Cablegate: Afghanistan: Fy 2010 Prohibition On Assistance to Govts.

VZCZCXRO6142
PP RUEHDBU RUEHPW RUEHSL
DE RUEHBUL #0228/01 0240735
ZNR UUUUU ZZH
P 240735Z JAN 10
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC PRIORITY 4937
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC 0968
RUCNAFG/AFGHANISTAN COLLECTIVE

UNCLAS SECTION 01 OF 03 KABUL 000228

SIPDIS
SENSITIVE

DEPT FOR EEB/IFD/OMS - SAUNDERS AND SCA/A - JEA AND SABAR
TREASURY FOR McDONALD, JCASAL, ABAUKOL, AWELLER, AND MNUGENT

E.O. 12958; N/A
TAGS: EAID ECON EFIN PREL PGOV AF
SUBJECT: AFGHANISTAN: FY 2010 PROHIBITION ON ASSISTANCE TO GOVTS.
WITH NON-TRANSPARENT BUDGETS

REF: (A) 09 STATE 01923
(B) 09 STATE 81177
(C) 09 STATE 288885
(D) 09 KABUL 2812
(E) 08 STATE 016737

1. (SBU) Summary: Since 2005, Afghanistan has made steady progress
in fulfilling its commitment to fiscal transparency, reinforced by
the passage of a Public Expenditure and Financial Management Law
(PEFML - 2005), a Procurement Law (2005), the publication of a
Medium-Term Fiscal Framework (MTFF - 2005), and the issuance of the
Afghanistan National Development Strategy (April 2008). Most
recently, in December 2009, the Afghan government reinstated Article
61 of the PEFML, restoring the authority of the Finance Ministry
(MoF) to conduct audits of other line ministries. In concert with
these reforms, the MoF has regularly posted the annual GIRoA budget
on the internet since 2004. On balance, we believe GIRoA is making
solid progress towards improving fiscal transparency but it will
need to work with donors to identify additional resources needed to
carry out its reform roadmap. Granting the waiver on fiscal
transparency not only provides the support needed to do this work
but encourages the GIRoA to stay on track. Specific answers to
reftel questions follow. End summary.

2. (U) Is the central government expected to receive funding under
the FY 2010 Department of State, Foreign Operations, and Related
Programs Appropriations Act (SFOAA)?

Yes. FY-10 funding for Afghanistan is the largest country-specific
element of the current SFOAA, reflecting the President's priorities.

3. (U) Is the GIRoA's annual national budget publicly available?

Yes. The MoF annually publishes the Afghan national budget on a
public website (http://www.budgetmof.gov.af) in three languages:
English, Pashto, and Dari. In addition, the MoF posts mid-year
reviews of the national budget (reconciling expenditures with the
budget ceiling), the MOF's Treasury Department execution and
disbursement reports, and end-of-the-year closing account and audit
reports on its website.

4. (U) Are incomes and expenditures included in the publicly
available budget?

Most revenues and expenditures are captured by the budget and made
public. The budget has a core and external component. The core
budget details all funds flowing through government accounts, and
the external budget covers external assistance directly executed by
donors. The core budget consists of an operating budget, covering
current expenditure, and a development budget detailing
reconstruction costs. External expenditures are not captured
comprehensively by the public budget since they are covered mostly
by donors, who also fund a substantial part of the government's
recurring expenses. (FYI: According to GIRoA, 100% of Afghanistan's
development budget and 35% of operating expenses are covered by
donors. Foreign Assistance accounted for 43% of Afghanistan's GDP
in 2008.)

The legislative basis for public access to budget and fiscal
documents is the Public Expenditure and Financial Management Law
which stipulates that the Ministry of Finance must publish the
annual budget upon approval, quarterly progress reports upon
submission to the Government and the President, as well as a final
budget reconciliation report and a set of financial statements. Of
those, only the final budget reconciliation report has yet to be
made public. The Procurement Law (2005) stipulates that the
procuring entities must publish notice of all procurement awards on
a special web site (www.ards.org.af).

