[inaudible conversations] to spend glass afternoon everyone then director of the center at the Atlantic Council event on behalf of my colleagues i want to welcome all love you to our second event in todays on afghanistan. For obvious reasons the attention is now focused from our side even though we know washington bag gets distracted by the crisis of the day we felt it very critical that we continue our focus on afghanistan and in particular because looking at this country and if the surrounding neighbors over the last five and a half years we felt it period important we continue with the issues of the critical juncture with the development of the policies so even while we wait for the final results of the election we felt it is critical to share with you of what to expect. I am delighted with of the transition and transformation and i am very pleased to welcome to day paul frost the chief far the imf and is a former colleague from my own days at the fund and has a very rich background to deal with major responsibilities and make economics and policy designed and he has work to a range of countries including afghanistan of course, and haiti, and4 m cp ae imf financial needs with riskmanagement and was with s. G. Company in london and was a university colleague in london and columbia university. I will request him to speak briefly to give us his view of the economy since the imf has completed article for consultations for those that dont follow the annual physical of the economy where they examine the books to talk about the issues that are looming the way the of member country can ameliorate the situation. So i will request paul to speak remember this session is on the record and if you have then a cellular phones to have not switched off so we dont have the interruption. Also courtesy of cspan this will be broadcast and we are grateful to your support with pakistan and in this case were grateful for the support of all of our colleagues. [inaudible conversations] end think you for coming in and invitee me. I would like to share the imf perspective for the economic transition and transformation if in afghanistan. To start to it is the landlocked country from central asia and pakistan and the target with central asia it is reflected with that history. Of which just like to outline what we plan to cover today and start by showing the key messages to talk about between 22 and 2013 and the risks it faces in to discuss policies to help afghanistan and manage the transition is successfully. And i am referring to 2014 with the new government and at the same time the drawdown is under way in completed by the end of the year in in terms of transformation in 2015 i have four key messages to share with you. Afghanistan has made enormous progress of reconstruction and development in to take important steps to lay the foundation for macroeconomics and stability and growth to raise livinguk, standards with the opportunity to rebuild the institutions. Assuming a smooths transition with continued reform on the economic front and a donor financing fee all look should be positive. Third, to insure inclusive growth throughout the population and to continue Structural Reforms in and let me explain what i mean. A of a jogger use and the imf frequently. We are referring to low inflation with fell lower debt position and a budget that is balanced for what afghanistan received sandy accounts that is financed with the deficit it is financed by donor grants. And last but not least afghanistan has the internationalisms. Now doublea2 reach her in to achievements made in the afghan economy between 2002 and 2013. First, the afghan authorities which they inherited they introduced a new currency to create the independent central bank and had a minister of finance they established commercial Banking System and benefited from a comprehensive debt restructuring and reduction between 2006 and 2010. At the same time part of these achievements is to maintain macroeconomic stability. As you can see on the righthand side the position is comfortable and secure and a debt is low and inflation is also no. And as a mentioned earlier earlier, when the budget is balanced after taking into account the donor grants received. As in engender earlier gdp has increased by 2. 5 times and this growth gained is due to a generous pahang support made by the afghan authorities as. Now i would like to go to the second part of my a presentation with the Economic Outlook can risks to the economy. First to set the stage of life to recap the daughter commitments made in 2012 to afghanistan. In may 2012 the International Partners provided assurances that estimated that 4 billion per year through the following decade aaron toward that the government is expected to make gradually increasing contributions. July 2012 in tokyo voters will pledge their assistance withq 16 billion through 2015 to sustain a symbol of the full they also adopted the the mutual accountability a framework that is us set of principles to promote effectiveness reform and Good Governance and sustained growth. And as indicated that it depends on afghanistan meeting the commitments made under the framework by Development Partners expected to be held later this year after the new government has been installed. Now turning to the medium term outlook, this would be determined via the success of the Economic Transformation through more salsa save the economy over the transformation in decade in International Finance assistance will continue to be needed and several factors will play a role in that outlook. The drive down of the International Troops has affected growth in those years. And as i mentioned security from afghanistan