IMF rejection of proposals over Kabul Bank crisis, $820m bailout debts and suspension of aid leaves country in deepening crisis

The Afghan government will struggle to pay its bills "within a month" after the International Monetary Fund rejected proposals for resolving the Kabul Bank scandal, western officials have warned.

Although the war-torn country's biggest bank nearly collapsed last September, the government of Hamid Karzai and the international community are still at loggerheads over plans to fund an $820m (£507m) bailout as well as how the disgraced former managers and shareholders who helped themselves to hundreds of millions of dollars should be prosecuted.

As long as the IMF declares the plans to be inadequate, many countries, including Britain, are legally barred from pumping money into a government that is almost completely reliant on foreign cash to pay civil servants' salaries.

It was reported by Reuters that the IMF has now formally rejected the Afghan government's proposals, meaning aid disbursements will remain on hold. The failure to reach a deal by a deadline of last Saturday also meant a $70m payment from the World Bank's Afghan reconstruction trust fund was automatically withheld.

Two senior western officials said the government will face a cash crisis in the coming weeks and could struggle to pay staff bills, although one predicted this would be avoided by cutting other spending priorities.

Last month, Omar Zakhilwal, the country's finance minister, told the Guardian that suspension of aid payments "has already had an effect on us, no doubt about it". He insisted that the Afghan government had done "95% of what was asked of us" by the IMF, including effectively nationalising Kabul Bank, stripping the shareholders of their rights and putting all unrecovered loans into receivership.

But although he claimed the remaining issues "were inconsequential to Kabul Bank" the IMF sees two aspects as vitally important. Firstly, an agreement that Afghan taxes, not foreign aid, will repay the $820m taken out of central bank reserves last year to prop up the bank. Second, they want serious criminal investigations against managers and shareholders, many of whom enjoy high level political support, who illegally borrowed huge sums of interest-free cash from the bank.

Although the finance ministry has drawn up plans to increase its tax-raising efforts in order to pay off the bailout in annual instalments, horrified MPs have already rejected one budget request for $73m and is also likely to reject a supplemental budget due to be presented by Zakhilwal soon.

"The IMF tells me, this is our demand, give me condition by this date the parliament must approve this line in the budget," explained Zakhilwal. "I am a minister, can I chose the parliament timeline? On these issues the international community totally disregards the legal processes of Afghanistan."

Many MPs argue that the money should be found by simply selling off the assets illegally bought by shareholders and managers, including a gas distribution company, an airline and luxury villas in Dubai.

Although a $10m forensic audit by Kroll may help identify many deliberately hidden assets, most western experts doubt more than half of the outstanding $910m will be recovered. So far just $61m has been retrieved.

Zakhilwal also argued that prosecutions could only be handled by the attorney general and warned that the complicated inquiry cannot be rushed.

"The attorney general can arrest people, but after 15 days with not case they have to be acquitted – that would be even more embarrassing for us," Zakhilwal said.

Although the finance minister insisted the attorney general was "absolutely committed" to a thorough investigation, the international community is sceptical, not least after Afghanistan's top law officer threw out a case last year against one of Karzai's key aides who had been wire-tapped soliciting a bribe.

One alternative plan is for a special court of handpicked judges deemed to be reasonably honest and well-versed in finance to hear the case.

Credible prosecutions are vital, not just to appease public anger, but also because many of Kabul Bank's assets are in Dubai. Under United Arab Emirates law it is impossible to seize properties until criminal investigations have begun.

Not only does Afghanistan face a cash crunch, the showdown with the IMF also threatens to derail plans, pushed hard by Hamid Karzai, for a far greater proportion of international aid to be spent through official channels, rather than on projects outside the control of the government.

A key element of the "transition" strategy by which the foreign intervention in Afghanistan will be greatly reduced by the end of 2014, the international community last year agreed that 50% of spending will go through the government by 2012.

