantial

4. Technical Design of Project or Program ⚫ Substantial

5. Institutional Capacity for Implementation and Sustainability ⚫ High

6. Fiduciary ⚫ Substantial

7. Environment and Social ⚫ High

8. Stakeholders ⚫ Substantial

9. Other ⚫ High

Overall ⚫ High

.


Page 47

ANNEX 1: POLICY AND RESULTS MATRIX

Policy Action Type Results Indicator Baseline

(End-2019) Target (End-2021)

Pillar I: Strengthening the Policy Framework to Support State Effectiveness, Private Investment, and Social Inclusion

1) To simplify tax payment procedures the government has integrated systems for e-payments (the ATS, APS, ASYCUDA, SIGTAS, and the core banking system / DAB).

Tranche Release Condition

Volume of tax and customs dues paid

using electronic payments

0% 20%

2) To strengthen expenditure control and combat corruption IARCSC has issued a procedure requiring the rollout of a new HRMIS system.

Prior Action Proportion of civil servants included on

the HMRIS

25% 100%

3) To support implementation of the new civil servants law: a) the high-level pay committee approves cadre allowances for procurement and customs cadres based on cadre regulations and pay policy; b) ACD advertises 40 positions for competitive hire under new cadre regulations for grades 3-6; c) IARCSC approves a competency pay framework for teachers in accordance with pay policy specifying methods and instruments for competency verification.


Proportion of customs and procurement staff receiving cadre allowance

0% (Men)

0% (Women)

25% (Men)

25% (Women)

4) To support private sector development, MoF and the MoIC will create a link between SIGTAS (ARD’s IT system) and ACBR’s database to facilitate the digital issuance of TCCs and their utilization for business license renewals.


Proportion of business license renewals

issued based on ACBR receipt of digital

tax clearance certificates 0% 20%

5) To support private sector development Kabul Municipality (KM) has approved rules of procedures under the Kabul Urban Design Framework (KUDF) and new Municipalities Law to significantly reduce the time required to obtain a construction permit.

Prior Action Doing Business score against acquiring construction permits

34.5 40


Page 48

6) To improve land administration: i) Cabinet approves and submits to the National Assembly a new Land Survey Law; ii) the Minister of Urban Development and Land approve new cadaster procedures; iii) the Minister of Urban Development and Land approves specifications for a new land information system, including requirement for gender-disaggregated data.


Number of municipal districts in which an administrative land system is operating

1 2

Sex-disaggregated land registry data available

No Yes

7) To support improved institutional arrangements in the hydrocarbons sector: i) Cabinet approves the Administrative Regulation under Chapters II and III of the 2017 Hydrocarbons Law regarding the roles and responsibilities therein assigned to MoMP and AOGRA; ii) AOGRA is operationalized through the appointment of its CEO.


Number of hydrocarbons sector regulations and contract templates jointly developed by the Ministry of Mines and AOGRA and approved by Cabinet

0 5

Pillar II: Improving the policy and institutional framework for Public Financial Management and Fiscal Sustainability

8) To improve the sustainable operations of DABS: i) the Minister of Finance approves the conversion to equity of DABS outstanding debt to MOF; ii) Cabinet approves new articles of incorporation for DABS to strengthen governance; and iii) DABS board approves revisions to the tariff schedule.


Technical losses as a proportion of network generation

17.3% 15%

9) To strengthen resilience to climate change shocks, new regulations are gazetted, governing utilization of the existing contingency reserve funds, establishing standard operating procedures, clearly defining eligible expenditures, including for weather-related events, and establishing reporting requirements.


Contingency fund allocations as a percentage of limits established under the PEFM law

140% <100%

Proportion of contingency reserve eligible for use in responding to natural disasters

3% 50%

10) To improve public investment management new Public Investment Management regulations are gazetted establishing a regulatory framework for project appraisal and approval based on economic, strategic fit, and gender analysis.


Proportion of new projects of over US$7.5 million approved for implementation in the discretionary development budget than have undergone economic and gender analysis

75% 100%


Page 49

11) To improve tax administration ARD issues a circular mandating e-filing for all large taxpayers and selected sectors in MTO and STO

Prior Action Proportion of LTO, MTO and STO clients that make use of e-filing.

