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Cablegate: Current Status and Next Steps On Agriculture Credit

VZCZCXRO3617
PP RUEHDBU RUEHPW RUEHSL
DE RUEHBUL #0490/01 0400822
ZNR UUUUU ZZH
P 090822Z FEB 10 ZDK
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC PRIORITY 5479
INFO RUCNAFG/AFGHANISTAN COLLECTIVE
RUEHRC/USDA FAS WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC 0974

UNCLAS SECTION 01 OF 02 KABUL 000490

SENSITIVE
SIPDIS

DEPT FOR AID/ASIA SCAA DRAY
TREASURY FOR MNUGENT, JCASAL, AKIFAYAT
USDA FOR FAS BREWER

E.O. 12958: N/A
TAGS: EAID EAGR ECON SNAR PGOV PINS AF
SUBJECT: CURRENT STATUS AND NEXT STEPS ON AGRICULTURE CREDIT

KABUL 00000490 001.2 OF 002


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SUMMARY
-------

1. (SBU) Members of the Embassy Interagency Agriculture Team met
with the Ministry of Agriculture, Irrigation, and Livestock (MAIL)
on February 3 to discuss the current status and next steps on
addressing the agriculture credit constraints facing the small
commercial farmer. MAIL reiterated its commitment to agriculture
credit and requested Embassy assistance to address the complex legal
and policy issues involved with setting up a specialized national
agriculture credit system. MAIL reviewed the report and
recommendations prepared by consultants, Drs. John Mellor and
Muhammad Usman, and requested additional support to provide legal
and banking experts to assist the Afghan Government (GIRoA),
including the Ministry of Finance (MOF) and the Central Bank (Da
Afghanistan Bank-DAB), in developing a detailed roadmap that clearly
outlines the legal and policy issues that GIRoA must address and by
what date, in order to have a sustainable agriculture credit
institution up and running at a time to be determined by GIRoA. In
response to MAIL's request, Embassy interagency Agriculture Team,
Treasury and State/Econ will provide banking and legal experts to
assist MAIL, MOF and DAB develop the roadmap. Additionally, Embassy
is modifying existing programs to address the credit needs of the
small commercial farmer while the new specialized agriculture credit
institution is being established. END SUMMARY.

----------------------------------
MAIL FEEDBACK ON CONSULTANT REPORT
----------------------------------

2. (SBU) Senior MAIL representative, stressing that she was
speaking on behalf of Agriculture Minister Rahimi, fully agreed with
the concept of a specialized agriculture credit institution, but
raised several concerns.

--timeline: MAIL considers the timeline set forth in the AID-funded
consultant report unrealistic, given the legal and policy
complexities involved. (NOTE: During his January visit to
Afghanistan, Agriculture Secretary Tom Vilsack, while agreeing for
the need to develop a specialized national agriculture credit
institution, shared similar concerns with MAIL regarding the
timeline and suggested instead that a "model" institution be
established in one location first before proceeding to develop
branches nationwide.)

--senior staff: MAIL representative stated that Minister Rahimi is
"adamant" that previous employees of the defunct Agriculture
Development Bank of Afghanistan (ADBA) not be hired in senior
positions within the new institution. "No donor would buy into the
consultants' recommended plan 'as is'", they stated.

--budget/personnel: MAIL also expressed concern that the budget
estimate was too low and that position descriptions of key employees
lacked essential qualification criteria of the new institution.

--other options: MAIL also asked for further analysis of the
various institutional options available for GIRoA to consider,
rather than different options to implement one single type of
institution.

--"lessons learned:" Stressing that MAIL supports the idea of a
specialized national agriculture credit institution, they asked
"what went wrong with the previous specialized agriculture credit
institution-the defunct ADBA?" What lessons can be learned from that
experience to ensure it does not happen again?

--Analysis: Lastly, MAIL saw insufficient verification to support
some of the analyses provided. Embassy Agriculture Team members
responded that the credit demand analysis, requested by MAIL, should
be complete by the end of April.