But it is now feared that if the Afghan government continues to be considered unworthy of international investment by the IMF the country will have to return to patchwork of bilateral funding agreements.

ISLAMABAD: Afghan President Hamid Karzai called on Pakistan to eradicate militant sanctuaries at “detailed” talks Saturday about a peace process with the Taliban that inaugurated a joint peace commission.





Karzai and Prime Minister Yousuf Raza Gilani led the first meeting of a joint commission for reconciliation and peace, pledging that the body would meet again in October and a sub-committee in 20 days to a month.
In another effort to improve ties, a much delayed transit trade agreement between Afghanistan and Pakistan, which was signed last year, is due to come into effect on Sunday, Islamabad said.
The Taliban-led insurgency in Afghanistan is now into a 10th year with violence at record levels. Pakistan is also fighting a home-grown Taliban insurgency in its northwest and there are near daily militant bomb attacks.
“The facts are so bare and the wound is so clear and hurting that it requires both of us to work diligently and extremely aggressively and effectively to curb terrorism and radicalism in the region,” Karzai said.
Asked about swarms of militants attacking Pakistani troops close to the Afghan border, Karzai said the attacks were “all the more reason for us to work harder to remove radicals from both countries and to remove sanctuaries”.
Gilani insisted that Pakistan wanted a stable, peaceful, prosperous, independent and sovereign Afghanistan, saying that Islamabad was ready to provide “whatever support they want” in the Afghan-led peace process.
“We have discussed in detail the peace process, with all stakeholders and certainly what happened in our capacity is a readiness,” said Gilani.
But when asked if the Haqqanis or Pakistan’s arrest last year of Mullah Abdul Ghani Baradar, said to be the Taliban second-in-command, could be part of the reconciliation process neither leader went into detail.
The Taliban have rejected peace overtures in public, although some experts believe the death of bin Laden, whom Taliban supreme leader Mullah Omar refused to surrender after the September 11, 2001 attacks, could be a spur.
Pakistan was a main ally of the Taliban until it joined the US-led “war on terror” following the attacks on New York and Washington and subsequently started fighting a home-grown Taliban insurgency along the Afghan border.
But its intelligence services are thought to maintain links to Afghan insurgents with strongholds on its territory, namely the Haqqani network, one of the staunchest US enemies in Afghanistan, and Afghan Taliban leaders.
Fighting between the Taliban and US-led Nato troops in Afghanistan has become deadlier each year since the 2001 invasion.
The 130,000 international troops today in the country are due to start limited withdrawals from July with the Afghan police and army scheduled to take control of security gradually before the end of 2014.
In Pakistan, more than 4,400 people have been killed in attacks blamed on Taliban and other extremist networks based in the tribal belt since 2007.

CONGRESSIONAL REPORT Nation-building efforts in peril, investigation finds

The hugely expensive U.S. attempt at nation-building in Afghanistan has had only limited success and may not survive an American withdrawal, according to the findings of a two-year congressional investigation to be released Wednesday.

Small parachutes bearing food supplies for U.S. Marines are dropped from a plane outside Forward Operating Base Edi in southern Afghanistan’s Helmand province.

The report calls on the administration to rethink urgently its assistance programs as President Obama prepares to begin drawing down the number of U.S. troops in Afghanistan this summer.

The report, prepared by the Senate Foreign Relations Committee’s Democratic majority staff, comes as Congress and the American public have grown increasingly restive about the human and economic cost of the decade-long war and reflects growing concerns about Obama’s war strategy even among supporters within his party.

The report describes the use of aid money to stabilize areas the military has cleared of Taliban fighters — a key component of the administration’s counterinsurgency strategy — as a short-term fix that provides politically pleasing results. But it says that the enormous cash flows can overwhelm and distort local culture and economies, and that there is little evidence the positive results are sustainable.