35% (LTO)

0% (MTO)

0% (STO)

100% (LTO)

6.5% (MTO)

9.3% (STO)

12) To underpin implementation of the new O&M policy, Cabinet approves a 2021 executive budget in accordance with the budget norms and guidelines for three asset categories in at least five ministries


Budgetary allocations for O&M expenditures included in contingency reserves.

100% 50%

13) To strengthen audit independence, Cabinet approves and submits to the National Assembly a revised SAO law in line with international good practice and consistent with relevant provisions of the constitution and the public finance and expenditure management law


Number of the Mexico Declaration Principles with which the Afghanistan SAO legal framework complies

2 6

14) To improve fiscal transparency and accountability, the Ministry of Finance publishes on its website full data on expenditures over the past five years at the line-item level.

Prior Action Number of downloads of the public expenditure database

0 100

The World Bank Afghanistan 2020 Incentive Program Development Policy Grant (P172211)

Page 50

ANNEX 2: FUND RELATIONS ANNEX

Staff Appraisal—CCRT Request

Afghanistan faces an exceptional balance of payments need from the impact of COVID-19 and

has requested support under the Catastrophe Containment window of the CCRT.

Economic impact. The pandemic is having a severe impact on Afghanistan’s economy. A large

influx of Afghan migrants from neighboring countries, weak capacity in the context of fragility,

and the domestic conflict make the country vulnerable to the pandemic. Intermittent closures of

the border with Pakistan, the second largest export market, have led to a significant drop in

agricultural exports and disrupted imports, causing prices of essential goods to spike. Inflows of

remittances are expected to halve due to the return of Afghan workers from host countries,

many of which are oil exporters whose economic prospects have weakened due to the

pandemic and the sharp drop in oil prices. To slow the spread of the virus, the government

introduced drastic social distancing measures, including placing Kabul and other large cities

under lockdown, which have inhibited domestic activity. As a result, output is expected to

contract by 3 percent this year, compared to 3.5 percent growth projected earlier, and the fiscal

position is expected to worsen as domestic revenue plummets while the budget takes on large

pandemic-related expenditure, including 0.55 percent of GDP for health. The shock has also

opened a large balance of payment need, estimated at about $800 million (about 4.3 percent of

GDP).

Macroeconomic policies. With containment measures in place and most urgent health needs

being addressed, the authorities are mobilizing their efforts and financial resources, including

from donors, to mitigate the economic fallout of the pandemic. To ensure funding for the health

sector as well as social relief to the affected households, the authorities are postponing

non-priority spending, including some non-health capital projects, and planning to allow the

fiscal deficit to rise to 4 percent of GDP. Once the pandemic passes, they are committed to

bring the deficit to within 1 percent of GDP over the next two years. The central bank will

continue to focus on price stability and will limit foreign exchange interventions to addressing

disorderly market conditions. It also stands ready to support the resiliency of the financial sector,

ensure adequate liquidity in banks, and, when justified, exercise forbearance as lenders are

encouraged to forbear or reschedule loan repayments by otherwise solvent borrowers.

IMF program status. The sixth and final review under the ECF arrangement was concluded in

December 2019. Afghanistan requested emergency financing under the RCF in March 2020.


Page 51

Staff appraisal. Staff supports the authorities' request for debt relief under the CCRT. With GNI

per capita of $550, Afghanistan meets the CCRT income threshold of $1,175. Staff assesses

that it is facing an exceptional BOP need stemming from the impact of COVID-19, and the

authorities are committed to pursuing appropriate macroeconomic policies to address its

economic fallout.

Upcoming debt service. Afghanistan has debt service of SDR 2.4 million falling due in the

initial period of debt service relief from April 14 to October 13, 2020. The debt service falling due

in the 24 months from April 14, 2020 (the maximum potential period of debt service relief,

subject to availability of resources and decisions of the Executive Board) amounts to SDR 10.1

million.

Tables:

1. Selected Economic Indicators

2. Balance of Payments

3. ECF debt service due to the IMF over the 24 months from April 14, 2020.


Page 52

Table 1. Islamic Republic of Afghanistan: Selected Economic Indicators, 2017–25

2017 2018 2019 2022 2023 2024 2025

Est.

Output and prices 1/

Real GDP 2.9 2.7 3.0 -3.0 4.5 4.5 4.0 4.0 4.0

Nominal GDP (in billions of Afghanis) 1,374 1,444 1,523 1,548 1,690 1,863 2,054 2,276 2,481

Nominal GDP (in billions of U.S. dollars) 20.2 19.9 19.6 18.9 19.8 21.8 24.1 26.5 28.5

Consumer prices (period average) 5.0 0.6 2.3 4.7 4.5 5.0 5.0 5.0 5.0

Food 6.9 -1.1 3.8 ... ... ... ... ... ...