is it important determinant of gross bledsoe will the maintenance and progressing structure reform to help assure continued support and in particular the governments needs to improve importune me and threw his those that the Business Environment will improve and encourage higher the levels of private sector purchase a patient as well as job creation. Low inflation will need to be maintained this is a condition to have a stable investment environment. Assuming these things take place with macroeconomic policies gdp could triple over the next 20 years. In 2015 through 2020 for in the development of the agricultural and Natural Resource sectors although projected, i apologize. Although gdp growth is projected to slow just over 3 because of the troop try down in there the part of the year it is expected to pick up thereafter as investment rebound and those to show those gaps covered with the Monetary Policy inflation and should remain in Single Digits in longterm the improved Business Environment i expect to facilitate development of Natural Resources in growth could pick celebrate to the end of the decade and then convert jack 4 thereafter. As i mentioned there is a wide range of risks but many are on the downside. It could result in higher confidence and higher Economic Activity. Even have a piece dissident fighters sectors and the return of expatriates. But on the down side is a number of risks ended down in the nearterm with the regional conditions indeed inadequate implementation. Siq over the medium term the Downside Risk is from insufficient progress including those in the accountability framework for government fatigue. In addition end of a weakening of the supervision with delays of developing Natural Resources are Downside Risk. Of large Foreign Exchange reserve position has a buffer in the short term. I said i fled talk more about it it is modest currently but there are a large expenditure needs met only with domestic revenue capacity at present which means that a high dependence on government financing will continue in the near term. Following extensive deputy if 2006 through 2010 afghanistan was alleviated significantly and it amounted and 1. 3 million and most of that was owed to creditors and to the baseline scenario those made in chicago that debt is sustainable however there are some probabilities if growth were to stall for security to deteriorate or a Financial Support was in the grant there would be a need for large fiscal adjustment to make expenditure cuts of course, those would affect security and development. If debtfinanced was to replace low world levels then it would increase rapidly to reach the unsustainable trajectory. So that was the alcan the risk. n finance more of its own operations based on its own activities. Domestic revenue mobilization as well as more expenditure management. Revenue as in used for social safety net our Development Outlays to help increase the capacity of the economy to grow and improve Living Standards. Third, there is a need to promote Financial Sectors stability and development through Banking Sector reform and strengthen supervision, to insure that the Banking Sector does not experienced trouble or crises and also so that it can increase its capacity and ability to provide credit to the economy cannot help the economy grow, particularly to help new Enterprises Start to grow. The fourth element is to improve economic governance. That includes many components. Anti moneylaundering walls. Going ahead and making it easier for businesses to get licenses for investors to invest. All these things are designed so that by reducing corruption you are lining economic incentives with broadbased growth in the economy. I am going to talk a little bit more about each one of these areas starting with Macro Economic policies. Fiscal policy, the policy mix so far has been using fiscal policy to support demand which is been financed by grants and Monetary Policy to focus on managing inflation. This is predicated on donor flows continuing to finance the fiscal and external deficits. And excuse me. So as i have mentioned, revenue mobilization is needed and also to insure that expenditure is managed effectively so that there is proper prioritization both to ensure that enough is bent on our reduction, Development Needs to my Building Infrastructure as well as other at a quick money available to ensure the security is stable and security conditions are such that Economic Activity is unhanded by security and uncertainties. Next a Monetary Policy should continue to focus on maintaining lower inflation and Exchange Rates should be managed reflexively. As i mentioned, the International Reserves to afghanistan does provide a buffer in times of timber volatility while these buffers are billed that mean to be proactive and flexible in the kayseven during pressures the center will need to be managed flexibly and complementary. Let me turn it by may to continue talking about this policy, the point of view of sustainability, afghanistan needs to move toward fiscal stability. You can see in the slide that the red line represents revenue in the blue line represents part of spending. Additional spending, the development spending, and you can see, there is a considerable representative. They need to move ahead to close that gap. As i mentioned this will means it is a step up revenue mobilization effort as well as to improve its miniature five. Service delivery. Domestic revenues have stagnated over the last couple of years. And they will due to the slowdown in the economy, forging efforts and leakages and expected to rise but only slowly while operating expenditure to increase considerably because of security