One example cited in the report is the Performance-Based Governors Fund, which is authorized to distribute up to $100,000 a month in U.S. funds to individual provincial leaders for use on local expenses and development projects. In some provinces, it says, “this amount represents a tidal wave of funding” that local officials are incapable of “spending wisely.”

Because oversight is scanty, the report says, the fund encourages corruption. Although the U.S. plan is for the Afghan government to eventually take over this and other programs, it has neither the management capacity nor the funds to do so.

The report also warns that the Afghan economy could slide into a depression with the inevitable decline of the foreign military and development spending that now provides 97 percent of the country’s gross domestic product.

The “single most important step” the Obama administration could take, the report says, is to stop paying Afghans “inflated salaries” — often 10 or more times as much as the going rate — to work for foreign governments and contractors. Such practices, it says, have “drawn otherwise qualified civil servants away from the Afghan government and created a culture of aid dependency.”

Even when U.S. development experts determine that a proposed project “lacks achievable goals and needs to be scaled back,” the U.S. military often takes it over and funds it anyway, the report says.

It also cites excessive use and poor oversight of contractors. Although the report provides some examples of successful projects, it is critical overall of what one senior committee aide called the U.S. focus on a rapid “burn rate” of available funding as a key metric for success. The aide spoke on the condition of anonymity to discuss the report before its release.

Debate has begun within the White House and in Congress over how quickly to begin withdrawing the 100,000 U.S. troops in Afghanistan, with senior Defense Department figures cautioning against a precipitous drawdown this summer. Defense Secretary Robert M. Gates has called for a “modest” decrease that would avoid jeopardizing recent combat gains.

Sen. Carl Levin (D-Mich.), chairman of the Armed Services Committee, told reporters Tuesday that he would like to see a minimum of 15,000 U.S. troops withdrawn by the end of the year. Sen. John McCain (Ariz.), the committee’s ranking Republican, was quoted in the Financial Times as saying that he thought the number should be no more than 3,000.

But an increasing number of lawmakers on both sides have called for a more wholesale reconsideration of Obama’s strategy in Afghanistan, saying that the war’s cost cannot be sustained at a time of domestic economic hardship. They point as well to changing realities on the ground, including signs of growing extremist violence in Pakistan and the killing last month of al-Qaeda leader Osama bin Laden.

“I’m personally for changing the military strategy to some degree,” Sen. John F. Kerry (D-Mass.), chairman of the committee, said in an interview. Because the military and civilian components are tightly intertwined in Afghanistan, Kerry said, both have to be considered at the same time.

“We’ve created a . . . wartime economy” that is a “huge distortion” of Afghanistan’s revenue production, he said. “It’s very dangerous, and we have to get a handle on it rapidly.”

Kerry said that the committee’s report was not “a gotcha” but that it was intended to help the administration “think through and analyze” how to proceed. The report was distributed Tuesday to Democratic committee members and to Sen. Richard G. Lugar (Ind.), the ranking Republican.

The administration has requested $3.2 billion for Afghanistan reconstruction projects in the coming fiscal year. The report argued that the foreign aid program must continue because “the goal should be to reduce some of the political pressure to spend money quickly, especially when the conditions are not right.”

All U.S. development projects in Afghanistan should be reexamined, it adds, to determine whether they are “necessary, achievable, and sustainable.”

The report recommends multi-year congressional funding for the aid program that would plan ahead for the increased civilian responsibilities as the number of troops decreases and calls for “a simple rule: donors should not implement projects if Afghans cannot sustain them.”

Last week, the bipartisan Commission on Wartime Contracting in Iraq and Afghanistan said in a separate report that billions of dollars in U.S.-funded reconstruction projects in both countries could fall into disrepair over the next few years because of inadequate planning to pay for their ongoing operations and maintenance. That report warned that “the United States faces new waves of waste in Iraq and Afghanistan.”