Non-food 3.2 2.3 0.9 ... ... ... ... ... ...

Consumer prices (end of period) 3.0 0.8 2.8 4.5 5.0 5.0 5.0 5.0 5.0

Investment and savings

Gross domestic investment 17.6 16.7 17.7 16.6 17.4 18.9 19.5 19.9 20.2

Of which: Private 5.7 5.4 6.5 6.0 7.1 8.1 8.3 8.6 8.8

Gross national savings 24.7 29.7 26.3 21.5 23.2 23.0 22.7 22.4 22.3

Of which: Private 13.5 16.9 16.1 14.9 14.9 13.3 12.1 11.6 11.4

Public finances (central government)

Domestic revenues and grants 25.3 28.1 26.1 24.0 25.1 26.2 27.1 26.6 26.4

Domestic revenues 12.2 13.1 13.6 9.4 11.8 13.8 15.4 15.6 15.9

On-budget grants (excl. donors' direct spending outside the budget) 13.1 15.0 12.5 14.6 13.3 12.5 11.7 11.0 10.5

Expenditures 25.9 26.6 27.1 28.0 27.1 27.2 27.6 27.1 26.9

Operating 2/ 18.4 17.9 17.9 20.3 18.6 18.5 18.3 17.4 16.8

Development 7.5 8.7 9.1 7.7 8.5 8.7 9.3 9.7 10.1

Operating balance (excluding grants) 3/ -6.2 -4.7 -4.3 -10.9 -6.8 -4.8 -2.9 -1.8 -0.9

Overall balance (including grants) -0.6 1.5 -1.0 -4.0 -2.0 -1.0 -0.5 -0.5 -0.5

Public debt 4/ 5/ 7.5 6.8 6.8 9.0 8.9 8.9 8.5 8.1 7.8

Monetary sector

Reserve money 10.2 -2.7 10.6 7.8 9.3 9.3 8.3 7.1 9.0

Currency in circulation 2.2 -0.2 13.6 6.5 10.0 8.5 8.0 8.0 8.0

Broad money 5.9 2.6 5.7 4.1 5.3 5.7 7.3 7.3 7.3

Interest rate, 28-day capital note (in percent) 3.0 3.0 … … … … … … …

External sector 1/

Exports of goods (in millions of U.S. dollars) 784 875 853 641 831 940 1039 1156 1273

Exports of goods (annual percentage change) 27.6 11.6 -2.6 -24.8 29.5 13.1 10.6 11.2 10.1

Imports of goods (in millions of U.S. dollars) 6,737 6,596 6,381 6,408 6,506 6,691 6,869 7,072 7,253

Imports of goods (annual percentage change) 7.6 -2.1 -3.3 0.4 1.5 2.8 2.7 3 3

Merchandise trade balance -29.5 -28.7 -28.3 -30.6 -28.6 -26.4 -24.2 -22.4 -21.0

Current account balance

Excluding official transfers -29.9 -27.1 -28.9 -33.4 -30.2 -28.1 -25.9 -24.0 -22.5

Including official transfers 7.1 13.0 8.6 4.9 5.8 4.1 3.3 2.5 2.1

Foreign direct investment 0.2 0.4 0.5 0.0 0.5 0.5 0.5 0.5 0.5

Total external debt 4/ 6.4 6.3 6.8 8.3 8.1 8.1 7.7 7.4 7.2

Gross international reserves (in millions of U.S. dollars) 8,139 8,273 8,573 8,179 8,074 7,976 7,876 7,776 7,682

Import coverage of reserves 6/ 12.2 12.8 13.2 12.4 11.8 11.3 10.8 10.4 10.1

Exchange rate (average, Afghanis per U.S. dollar) 68.1 72.4 77.9 … … … … … …

Real exchange rate (average, percentage change) 7/ 6.4 6.3 6.8 … ... … … … …

Sources: Afghan authorities, United Nations Office on Drugs and Crime, WITS database, and IMF staff estimates and projections.

1/ Excluding the narcotics economy.

3/ Defined as domestic revenues minus operating expenditures.