transitions about which i will talk in a minute. To generate the need of the skills base Tax Compliance must be improved decisively. There are too many leakages in the tax system at present. The planned should be introduced soon and new tax Revenue Sources would also be likely needed such as excise taxes. Establishing fiscal mining revenues well under way will need to be finalized to show economic and the large spending is projected to continue. Continued reconstruction and Public Services in order to progress toward Millennium Development roles. Long security and Development Needs are expected to increase significantly. The government plans to hire a large number of teachers and Health Workers to continue expanding infrastructure, and as i mentioned, the security and transition means that donors are currently managing a modern securities managers at present. Transfer responsibilities for expenditures on to the budget which is behind the increase in the blue line between 2012, 2017. Over time those projects will be transferred to the Afghan Government to manage, initially with financing from donors. The key risk to the fiscal outlook is inadequate revenue mobilization. Donor disengagement. Now i would like to talk about monetary policies. I have noted monetary policies to continue to focus on maintaining lower inflation. The normal maker and Exchange Rates should be managed flexibly. The size of a launch a National Position provides a buffer, and this reserve buffer should be maintained given the Downside Risks that the economy faces. Now i would like to talk about reform, structural reform, spending growth will require continued progress on structural reform agenda to foster sector activity. The Extractive Industries and the energy sector. Privatesector growth and employment outside the security and government is also needed and will be supported by restructure reforms. I would like to start by talking about Banking Sector reform and its role in saving investment growth and improving access to finance. Strengthening the Banking Sector is needed because of the legacy of bank crisis and poor governments in the Banking System which credit provision and the affect Public Confidence in banks, the strategy requires developing financial infrastructure, improving banking and anti moneylaundering and terrorism supervision and enforcement as well as developing an interbank market. The minimum Capital Requirements have been increased, but some banks need more capital because of the loan portfolios not performing well. Further, Financial Markets need to start to be developed because they will not only improve the effectiveness of Monetary Policy but they also provide more liquidity management and better liquidity management for the Banking System as a whole. The new banking law will provide a better legal basis for Financial Sector development and improve bank and corporate governance, supervisory oversight, strengthened core and enforcement measures and the bank resolution. Central Bank FinancialDivision Department has adopted a fiveyear strategic plan. The central bank is prepared qualities to enhance the protection of supervisory staff. New laws on making Money Laundering and the counting of financing for terrorism should help in general as well as help afghan banks establish and maintain International Correspondent banking relationships. Some banks have encountered difficulties in this area recently. Passage of new laws, a counterterrorism, in line with recommendations. Help maintain and establish these Correspondent Banking relationships. The combination of these reforms for the Financial Sector will increase Public Confidence in banks and encourage movement into the formal sector of the economy, increased credits to the credit and access to it finance. Now let me turn to reforms for the Business Environment. Improving economic governance is critical for inclusive growth. Strength in this area of strengthening economic governance has been an Important Pillar of engagement. The Business Environment remains challenging despite recent improvements due to deficiencies in economic governance. Afghanistan has improved its world bank during business ranking to 164 of 189 economists from the adjusted rate of one her 70 the previous year, nonetheless it is still pretty low. Transparency International Corruption index ranks afghanistan as 175 out of 177 countries and there are significant challenges in many areas. As noted, improved governance is critical to raising growth and creating jobs. The Business Environment needs to be improved so that there can be more private sector activity which will lead to among other things a more efficient judicial system and steps to counter Economic Crimes and to help new business improved access to finance and bolstered destruction. Over time such an environment will reduce the economist dependence on dollars support and promote regional integration now, let me briefly talk about promoting Inclusive Group before i conclude. Relied so far publicsector spending and dollar inflows to promote growth and development. The strategy is to assist the investing in public goods to the naval economic captivity. Large investments and access to and use of expanded participation in modernize the economy. Several mullen in development goals, others on track for 2015. Along with increased spending on health to raise the ratio of girls to boys will reduce influx in Child Mortality rates, increase immunization against measles and lower the rate of tuberculosis. Legal reforms to remove gender equality is will help ensure more inclusive and gender equal growth. Progress is being made that there are not quantitative indicators. Female