5. (U) What is post's assessment of the extent to which the
publicly-available budget accurately reflects actual government
incomes and expenditures?

MoF officials acknowledge that the Ministry must refine its
budgetary submissions further to meet international transparency and
internal controls standards. The MoF is considering adopting a
performance review system that would report both disbursements to
line ministries and the actual performance outcomes of those
disbursements. The MoF is requesting World Bank and other donor
assistance to implement this performance-based budgetary reporting
system so that it could be expanded to provincial and district-level
offices.

Development budget execution (necessary for growth and development)
remains low in Afghanistan. The MOF has taken a range of measures to
improve the situation including the introduction in 2007/8 of a

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clearer development budget structure that better identifies projects
for which resources are available. The MoF (in collaboration with
the Ministry of Economy) has also produced a standard template for
investment projects. While this was used in eight line ministries
beginning in 2008/9, further technical assistance is needed to
improve its use in key spending line ministries. The U.S. Mission's
assistance plans include projects to improve Ministry capacity in
this area.

6. (U) Have there been any events since the 2009 review that may
have affected fiscal transparency?

In December 2009, the Afghan government reinstated Article 61 of the
PEFML, restoring the authority of the Finance Ministry (MoF) to
conduct audits of other line ministries. This audit authority was a
benchmark set under the Afghanistan Reconstruction Trust Fund (ARTF)
rubric in conjunction with the World Bank and International Monetary
Fund. In addition, the MoF's Treasury Department instituted an
integrated financial management software program that is run on a
well- known commercial software package. At present, the MoF is
considering how to roll out this program to its provincial offices.

In line with GIRoA's progress towards fiscal transparency, USAID has
certified three GIRoA ministries to receive direct U.S. assistance:
the Ministry of Public Health, Ministry of Communication and
Information Technology, and the Ministry of Finance. USAID is
currently assessing the Ministries of Education and Agriculture,
Irrigation, and Livestock and will soon begin assessing the Ministry
of Rural Rehabilitation and Development. The U.S. aim is to
increase the percentage of U.S. assistance that flows directly
through GIRoA institutions from approximately 12 percent in FY 2009,
to 20 percent in FY-2010 and about 40 percent in FY 2011.

7. (U) Since last year's review, what efforts has the Afghan
government undertake to improve fiscal transparency? What progress
has been made, pursuant to the 2009 demarches on the subject?

Over the past year, budget performance has been regularly monitored
by the Ministry of Finance Technical Coordination Committee (TCC),
meeting monthly at the MoF to track progress toward IMF benchmarks.
The most recent analysis indicates that within the core budget,
development budget execution stands at 29% so far in this Islamic
solar year (which ends March 20) compared to 32% the previous year,
while operational budget execution stands at 70% so far this Islamic
solar year compared to 61% this time last year. Execution rates
reflect a range of factors, including lack of discretionary
resources for development budget, weak budget planning by line
ministries, the recent election uncertainty, and lack of security.
Meanwhile, revenue collection is continuing to improve, with 45
billion Afs collected as of January 6, meeting 83 percent of GIRoA's
target of 54.5 billion Afs, with 2.5 months remaining in the 2009/10
fiscal year.

Increasing the execution of the core development budget requires
further reforms in GIRoA's allotment and disbursement procedures,
improved compliance on procurement plans, and most importantly,
robust capacity building at key spending ministries.

In response to our demarche request to post budget documents in
government offices and other public places, MoF officials have
questioned the utility of such actions in light of the relatively
high illiteracy rate and the complexity of budget documents. To
date, the MoF has not posted budget documents beyond its publicly
available website.

8. (U) Efforts by GIRoA to improve fiscal transparency.

The MoF has taken steps to make its financial information compliant
with the IMF's Government Financial Statistics (GFS) standard, and
the IMF has noted this progress in accountability. In addition,
Public Expenditure and Financial Accountability (PEFA), a worldwide
partnership of multilateral and bilateral donors, has conducted
several Public Financial Management Performance Assessments. The
most recent PEFA assessment acknowledged progress made in public
financial management and fiscal transparency. The report is
available on the World Bank website (www.worldbank.org/afghanistan)
and shows that Afghanistan outperformed the average for middle
income countries (such as Ukraine and Armenia).