4/ Public sector only. Incorporates committed but not yet delivered debt relief. Debt relief recorded fully at time of commitment.

5/ Public debt includes promissory note issued by MoF to settle DAB's Kabul Bank exposure.

6/ In months of next year's import of goods and services

7/ CPI-based, vis-a-vis the U.S. dollar. Positive - real appreciation of the Afghani.

(Main exports: dried and fresh fruits and vegetables, medical seeds, 2018)

2/ Comprising mainly current spending.

(Annual percentage change, unless otherwise indicated)

(In percent of GDP)

(Annual percentage change, end of period, unless otherwise

indicated)

(In percent of GDP, unless otherwise indicated)

2020 2021

Proj.

(Quota: SDR 323.8 million)

(Population: approx. 34.7 million; 2016)

(Per capita GDP: approx. US$554; 2018)

(Poverty rate: 54.5 percent; 2016-2017)


Page 53

Table 2. Islamic Republic of Afghanistan: Balance of Payments, 2017–25 1/

(In millions of U.S. dollars, unless otherwise indicated)

2017 2018 2019 2022 2023 2024 2025

Est.

Current account 1,431 2,590 1,681 923 1,142 897 785 659 603

Excluding official grants -6,038 -5,413 -5,644 -6,299 -6,003 -6,121 -6,233 -6,358 -6,411

Trade balance of goods -5,953 -5,721 -5,528 -5,767 -5,675 -5,751 -5,830 -5,916 -5,980

Exports of goods and services 1,156 1,974 1,442 1,039 1,353 1,465 1,577 1,705 1,835

Goods 784 875 853 641 831 940 1,039 1,156 1,273

Services 372 1,099 589 398 523 526 537 550 562

Imports of goods and services 7,960 7,985 7,766 7,786 7,934 8,187 8,435 8,716 8,939

Goods 6,737 6,596 6,381 6,408 6,506 6,691 6,869 7,072 7,253

Services 1,222 1,389 1,385 1,377 1,427 1,497 1,566 1,644 1,686

Income, net 254 212 269 240 244 249 253 259 256

Of which: Interest on official loans 5 5 8 9 12 16 20 23 27

Current transfers, net 7,980 8,389 7,736 7,429 7,478 7,371 7,391 7,410 7,451

Of which: Official 2/ 7,468 8,003 7,324 7,223 7,145 7,018 7,018 7,017 7,014

Capital account 0 0 0 0 0 0 0 0 0

Financial account, net 165 -389 -1,385 -1,745 -1,246 -993 -880 -752 -688

Foreign direct investment 41 79 94 3 98 106 115 125 135

Portfolio investment 29 -141 -146 -201 -124 -114 -104 -94 -84

Official loans 3/ -5 -20 105 184 143 134 102 100 94

Disbursement 20 2 132 212 171 162 144 146 142

Amortization 25 22 27 28 28 28 42 46 48

Other investment 101 -307 -1,437 -1,730 -1,363 -1,119 -993 -883 -832Financial derivatives 0 0 0 0 0 0 0 0 0

Errors and omissions -806 -2,063 0 0 0 0 0 0 0

Overall balance 790 138 296 -821 -105 -96 -95 -93 -85

Financing -790 -138 -296 546 105 96 95 93 85

Central bank's gross reserves ('-' = accumulation) -782 -134 -300 394 105 99 99 100 94

Use of Fund resources, net -8 -4 4 -8 -7 -5 -4 -7 -9

Disbursements 13 13 14 0 0 0 0 0 0

Repayments 21 16 10 8 7 5 4 7 9

Exceptional Financing 0 0 0 160 7 2 0 0 0

Grant for debt relief under CCRT 4/ 0 0 0 5 7 2 0 0 0

Exceptional Financing from other IFIs and donors 0 0 0 155 0 0 0 0 0

Unidentified Financing 0 0 0 275 0 0 0 0 0

Memorandum items:

Gross international reserves, central bank 8,139 8,273 8,573 8,179 8,074 7,976 7,876 7,776 7,682

Import coverage of reserves 5/ 12.2 12.8 13.2 12.4 11.8 11.3 10.8 10.4 10.1

External debt stock, official 6/ 1,258 1,213 1,321 1,497 1,632 1,761 1,857 1,951 2,036

in percent of GDP 6.4 6.3 6.8 8.3 8.1 8.1 7.7 7.4 7.1

Current account, in percent of GDP 7.1 13.0 8.6 4.9 5.8 4.1 3.3 2.5 2.1

Trade balance, in percent of GDP -29.5 -28.7 -28.3 -30.6 -28.6 -26.4 -24.2 -22.4 -21.0

