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Cablegate: Treasury Deputy Secretary Wolin Emphasizes Importance Of

VZCZCXRO1769
PP RUEHDBU RUEHPW RUEHSL
DE RUEHBUL #0684/01 0551020
ZNR UUUUU ZZH
P 241020Z FEB 10
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC PRIORITY 5848
INFO RUCNAFG/AFGHANISTAN COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC 0988

UNCLAS SECTION 01 OF 03 KABUL 000684

DEPT FOR SRAP, SCA/FO, SCA/RA, AND SCA/A
TREASURY FOR NWOLIN, DCOHEN, LMCDONALD, MNUGENT, JCASAL, AKIFAYAT

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EFIN EAID ECON PGOV KCRP AF

SUBJECT: TREASURY DEPUTY SECRETARY WOLIN EMPHASIZES IMPORTANCE OF
SOUND PUBLIC FINANCIAL MANAGEMENT AND GOVERNANCE

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SUMMARY
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1. (SBU) During a February 10-11 visit to Kabul, Treasury Deputy
Secretary Wolin promoted sound public financial management and
governance in meetings with senior Afghan officials, including
Central Bank Governor Fitrat and Finance Minister Zakhilwal and in a
speech at the American University of Afghanistan. The Deputy
Secretary pressed for strong anti-money laundering/ combating
terrorist finance efforts in meetings with the Central Bank's
financial intelligence unit FinTRACA, urged more attention to
sub-national governance with Minister of Rural Rehabilitation and
Development Mansoori, and discussed anti-corruption with Ashraf
Ghani, whom President Karzai has asked to play a lead role in
developing a coherent national strategy in this area. The Deputy
Secretary also launched the recently-formed Financial Services
Advisory Group at a dinner hosted by the Ambassador. End Summary.

--------------------------------------------
CENTRAL BANK STRENGTHENS BANKING SUPERVISION
--------------------------------------------

2. (SBU) In a February 10 meeting with Central Bank Governor Fitrat,
Treasury Deputy Secretary Wolin discussed banking supervision,
combating illicit finance, increasing access to finance, monetary
policy, and joint efforts to grow the Afghan economy. Wolin
emphasized the importance of robust banking supervision and
effective anti-money laundering and combating the financing of
terrorism (AML/CFT) measures. Governor Fitrat responded that the
Banking Supervision Department was relatively new (established in
2003, with USG support) and that it had been strengthened in recent
years, with additional staff for on-site supervision (from the
banking supervision office, financial intelligence unit, and risk
management office) and that off-site supervision was based on
monthly data collected from all banks operating in Afghanistan. The
Central Bank conducts full scope bank examinations every six months,
resulting in two full cycles per year, Fitrat stated.

3. (SBU) Governor Fitrat asserted that various banks have taken
steps to lift their CAMEL ratings and address Central Bank concerns
over poor asset quality. (Note: "CAMEL ratings" measure a bank's
capital, assets, management, earnings, and liquidity. End Note)
The Central Bank had forced several banks to "make their loans
current" i.e., not delinquent for more than 30 days. Fitrat claimed
that the non-performing loan rate was 0.74, although some financial
sector observers dispute how the Central Bank calculates this
figure. He also said the Central Bank now requires external audits
of all banks by one of the big four international auditors (KMPG,
PwC, Deloitte, Ernst & Young) and obliges banks to make audited
financial reports public. Fitrat also observed that access to
credit is improving and that Afghanistan's international ranking in
the World Bank's Access to Finance 2009 report had risen from 180 to
127.

4. (SBU) When Deputy Secretary Wolin pressed for the need to combat
illicit finance more diligently, Fitrat described improvements
within FinTRACA, the Central Bank's financial intelligence unit.
According to Fitrat, the Central Bank has licensed more than five
hundred foreign exchange dealers and 416 money service providers,
mainly hawalas, throughout the country. Hawala licensing is lagging
in the South and Southeast due to security concerns, he added, but
vowed to continue efforts to address these deficiencies.