-------
ROADMAP
-------

3. (SBU) MAIL requested Embassy support to provide a detailed
roadmap or action plan that lists the specific legal and policy
actions GIRoA (w/USG or other donor support) needs to undertake to
set up a specialized agriculture credit institution. These include:
1) the steps GIRoA must take to approve the new institution; 2)
structure and governance of the institution; 3) disposal of the
assets of the defunct ADBA; 4) a review of the previous ADBA charter
(from 1956) and by-laws to determine if they are appropriate for a
new institution; 5) whether the new institution could operate as a
"bank" without DAB issuance of a license to be a deposit-taking

KABUL 00000490 002.2 OF 002


institution; and 6) whether the creation of such an institution
impacts any loan conditionality from the International Monetary Fund
(IMF), World Bank, or Asian Development Bank (ADB). (Note: In a
February 4 meeting in Washington with USAID and Treasury, IMF
economists urged caution about such a specialized agriculture credit
institution, as described in the consultant report. Specifically,
the IMF prefers a more "systemic" approach to address credit needs
in Afghanistan. In their view, a specialized agriculture credit
institution (and as described in the consultant report), is
susceptible to high loan and institutional failure rates, widespread
corruption, cronyism, inevitable state influence and creation of
contingent liabilities for their governments. These types of legal
and policy concerns and a roadmap with a detailed timeline need to
be addressed. The current timeline, as provided in the consultant
report, does not provide the level of detail requested by the
Minister in his out-brief with the USAID consultants on January 20.


------------------------
IMMEDIATE USG ASSISTANCE
------------------------

4. (SBU) USAID has engaged a senior banking specialist to respond
to MAIL's questions. Specialist will arrive in Kabul o/a February 8
for a two-week period. In coordination with the Embassy Agriculture
Team, Treasury and other Embassy officers, he will assist GIRoA
(MAIL, MOF, DAB) develop a detailed roadmap/action plan. Additional
banking and legal specialists are also available to provide
short-term assistance on an as-needed basis to be determined by
GIRoA. Lastly, USAID has hired a long-term agriculture credit
specialist, who will serve a full one-year tour in Kabul and will
arrive to post o/a March 1.

5. (SBU) While our Mission staff address MAIL concerns and set up
the specialized agricultural credit institution, in collaboration
with its implementing partners we have devised a holistic plan to
address the credit needs of the small commercial farmer in the
near-term. This plan includes increasing lending through existing
credit unions, providing specialized voucher packages to small
commercial farmers, and providing lines of credit to Afghan-led farm
stores and agriculture depots that will then provide supplier credit
directly to small commercial farmers. Additionally, a new USG
program will start in spring 2010 that, inter alia, will provide
incentives to existing commercial banks to increase their lending to
the agriculture sector. Minister Rahimi, during the January 20
out-brief of the consultant report, agreed with this approach to
complement efforts to establish the new agriculture credit
institution. MAIL reiterated its support for this approach in the
February 3 meeting.

----------
NEXT STEPS
----------

6. (SBU) In response to the issues MAIL raised regarding the
consultant report and its request for additional assistance, we have
agreed to provide the legal and banking experts to develop an
actionable roadmap for GIRoA and USG to move forward. The roadmap
will include a detailed timeline of actions to set up a specialized
agriculture credit institution by a date to be determined by GIRoA.
As part of this process, these experts will assist GIRoA in
developing its own internal consensus on the path forward, which is
not yet present. Once consensus is reached within GIRoA, we can
assist in gaining buy-in from IMF, World Bank, ADB and bilateral
donors. Upon completion and review of the senior banking
specialist's roadmap, MAIL will determine what further assistance it
will seek from the USG to develop the specialized national
agriculture credit institution that MAIL and the USG agree is
urgently necessary.

EIKENBERRY

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