Export of goods and services, in percent of GDP 5.7 9.9 7.4 5.5 6.8 6.7 6.5 6.4 6.4

Import of goods and services, in percent of GDP 39.4 40.0 39.7 41.3 40.0 37.5 35.0 32.9 31.4

Official grants, in percent of GDP 37.0 40.1 37.4 38.3 36.0 32.2 29.2 26.5 24.6

Sources: Afghan authorities and Fund staff estimates and projections.

1/ BoP data exclude the narcotics economy.

3/ Excluding IMF.

5/ In months of next year's import of goods and services.

2020 2021

Proj.

4/ The grant for the debt service falling due in the 18 months from October 14, 2020 is subject to the availability of resources under the CCRT.

2/ As the breakdown between capital grants and current grants is difficult to identify, all grants are included in current transfers.

6/ Incorporates committed but not yet delivered debt relief. Debt relief recorded fully at time of commitment.


Page 54

Table 3. Islamic Republic of Afghanistan: Debt Service to the IMF, 2020–22


Page 55

ANNEX 3: LETTER OF DEVELOPMENT POLICY


Page 56


Page 57


Page 58


Page 59

ANNEX 4: ENVIRONMENT AND POVERTY/SOCIAL ANALYSIS TABLE

Prior Actions Significant positive or negative

environment effects

Significant poverty, social or distributional effects positive or

negative

Operation Pillar 1: Strengthening the Policy Framework to Support State Effectiveness, Private Investment, and Social Inclusion

To simplify tax payment procedures the government has integrated systems for e-payments (the ATS, APS, ASYCUDA, SIGTAS, and the core banking system / DAB).

No significant positive or negative environmental effects

Positive poverty effects through expanded financial inclusion

To strengthen expenditure control and combat corruption IARCSC has issued a procedure requiring the rollout of a new HRMIS system.


No significant positive or negative poverty or social effects

To support implementation of the new civil servants law: a) the high-level pay committee approves cadre allowances for procurement and customs cadres based on cadre regulations and pay policy; b) ACD advertises 40 positions for competitive hire under new cadre regulations for grades 3-6; c) IARCSC approves a competency pay framework for teachers in accordance with pay policy specifying methods and instruments for competency verification.



To support private sector development, MoF and the MoIC will create a link between SIGTAS (ARD’s IT system) and ACBR’s database to facilitate the digital issuance of TCCs and their utilization for business license renewals.


Positive poverty effects through improved private sector development

To support private sector development Kabul Municipality (KM) has approved rules of procedures under the Kabul Urban Design Framework (KUDF) to significantly reduce the time required to obtain a construction permit.

Positive environmental effects due to improved enforcement of pollution rules

Positive poverty effects through improved private sector development

To improve land administration: i) Cabinet approves and submits to the National Assembly a new Land Survey Law; ii) the Minister of Urban Development and Land approve new cadaster procedures; iii) the Minister of Urban Development and Land approves specifications for a new land information system, including requirement for gender-disaggregated data.

Positive environmental effects through improved land use planning, potential negative effects through intensified land use

Positive poverty effects through strengthened land tenure

To support improved institutional arrangements in the hydrocarbons sector: i) Cabinet approves the




Page 60

Administrative Regulation under Chapters II and III of the 2017 Hydrocarbons Law regarding the roles and responsibilities therein assigned to MoMP and AOGRA; ii) AOGRA is operationalized through the appointment of its CEO. Operation Pillar 2: Improving the Policy and Institutional Framework for Public Financial Management and Fiscal Sustainability

To improve the sustainable operations of DABS: i) the Minister of Finance approves the conversion to equity of DABS outstanding debt to MOF; ii) Cabinet approves new articles of incorporation for DABS to strengthen governance; and iii) DABS board approves revisions to the tariff schedule.



To strengthen resilience to climate change shocks, new regulations are gazetted, governing utilization of the existing contingency reserve funds, establishing standard operating procedures, clearly defining eligible expenditures, including for weather-related events, and establishing reporting requirements.