--------------------
SAUDI RIYAL MOVEMENT
--------------------

5. (SBU) Fitrat highlighted the Central Bank's efforts to track the
large movement of Saudi Riyals in Afghanistan, which he believes
originate in Pakistan, and to establish whether this flow is related
to terrorist financing. (Note: the Treasury Attach Office brought
this issue to the Governor's attention in January and has
followed-up several times. End Note) Fitrat stressed that he
needed more clarity on this issue, which would require cooperation
from other Afghan ministries working on borders and customs issues
(particularly Interior and Finance).

----------------------------------
CEILING ON CURRENCY IN CIRCULATION
----------------------------------

6. (SBU) Governor Fitrat asked for Treasury support in raising
Afghanistan's currency-in-circulation ceiling (CiC) under the IMF
program - the Poverty Reduction and Growth Facility (PRGF), which is
scheduled to expire in June. The PRGF originally established a

KABUL 00000684 002 OF 003


ceiling of 16% year-on-year growth for currency-in-circulation,
later raised to 22%. Fitrat argued that this rate was too low given
real growth of 15% this Afghan calendar year and the deflationary
pressures facing the country. The low ceiling for CiC growth has
resulted in an appreciation of the Afghani, which undermines the
competitiveness of Afghan exports and contributes in part to the 40%
fall in exports in the last year. Fitrat said that the currency
appreciation represents significant losses on the Central Bank's
balance sheets (as its holdings of foreign exchange are now worth
less relative the stronger Afghani), and that the Central Bank is
losing close to $1 million/day from this. The IMF ceiling target is
undermining Afghanistan's economic growth, Fitrat said, and asked
Deputy Secretary Wolin to take up this issue with IMF headquarters
in Washington. (Note: On February 16, the IMF Resident
Representative told Treasury Attache that Afghan core inflation is
still high, which necessitates IMF enforcement of the 22% CiC
ceiling. The Treasury Attach Office asked the IMF Resident
Representative to engage the Central Bank as soon as possible on
this issue. End Note)

----------------------------------
SUPPORT FOR DEPOSIT INSURANCE FUND
----------------------------------

7. (SBU) Governor Fitrat raised the issue of creating a deposit
insurance fund, noting that depositors have been seeking some form
of guarantee. Observing that the Central Bank had $21 million of
the target $30 million deposit insurance fund on hand (with $10
million contributions from DAB and MOF respectively and $1 million
from the banks), Fitrat requested donor support for the $9 million
shortfall. Deputy Secretary Wolin pointed out that deposit
insurance schemes in the United States are entirely funded by
private banks and do not come from public funds. Fitrat agreed that
banks should eventually bear the full cost of deposit insurance and
committed to withdrawing public funds over time, but argued that the
infusion of public funds is necessary to start up the program and
build confidence in the banking system.

-----------------------------------------
STRENGTHENING PUBLIC FINANCIAL MANAGEMENT
-----------------------------------------

8. (SBU) Deputy Secretary Wolin also delivered a speech at the
American University of Afghanistan to more than 100 students on the
importance of strengthening public financial management systems to
reduce opportunities for corruption and increase Afghan government
capacity to manage development funds. The American University of
Afghanistan is Afghanistan's only private, not-for-profit
institution of higher education and serves as the training ground
for many of the country's future leaders.

9. (SBU) Noting that the Treasury Department plans to send more
advisors to strengthen Afghanistan's public financial management
system, Deputy Secretary Wolin also described how advisors have
already assisted Afghanistan to restructure its debt, streamline its
budget process, improve its payment system for government employees,
and stand up a debt management unit at the Ministry of Finance. He
argued that stronger public financial management systems would help
address corruption and ensure resources reach their intended
beneficiary.

