Cablegate: Finance Minister Declares New Beginning for Credible And

VZCZCXRO2581
PP RUEHDBU RUEHPW RUEHSL
DE RUEHBUL #3724/01 3231218
ZNR UUUUU ZZH
P 191218Z NOV 09
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC PRIORITY 3308
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY 0941
INFO RUCNAFG/AFGHANISTAN COLLECTIVE

UNCLAS SECTION 01 OF 02 KABUL 003724

SENSITIVE
SIPDIS

DEPT FOR S/SRAP AND SCA/A
TREASURY FOR MKAPLAN, AWELLER, JCASAL

E.O. 12958: N/A
TAGS: EFIN EAID PGOV PREL AF
SUBJECT: FINANCE MINISTER DECLARES NEW BEGINNING FOR CREDIBLE AND
TRANSPARENT MINISTRY OF FINANCE

REF: A) Kabul 3701
B) Kabul 3714
C) Kabul 2812

1. (SBU) Summary: On November 14, Finance Minister Zakhilwal told
U.S. Treasury Deputy Assistant Secretary for Technical Assistance
Policy Larry McDonald and Ambassador Wayne that the U.S. Treasury's
technical assistance support had helped strengthen his Ministry's
credibility and transparency. Minister Zakhilwal said corruption is
a serious challenge within MoF but reiterated his determination to
eradicate it. He also stressed his hope to focus on several top
reforms in the year ahead that will improve service delivery to the
population. Zakhilwal asked that more resources be channeled
through Afghanistan's core budget since public financial management
systems are now sound enough to handle larger inflows. Minister
Zakhilwal credited U.S. support as being crucial to GIRoA's
negotiations with the IMF and in the HIPC debt relief process. End
summary.

SEEKING DEMAND-LED GROWTH IN TECHNICAL ASSISTANCE

2. (SBU) Visiting DAS McDonald confirmed Treasury's ongoing
commitment to Afghanistan and asked the Minister about additional
needs for technical assistance. The Minister requested assistance
to strengthen the audit functions in the Ministry of Finance's (MoF)
Budget and Treasury departments and provincial Ministry offices
(Mustofiats). Minister Zakhilwal stated that Treasury support has
been critical to modernizing the budget process in his Ministry.
Moving forward, he would like to see the budget become more
innovative and include incentives. Internal audit capacity needs to
be significantly strengthened before the MoF can take full advantage
of the recent reinstatement of Article 61, a World Bank Afghanistan
Reconstruction Trust Fund (ARTF) benchmark which enables MoF to
audit other GIRoA agencies. Minister Zakhilwal also wants to
implement a new tax collection system within the Provincial
Mustofiats whereby revenues are remitted to the Revenue Department
instead of to the Administration Department, both under the Ministry
of Finance. He emphasized that growth in technical assistance
should be demand-driven and organic.

NEW REFORM AGENDA TO COMBAT CORRUPTION

3. (SBU) Minister Zakhilwal stated that Afghanistan is on a path
toward a "new beginning," emphasizing the need to improve the donor
community's trust in GIRoA. Once the new Cabinet is established, he
will begin work on a reform package that will be driven by the GIRoA
and supported by the U.S.

4. (SBU) In response to Ambassador Wayne's question on the reform
agenda, Minister Zakhilwal said he will propose a plan at the next
Joint Coordination Management Board (JCMB) meeting to use funds from
the Civilian Technical Assistance Plan (CTAP) (ref: Frej/Z cable) to
carry out targeted reforms at the top 5-6 ministries responsible for
80-90% of GIRoA's economic development initiatives. He said reforms
will focus on up to ten areas selected by the potential to increase
service delivery, reduce corruption, and increase government
revenue.

5. (SBU) Minister Zakhilwal emphasized the importance of building
capacity in tax collection and non-tax revenue. Non-customs revenue
from the provinces remains very low. While improving tax collection
capacity is more difficult than increasing customs capacity, it will
provide a more sustainable source of revenue over the long term.
The Minister will also enforce stronger collection efforts on such
high money flow areas as wedding halls, rents in expensive
neighborhoods in Kabul, and large international companies.

6. (SBU) Minister Zakhilwal highlighted the recent anti-corruption
success of firing customs officials at the Kabul Airport. These
high-ranking airport administrators are currently on administrative
leave and likely to be replaced. Minister Zakhilwal said that he
monitored the case himself after receiving two tips (one from the
U.S. Embassy), and he estimated that $30-50 million dollars may have
been diverted from government coffers by the alleged offenders.

7. (SBU) Note: This law enforcement action was handled by Minister
Zakhilwal's personal bodyguards, who had no formal authority to make
arrests. This raises a red flag that Afghan officials may be prone
to using extra-legal methods to combat corruption. Such methods can
produce quick results but ones that may not stand up in a court of
law. Zakhilwal told Ambassador Wayne that he had called Interior
Minister Atmar to get a proper investigation under way. End note.

LIMITING TAX EXEMPTIONS ON FOREIGN FIRMS

8. (SBU) Minister Zakhilwal stated that large international
contractors hired by U.S. and other foreign assistance agencies have

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sought unwarranted and excessive tax exemptions that protect their
profits from sales to non-assistance-related activities. He
believes that his Revenue and Customs Departments have granted
50-60% more tax exemption than is appropriate. Moving forward, he
stated that MoF needs to know specific details of each foreign
assistance contract to ensure international firms are not exploiting
their tax-exempt status.

9. (SBU) Note: The U.S. mission has noticed an uptick in putative
MoF enforcement measures against contractors, many of which violate
the terms of bilateral agreements between the USG and Afghanistan.
We are able to resolve most issues at the working level, but it is
clear the MoF sees contractors, who are fully tax-exempt under the
Status of Forces Agreement and other bilateral agreements, as
potential sources of revenue and will continue to explore the limits
of the broad existing agreements. (Note: In a conference in Kuwait
last year, the military committed to a principle of sharing
contracts and contract values with Afghan Ministry of Finance, to
ensure that local firms winning business opportunities would pay
appropriate taxes). End note.

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