Positive environmental effects through strengthened early response to weather-related shocks

Positive poverty effects through improved government responsiveness to natural disasters

To improve public investment management new Public Investment Management regulations are gazetted establishing a regulatory framework for project appraisal and approval based on economic, strategic fit, and gender analysis.



To improve tax administration ARD issues a circular mandating e-filing for all large taxpayers and selected sectors in MTO and STO



To underpin implementation of the new O&M policy, Cabinet approves a 2021 executive budget in accordance with the budget norms and guidelines for three asset categories in at least five ministries



To strengthen audit independence, Cabinet approves and submits to the National Assembly a revised SAO law in line with international good practice and consistent with relevant provisions of the constitution and the public finance and expenditure management law



To improve fiscal transparency and accountability, the Ministry of Finance publishes on its website full data on expenditures over the past five years at the line-item level.




Page 61

ANNEX 5: GOVERNMENT THREE-YEAR REFORM PROGRAM

2018 Reform Actions 2019 Reform Actions 2020 Reform Actions Medium-Term Results Indicator

Baseline (end-2017)

Target (end-2021)

Pillar 1: Strengthening the policy framework to support state effectiveness, private investment, and social inclusion

E-P

aym

en

ts a

nd

Mo

bile

Mo

ne

y

1. Tranche Release Condition: The President issues a decree formalizing and defining Asan Khedmat (AK) responsibilities for integrating national IT infrastructure necessary to roll out the E-money and digital payment system.

1. Tranche Release Condition: To develop a regulatory framework for e-money and digital payments: i) DAB issues a circular to operating banks and MOF issues a circular to tax and customs directorates and provincial offices allowing for electronic payment of customs and tax dues; and ii) DAB issues a circular requiring participation of all mobile money providers, payment card issuers, and acquiring banks in a regulated payment system (APS) to enable interoperability. To develop a regulatory framework for e-money and digital payments: i) DAB and MOF issue a joint regulation allowing for electronic payment of customs and tax dues; and ii) DAB issues regulations requiring participation of all mobile money providers, payment card issuers, and acquiring banks in a regulated payment system (APS) to enable interoperability.

1. Tranche Release Condition: To simplify tax payment procedures the government has integrated systems for e-payments (the ATS, APS, ASYCUDA, SIGTAS, and the core banking system / DAB).

Percentage share (by volume) of customs and tax dues settled through electronic payments

0% 20%

Civ

il se

rvic

e

refo

rm 2. Prior Action: The

Recipient’s Cabinet has approved and submitted to the National Assembly an amendment of the Civil

2. Prior Action: To support implementation of its Civil Servants Law, the Recipient’s: (i) Cabinet has approved (A) the Civil Service Pay Management Policy,

2. Prior Action: To strengthen expenditure control and combat corruption IARCSC has issued a procedure requiring the rollout of a new HRMIS system, including

Number of civil servant positions competitively selected in line with new

0 500


Page 62

Servants Law that: (i) establishes a career track for specialist staff; (ii) enables positive gender discrimination within civil service appointments; (iii) introduces merit-based and tailored recruitment into the civil service; (iv) establishes Deputy Minister positions within the civil service framework; and (v) enables transfers, sanctions, transparent grievance redress, and civil service renewal.

(B) the Policy for Increasing Women’s Participation in Civil Service, as well as (C) the Customs Cadre Regulation and the Procurement Cadre Regulation; and (ii) Independent Administrative Reform and Civil Service Commission has approved the Procedure on Civil Servants' Recruitment through Mass Competitive Exam.

requirements for collection of biometric data.

recruitment process

3. Tranche Release Condition: To support implementation of the new civil servants law: a) the high-level pay committee approves cadre allowances for procurement and customs cadres based on cadre regulations and pay policy; b) ACD advertises 40 positions for competitive hire under new cadre regulations for grades 3-6; c) IARCSC approves a competency pay framework for teachers in accordance with pay policy specifying methods and instruments for competency verification.

Proportion of female civil servants competitively recruited for civil servant positions.

0% 30%

Proportion of cadre recruitment in common function and select technical areas

0% 50%

Bu

sin

ess

en

viro

nm

en

t re

form

3. Prior Action: Cabinet has approved and submitted to the National Assembly an insolvency law which adequately addresses insolvency proceedings, reorganization provisions for insolvent companies, creditor rights, and treatment of insolvency in viable businesses.