In an effort to increase "Afghanization" and aid effectiveness in
ministries that have demonstrated the capability, procedures, and
transparency to manage U.S. resources, GIRoA has entered into
Host-Country Contracts (HCCs) with USAID that permit GIRoA to
oversee implementation of assistance programming. Both the Ministry
of Health (MOH) and the Ministry of Communications and Information
Technology (MCIT) are recipients of ongoing USAID HCCs, totaling

KABUL 00000228 003 OF 003

approximately $260 million and $1 million, respectively.

9. (U) USG/Post actions and strategy to promote such efforts,
including pursuant to reftels and resulting progress:

The United States Government is providing technical support to
improve Afghanistan's financial management practices, transparency,
and accountability. The U.S. Mission is implementing:

--the Economic Growth and Governance Initiative (EGGI), a five-year
program to work with the Ministry of Finance to improve fiscal
policy and revenue collection, and the Central Bank to strengthen
supervision of the banking sector, risk, and accountability.

--the Afghanistan Civil Service Support Program (ACSS) to strengthen
government capacity in procurement, financial management, project
management, strategic planning, and human resources. The program
also provides technical assistance in program budgeting and budget
formulation at the central and provincial levels.

--the five-year Afghanistan Parliamentary Assistance Program (APAP)
to reinforce legislative capabilities in the governance and fiscal
arenas.

--an Executive Masters in Public Administration program through its
e-Quality Alliances activity to strengthen the governance and public
management skills of rising Afghan civil servants.

The Mission is also providing technical advisors to assist the
Ministry of Finance to improve the management and transparency of
public debt, strengthen internal audit. The advisors are also
working with the Central Bank to strengthen controls against money
laundering, terror finance and other forms of illicit finance.

10. (U) An updated 2010 action plan to improve fiscal transparency
and promote graduation out of the need for a waiver.

MoF is currently reviewing a proposed action plan shaped by the
World Bank's recent Report on Observance of Standards and Codes
(ROSC) in Accounting and Auditing on Afghanistan. We are
considering the potential to engage with GIRoA on the following ROSC
recommendations:

--establish a government-led National Steering Committee to
coordinate, supervise and direct additional financial reporting and
auditing reforms in Afghanistan. This Committee would serve as the
ultimate trustees to ensure that Afghanistan develops a high quality
financial reporting and auditing system over the longer term.

--support the National Steering Committee in developing an
implementation plan (including short, medium and long term measures)
to develop accounting and auditing capacity in Afghanistan. This
plan would form the basis for a government program on education and
training, which would likely require both financial and technical
support from development agencies. A large scale education and
training in Accounting and Auditing has to be at the backbone of the
establishment of the profession in Afghanistan.

--extend Afghanistan Reconstruction Trust Fund (ARTF)-like financial
controls to the core budget as a whole. These financial controls
would include having the Auditor General conduct annual financial
statement audits to international auditing standards with the
support of an international firm of public accountants or extending
the ARTF Monitoring Agent beyond its ARTF rolew. The Monitoring
Agent is currently Price, Waterhouse, and Coopers of Netherlands.

11. (U) COMMENT: The U.S. Mission is supporting the above ROSC
recommendations by urging the Afghan government to develop a
sequenced and prioritized action plan promoting greater fiscal
transparency and by shaping future programs providing support for
Afghanistan's development of the accounting and auditing profession.
The Mission continues to encourage opportunities to channel
resources directly through the Afghan Government. On balance, we
believe Afghanistan is on the right path to increasing fiscal
transparency, but its government will need to work further with
donors to identify additional resources to carry out its roadmap.
Granting the waiver on fiscal transparency not only provides the
support needed to do this work but encourages the GIRoA to stay on
track. End comment.

EIKENBERRY

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