Representation Parliament decide, and afghanistan stands at number 40 out of 150 countries. Female enrollment education has improved but still lacks merit in a moment. The ministry of affairs implements promes for female empowerment from employment, and if gender equality. Authorities remain committed to protecting such spending. The new law will further increase proforma spending. These efforts will promote inclusive growth and Employment Generation through the transformation decade and in the long run. To conclude i would like to reiterate key messages that i have. Over the past dozen or so years afghanistan has made enormous progress in Reconstruction Development to improve Living Standards and has laid the foundation for macroeconomics stability in our reduction. Second, assuming smooth political and security transitions, continued economic reform and donor financing the economic finance for afghanistan is positive. There are, of course for risks. Third, continued macroeconomics stability, Structural Reforms, and political and security stability are needed to ensure inclusive grow. Last, i would like to conclude by reiterating the commitment to engage closely on policy, economic policies and helping with building Stronger Economic institutions in afghanistan. That concludes my presentation. Thank you very much. There were a number of documents we published recently about afghanistan. Thank you. [applause] okay. Thank you. Thank you very much for that wide ranging, really a detailed report on the state of the afghan economy. Listening to you took me back to my own days. The mission chief would return and you would get this blow by blow account. I also got the sense that we were talking about some other country to the end when you mentioned the corruption index. And so, my first question to you is selective that challenges. How can afghanistan ride over the big hurdles which are often discussed when looking at the countrys economy immobile of drugs and corruption and how that affects government. Yap. It is a longterm process. I think you put your finger on a very important point in afghanistan. The region in general suffers from we government. A lot of corruption. In afghanistan as faces many challenges. I think that in terms of the economic strategies, not just economic but also political and social aspects, but i think it is about improving the legal infrastructure, the key economic loss. For example, the banking law of the new Tax Administration wants , the laws on anti moneylaundering and countering financial terrorism, they help set the stage in a framework so that people have clear reviews of the rules of the game and what is a lot of what is not allowed and what the penalties are if you try and skirt what is allowed. That obviously means to be complemented by supervisory and regulatory reform. For example, the way the tax and ministration is wrong, the way banking supervision is done, the requirements for disclosure for corporations and companies so that there are measures in no way that reduces go for them to succumb or be a partner in corruption because one has to remember, corruption is a twoway street, a public and private sector. You want to try and reduce the scope of that. For that you need increased transparency. New laws will provide for more disclosure. It will also provide for better supervision by the banking supervisors and more redress if you have parties you feel that they are forced to make payments that are not lawful. There are avenues for them to seek an address. Also requires a lot more improvement in regulations, getting construction permits. This is going on. It is a long road. Some progress has been made. As i mentioned, an awful lot more progress is needed to help the economy lifted up and reach higher income levels. In some ways it is the primary challenge. If government can be improved, of corruption can be reduced that will make it easier to do business and will lift up Economic Activity and will also mean that the profits from activity, be they in the form of wages or corporate profits will flow to the population. It would also reduce corruption and help improve the distribution of the economic benefits and spread them more widely in the economy. Thank you. Lets talk about government, the capacity that has been developed when you look at the indicators, the growth of the economy since 2001 best to, it was in a deep hole. Obviously everything shows an improvement. But is the government capacity reasonably well established for you to be sanguine or even optimistic about the possibility should one of two things happen, should there be a political crisis as a result of the current elections or should there be a deterioration of the security situation following the withdrawal of the United States and its allies . Is afghanistan a to handle these challenges . I think that they have made some progress in terms of handling the government in improving the government. Theyre is a lot more to do. In the country as it faces political and stability or security and stability will have economic problems. You cannot grow and develop an economy when you have security and stability. I would think the economy would suffer in many aspects if there were a pro long or severe political or security and stability. I think that the track record suggests there is potential for further improvement of lot of risks. Who 01 the Extractive Industries a lot of talk about the potential of a afghanistan as resources, of 3 trillion sector that has been bandied about. How realistic is it to see these resources becoming accessible to the Afghan People in the economy and what kind of time friend would you put on their ability