3. Tranche Release Condition: To support private sector development through improved access to credit DAB has: i) issued a regulation altering collateral requirements to allow inclusion of risk guarantees from Afghan Credit Guarantee Foundation (ACGF); and ii) entered into a Memorandum of Understanding with DABS Brishna to allow data sharing to provide operating banks with additional information in evaluating creditworthiness of potential borrowers through the Public Credit Registry.

4. Tranche Release Condition: To support private sector development, MoF and the MoIC will create a link between SIGTAS (ARD’s IT system) and ACBR’s database to facilitate the digital issuance of TCCs and their utilization for business license renewals.

Doing Business score against starting a business as measured by the Doing Business Survey

DB2018 Resolving Insolvency DTF: 23.62 Ease of Doing Business DTF: 36.19

DB2021 Resolving Insolvency DTF: 33.32 Ease of Doing Business DTF: 40

5. Prior Action. To support private sector development Kabul Municipality (KM) has approved rules of procedures under the Kabul Urban Design Framework (KUDF) to significantly reduce the time required to obtain a construction permit.


Page 63

Po

we

r u

tilit

y re

form

4. Tranche Release Condition: DABS and MoF sign a Partnership Agreement to improve DABS’ performance over 2018-2020, including: i) a number of annual performance targets to be met by DABS; and ii) restructuring of DABS debt to MOF, conditional on performance improvements.

4. Tranche Release Condition: To reduce the costs of accessing electricity DABS’ Senior Management Group: i) approves simplified subscription procedures for commercial and industrial customers; ii) establishes a fast-track center for large customers in Kabul; and ii) approves a business process to regularly review and manage domestic and international power purchase agreements (PPA) including through the establishment of a multi-disciplinary team with the mandate of managing such contracts.

6. Tranche Release Condition. To improve the sustainable operations of DABS: i) the Minister of Finance approves the conversion to equity of DABS outstanding debt to MOF; ii) Cabinet approves new articles of incorporation for DABS to strengthen governance; and iii) DABS board approves revisions to the tariff schedule.

DABS working ratio

108 (in Afghan FY 2016)

100 (in FY2020)

Number of new electricity connections to industrial customers provided through the simplified procedure

0 100

Commercial losses as % generation

23% [TBD]

Lan

d g

ove

rnan

ce

5. Prior Action: The Recipient’s Cabinet has issued and published the Regulation on Managing Affairs of Informal Urban Properties allowing for the distribution of Property Documents to occupants of informal settlements in urban areas.

5. Tranche Release Condition: To improve land administration the Supreme Court and MUDL sign a protocol transferring responsibility for deed registration to MUDL in Herat city.

7. Tranche Release Condition. To improve land administration: i) Cabinet approves and submits to the National Assembly a new Land Survey Law; ii) the Minister of Urban Development and Land approve new cadaster procedures; iii) the Minister of Urban Development and Land approves specifications for a new land information system, including requirement for gender-disaggregated data.

Number of property documents issued to informal occupants of state land

0 1,000

Number of property documents recognizing women as part or whole owners

0 20% of total number of property documents issued

Gender disaggregated records of land ownership are available under the MUDL digital registration system.

Not available

Available in ARAZI digital registration system


Page 64

Wat

er,

clim

ate

re

silie

nce

, an

d e

xtra

ctiv

es

6. Tranche Release Condition: The Recipient’s Cabinet approves an Irrigation Policy and a Dry Lands Agriculture Policy to increase the resilience of agriculture-based livelihood activities against climate change and strengthen management of water rights.

6. Prior Action: To improve management of water resources Cabinet has approved and submitted to the National Assembly a revised water law which includes: i) clarification of MEW and MAIL mandates; ii) recognition of traditional water use rights; and iii) provisions governing dam safety, pollution, and groundwater.

8. Tranche Release Condition. To strengthen resilience to climate change shocks, new regulations are gazetted, governing utilization of the existing contingency reserve funds, establishing standard operating procedures, clearly defining eligible expenditures, including for weather-related events, and establishing reporting requirements.

Rainfed wheat productivity

1.03 t/ha 1.12 t/ha

9. Tranche Release Condition. To support improved institutional arrangements in the hydrocarbons sector: i) Cabinet approves the Administrative Regulation under Chapters II and III of the 2017 Hydrocarbons Law regarding the roles and responsibilities therein assigned to MoMP and AOGRA; ii) AOGRA is operationalized through the appointment of its CEO.