--------------------------------------------- --
LAUNCH OF THE FINANCIAL SERVICES ADVISORY GROUP
--------------------------------------------- --

10. (SBU) Deputy Secretary Wolin emphasized the importance of a
transparent and credible financial sector to the future of
Afghanistan during a dinner hosted by Ambassador Eikenberry that
helped formally launch the Financial Services Advisory Group (FSAG).
The FSAG -- which includes U.S., UK, EU, World Bank, and IMF
participation, along with representatives from the Afghan financial
sector and government -- will meet regularly to identify emerging
issues, hear from industry leaders, and develop strategies to
strengthen the formal financial sector.

--------------------------------------------- ----------
BOOSTING REVENUE COLLECTION, IMPROVING BUDGET EXECUTION,
AND ADDRESSING CORRUPTION
--------------------------------------------- ----------

11. (SBU) In a February 11 meeting, Deputy Secretary Wolin discussed
with Finance Minister Zakhilwal the importance of creating more
transparent and accountable revenue and customs collection
procedures, the "clustering concept" designed to better organize key
ministries under proven reform leaders, increasing budget execution
rates and effectiveness, and the need for more robust public

KABUL 00000684 003 OF 003


financial auditing of expenditures. Zakhilwal noted that the
Ministry of Finance had studied how to improve budget execution and
was targeting the seven line ministries that execute 70% of the
budget for technical support. He identified a "lack of capacity" as
the greatest obstacle to higher budget execution numbers. Zakhilwal
also expressed appreciation for Treasury's technical support in the
areas of budget and debt management, and welcomed the addition of
additional advisors in the area of internal audit.

12. (SBU) Minister Zakhilwal claimed that anti-corruption efforts
have improved revenue collection, which according to internal
estimates, will surpass Afs 65 billion this year and represent a
significant increase year-over-year. (Note: The IMF target this
year is Afs 54 billion. End Note) Wolin pressed the minister to
replace ineffective management at state-owned Pashtany Bank,
prompting Zakhilwal to respond that he would be "surprised" if new
leadership were not in place in two weeks and cited the need to
ensure that a "good CEO" replaces the current one.

13. (SBU) (Note: On February 13, Deputy Minister of Finance for
Customs and Revenue Gul Sabit told Treasury Attache that he had been
confirmed by the shareholders of Pashtany Bank (which is essentially
the Ministry of Finance) as the new CEO, pending confirmation by the
Central Bank. This is a significant breakthrough and a direct
consequence of Deputy Secretary Wolin's one-on-one conversation with
Finance Minister Zakhilwal. The Central Bank later confirmed Sabit
and he took over as CEO on February 19. End Note)

-------------------------------------
STRENGTHENING SUB-NATIONAL GOVERNANCE
-------------------------------------

14. (SBU) At another meeting with Finance Minister Zakhilwal and
Rural Rehabilitation and Development Minister Jarullah Mansoori,
U.S. participants noted that strengthening sub-national governance
requires greater efforts to facilitate the flow of information from
the provinces to the center, while at the same time building greater
budgeting capacity at the point of execution to manage resources
flowing down. To this end, Zakhilwal noted efforts by the Finance
Ministry to strengthen their internal Treasury Department and to
bring all mustofiat (Ministry of Finance regional office) heads
together for more frequent meetings.

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COMMENT
-------

15. (SBU) Deputy Secretary Wolin's trip highlighted the critical
need for Afghanistan to improve dramatically key areas of public
financial management as part of its efforts to ensure long-term
success. Achieving our strategic objectives in Afghanistan relies,
in large part, on the ability of the government to collect an
increasing percentage of its annual expenditures through revenues
from customs, minerals, and non-tax fees, etc., to budget
effectively, and to deliver services on time and in alignment with
need. We must remain committed to strengthening the Central Bank
and promoting a robust and transparent financial sector. We will
follow-up on the Deputy Secretary's meetings and aggressively push
forward these themes.

RICCIARDONE

CLEARANCE PAGE

Drafted by: RSJones, Treasury (x. 8369)


Cleared by:

MBoyse, CDDEA ___ok________ Date:2/23/10
NMFite, ECON ok Date: 2/22/10
KMeyer, DEA ok Date: 2/21/10

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