to start looking after themselves . The reason i mention this is not too long when this country when to to war there was a very optimistic scenario that said this is not going to cost the american taxpayers anything. We will find this with iraqi oil revenues. Of course, the story turned out to be somewhat different. How do you see this becoming a reality . Well, i think that the number of contracts that have been signed have encountered some delays and started to produce a small amount of oil already. There are two other contracts which are not yet at the point of or purging production. I think that if there is stability and if these projects can become operational by the end of the decade and at that point there would hope with the tax revenue they would add to growth. There is huge potential. The ability to actually realize that potential has a lot to do with afghanistan itself in terms of, you know, the business and investment environment so that investors feel that this will be a place where they can do business and will be able to do so profitably. Also depends on development of ever structure. It is a landlocked country. We need to check it to the seaports. Therefore there will need to be cooperation with neighbors on the transportation. Thank you. I would like to come back to their regional trade aspects of the integration of the region later, but i dont want to of heart the questioning. Such a great audience. I am going to ask people, do they wish to ask a question, please raise your hand and asked a question so that we can get more of them and. Let me go ahead. Please wait for the microphone. Introduce yourself. Then the next question will be on the other side. Thank you. Thank you for your interesting presentation. My question specifically is correlated to grow. You laid out all of the very important conditions for growth to occur. On the institutional side, structural reform, and macro and stability in all the necessary conditions. But i fallout. Today growth has been driven by donor spending in military spending. So what is afghanistans future competitive a vantage . Where is the growth going to come from . Queue laid out all the conditions, would you have not actually told us where this growth will come from, which sector, what afghanistan competitive pantages . Thank you. The ones that seem to have the most potential at the moment is the Natural Resource sector. There is more skilled for Employment Generation. Yielding quite a big growth sector. Those are the two principal sectors i would see. Just one second. I mean, you talked about the reforms in the institutions. That has to do with promoting and private investments. Agriculture does not need those institutions. Well, i talked about the macroeconomics i. Obviously there need to be complementary policy reforms the agricultural sector, there will be a need for more infrastructure developments. And there will also be a need for policy reform, although that is not an area i am specialize in. I must say, your presentation was priest moved, like soap. Although for the time being we appreciate the optimism that you have demonstrated, but as jeff has pointed out, these things that you have mentioned will happen what kind of fierce of things you have in mind after the draw down which most of the International Community is fearful of what that there could be implications and complications. Start falling apart society would be divided. Generally fragmented except the rule. Thank you. Thank you. You know, i think this is an important question. It is hard one for me to answer as an economist because a lot of the factors are not economic. I would have to assume what i said earlier, obviously afghanistan, every country needs political stability and security for its economy to prosper. If security, if politics is unstable, a security is not good and that will affect Economic Development and mean that the outlook that we foresee may not occur. Similarly it may not be driven by afghanistan. Like everyone else, afghanistan is dependent upon its neighbors. Regional conditions will also affect what were seeing in europe. Theyre affecting southern neighbors. The same applies in the region where afghanistan as if one country faces economic problems it cannot spillover into other countries. Thank you. I am used illegals. I was unimpressed by your introduction. I agree. Is he optimistic or is he not optimistic . Because you were optimistic assuming that there would be transitioned and a smooth security, continued reform which means governments, corruption. Also that this could be managed. Then when it came to the Mining Industry you mentioned a tremendous challenge and an infrastructure. And did you give those a little bit more of an impression . Are you optimistic or are you pessimistic when it comes to era the ability of a country that is not doubt for way from the insurgency what is your chiefs. You said it could be possible to start extracting. You need more than the infrastructure. You need a solid Regulatory Framework and rule of law that will enable the government and insured that the gunman has the willingness to insure that these resources become the property of the people and not companies and equally profit hungry afghans. You have made an accusation. Ifs. I think that, you know, to prepare a projection you have to make certain assumptions. I would say that i think that i would characterize the outlook that we have prepared as on that is feasible. It makes assumptions that relatively good things will happen. Not wildly optimistic positive but reno, assuming that certain things that happen and continue. It may be wrong in making those assumptions, the risk of any assumption