Irrigated wheat productivity

2.49 t/ha

2.95 t/ha

Pillar 2: Strengthen the policy and institutional framework for public financial management


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Imp

rove

d p

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g an

d a

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rais

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7. Tranche Release Condition: MoF issues a revised Budget Circular 1 that: (i) clearly defines the time-bound process and requirements for project proposal submission from ministries and agencies, including the submission of project concept notes according to the standard template and guidelines provided by the MoF; (ii) requires all projects proposals to include cost estimates for operating and capital expenses needed for the project life cycle.

7. Tranche Release Condition: To improve public investment management the circular for the 2020 budget: i) includes detailed guidelines on financial, economic, and gender analysis; and ii) specifies that no new project proposal of greater than USD 7.5 million will be approved for further appraisal through the discretionary budget for 2020 without strategic fit analysis and no new project will be approved for implementation without project appraisal including financial, economic, and gender analysis.

10. Tranche Release Condition: To improve public investment management new Public Investment Management regulations are approved by Cabinet and gazetted establishing a regulatory framework for project appraisal and approval based on economic, strategic fit, and gender analysis.

Ratio of the value of projects that have undergone the new PIM process to the total value of projects in the development budget submitted to the National Assembly.

0% of projects

At least 95% of projects

Imp

rovi

ng

Tax

Ad

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atio

n

8. Tranche Release Condition: ARD rolls out an electronic taxpayer management system by making fast-track tax filing available (but optional) in LTO.

8. Tranche Release Condition: To improve tax administration, MOF issues a circular to make fast-track tax filing mandatory for banking and telecommunication sectors in the large taxpayer office (LTO) and available for optional use in the medium taxpayer office (MTO).

11. Prior Action: To improve tax administration ARD issues a circular mandating e-filing for all large taxpayers and selected sectors in MTO and STO

Domestic revenue collected by ARD MTO and LTO.

AFN 38.6 billion

AFN 59.5 billion

Proportion of LTO and MTO clients with access to fast-track filing.

2% 100%

9. Tranche Release Condition: ARD reviews and revises LTO and MTO client

9. Tranche Release Condition: To improve tax administration, a Tax Dispute Resolution Board is

LTO share of domestic tax collection.

27% 45%


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lists to ensure correct categorization of tax-payers and risk-commensurate compliance and enforcement efforts.

equipped with five board members and a secretariat.

LTO/MTO Cases resolved by the Tax Disputes Resolution Board per year

0 case 20 cases

10. Tranche Release Condition: To strengthen tax policy Cabinet approves VAT regulations, including proposed exemptions by HS code and refund procedures.

Stre

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10. Tranche Release Condition: Cabinet approves a revised O&M Policy to: (i) improve O&M expenditure management; and (ii) mandate piloting of the revised O&M Policy by four line-ministries in preparing their 2019 budget.

11. Tranche Release Condition: To underpin implementation of the new O&M policy: i) a MOF circular mandates the use of revised norms for civilian vehicles and buildings in at least the four pilot ministries in preparing the 2020 budget; and ii) the O&M budget contingency included in the 2019 budget is allocated through the mid-term budget review towards costs associated with O&M policy implementation in pilot ministries.

12. Tranche Release Condition. To underpin implementation of the new O&M policy, Cabinet approves a 2021 executive budget in accordance with the budget norms and guidelines for three asset categories in at least five ministries

O&M budget allocation based on standard norms for O&M costing and allocation

Existing O&M policy does not specify norms for O&M budget and incremental budgeting is used.

All ministries apply the standard norms and guidelines for O&M costing and allocation.

Fisc

al r

isk

mo

nit

ori

ng

and

tra

nsp

are

ncy

12. Tranche Release Condition: To improve transparency MOF publishes fortnightly revenue reports on its website that: i) provide full disaggregated tax and customs performance data at the level of collection points; and ii) track progress against government revenue targets.

13. Tranche Release Condition: Cabinet approves and submits to the National Assembly a revised SAO law, strengthening SAO independence in line with international good practice and consistent with relevant provisions of the constitution and the public finance and expenditure management law


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13. Tranche Release Condition: To improve accountability and quality of cash-management, the cash management committee meets at least every 21 days and publishes minutes of decisions taken at those meetings on its website within 7 days of the meeting.

14) Prior Action. To improve fiscal transparency and accountability, the Ministry of Finance has published full data on expenditure over the past five years at the line-item level