in make. And youre talking about the mining sector. There are a lot of uncertainties and i totally agree with you, but will actually happen very much depends on what happens with the new government and house security situations involve. I dont know how that will go. I have made certain assumptions. I think is good or bad as anyone elses, but i think youre right that some must depend on what happens in the future. The actual outcomes depend on what happens in terms of the improvements in government for political situation, the determination for reform, the consensus within the country political or social. These are all on certain days that afghanistan faces, like every other country. And fred, there are larger because of the recent history. Fish, i would say the we can have of the years debate on the correct assumptions. Would not expect this to come to the same view. I think he is making the point that your assumptions are off founded and therefore your conclusions based on the assumptions are reasonably well funded. The probability that the trajectory they you define will actually occur a. Have you look at previous performance as an indicator of will we should expect . If that is the case is it going to be a political minefield or a security minefield . Maybe if you could get those in your calculations until as though you are reasonably optimistic or that you dont know. I cannot yet tell because i dont know the outcome of the elections. The international crew. I dont know exactly what policies the new government will pursue. The statements that i have seen obviously are in favor of Economic Growth and development and job creation but are not very specific to it in terms of policies and time once the outcome of elections whether there will be fully excepted are not of our security conditions would go. I am hoping to put a probability uncertain outcomes. There are many uncertainties. Thank you. Go back. David was a finalist this year it would we talked about the transition in afghanistan. Thank you very much. Thank you for putting on this event. Thank you for bringing a different perspective to most events. Most people who have biases make it hard to except. The resistance you are getting from the audience what youre saying is a great evidence of how hard that is to read what youre pointing out, pakistan, for example, argentina which has around 50 percent of its gdp in debt. If were talking about those countries who would be focusing on how impossible it was to overcome. This is all leading in. It is hard to say positive things about afghanistan. As you have heard here, have three questions i would like to ask you. There was a statement made earlier that basically all of the Economic Growth has come from donor spending and the military. As there been any way to disaggregate, you talk about the growth in gdp, much is due to the overspending, improvements in trade with the various factors that lead to that. A second question is in february of 2011. A huge leap influential article. The top levels of the u. S. Government and Treasury Department and has shaped u. S. Perspectives on afghan finance since 2011. Can you comment on the last three years. If you recall the article as the afghan Financial System may any positive steps forward . Are those positive steps sufficient to give you some credence to the idea that the financial progress the use it was necessary could be continued . In the third question you mentioned, the issue of revenue and the issue that revenue has stagnated in slightly declined, you have pointed to leakage. I love these economic terms. Can you define leakage . The imf euphemisms. On Economic Growth i have not seen any breakdown of to what extent the growth has been due to the large amount of spending both from donors and military. Clearly that has been an extremely important factor in the growth of the afghanistan, albeit from a low basis. I think that one should look at not just that fact but the fact that the progress that has been made does provide some scope for ensuring that that growth continues, even if donor support is not as large as it was growth has continued i am turning to the Financial System and progress i think that there has been some progress. Think what has been important is the new banking laws have been prepared. As not gone past parliament. Think that the supervision part of the central bank is been restructured and staffing is been increased. More work is needed, but that should improve the ability of the central bank to monitor and supervise banks and therefore reduce the risk of a crisis. However, despite those improvements the Banking System still remains quite fragile. There are a number of banks that have relatively low ratings. I think further improvement i there are a number of banks that have relatively low ratings, so i think further improvement is needed in the infrastructure in the development of banks to help them improve their financial positions. I mentioned that some banks will need more than the minimum capital required because of special situations they face with their loan portfolios. There will need to be continued efforts to improve the strength of management of banks so they are well run. I think this is the case of a sort of half full glass. Quite a bit has been done but theres lot more that needs to be done in this area. Then the word leakage. I was referring to money thats paid by our taxpayers, but for various reasons doesnt end up in the treasury. And what im talking about here is really an issue that every country faces. Every country has leakages. Perhaps theyre larger in afghanistan than many other countries, but its very important theres better compliance. Nost