Foreign aid expenditures by the State Department and the U.S. Agency for International Development in Afghanistan, about $320 million a month, pale beside the overall $10 billion monthly price tag for U.S. military operations. But Afghanistan is the biggest recipient of U.S. aid, with nearly $19 billion spent from 2002 to 2010. Much of that money has been expended in the past two years, most of it in war zones in the south and east of the country as part of the counterinsurgency strategy adopted by Obama just months after he took office.

The strategy, devised by Gen. David H. Petraeus, the commander of U.S. and coalition forces in Afghanistan, calls for pouring U.S. development aid into areas that the military has cleared of Taliban fighters to persuade the population to support the Afghan government.

But evidence of successful aid programs based on “counterinsurgency theories” is limited, the Senate committee report says. “Some research suggests the opposite, and development best practices question the efficacy of using aid as a stabilization tool over the long run.”

“The administration is understandably anxious for immediate results to demonstrate to Afghans and Americans alike that we are making progress,” the report says. “However, insecurity, abject poverty, weak indigenous capacity, and widespread corruption create challenges for spending money.”

High turnover among U.S. civilians working in Afghanistan, estimated at 85 percent a year, along with “pressure from the military, imbalances between military and civilian resources, unpredictable funding levels from Congress, and changing political timelines, have further complicated efforts,” it says.

The report is gently but unmistakably critical of the “whole of government” approach implemented by Richard C. Holbrooke, who served as Obama’s special representative for the region until his death in December. Control of all civilian operations on the ground were shifted to the State Department from the USAID, the traditional manager of development assistance.

“This new approach,” the report says, “created new levels of bureaucracy, diminished USAID’s voice at the table, and put decision-making on development issues in the hands of diplomats instead of development experts.”

PESHAWAR, Pakistan — At least 72 people have been killed in two days of intense fighting between Pakistani security forces and hundreds of militants who crossed from Afghanistan into northwest Pakistan, officials said.
Local officials and residents in Upper Dir, a remote valley that borders the Afghan province of Konar, said Pakistani troops regained control of the area after 36 hours of fierce clashes with heavily armed militants who attacked a police checkpoint Wednesday.

At least 27 Pakistanis, including four civilians, were killed in the fighting, as were 45 insurgents, local police officials said. The dead included two women, a child and a prayer leader in the town of Shaltalo.
The insurgent fighters blew up at least two schools and stole weapons from the Pakistani checkpoint, according to local officials in the area, who said the militants were thought to be Afghans and Pakistanis.
Pakistan’s foreign office said late Thursday that it had complained about the attack to Afghanistan and urged “stern action” by the Afghan army and NATO forces against militants and their hideouts in Afghanistan.
Omar Hassan Ahravi, who identified himself as a spokesman for the Pakistani Taliban in the nearby Malakand region, told some local reporters that his organization had carried out the attack “with Afghan friends.”
Ahravi said the militants managed to seize Pakistani antiaircraft weapons.
The mountainous border between Pakistan and Afghanistan is famously porous, making it easy for Afghan fighters based in Pakistan to cross over for attacks on coalition forces. But fighters based in Afghanistan rarely stage missions on the Pakistan side of the border. Pakistani security officials said Thursday that they thought the Upper Dir attack might have been carried out by Pakistani militants who previously fled across the frontier during military offensives.
Police in Upper Dir, which lies outside Pakistan’s tribal areas in Khyber Pakhtunkhwa province, said the majority of about 300 fighters had retreated back into Afghanistan by Wednesday afternoon.
The confrontation demonstrated the continued strength of Islamist militants along the Afghanistan-Pakistan frontier, in spite of several recent Pakistani military offensives on Pakistani soil and the presence of NATO troops across the border.
On Wednesday, the Pakistani general who commands troops in the restive northwest announced plans for a new offensive in Kurram, a tribal area farther south along the border. Kurram borders North Waziristan, a militant hub that the United States wants Pakistan to attack. But the general and other Pakistani officials said Wednesday that they have no imminent plans to do so.
“There is no change in North Waziristan in past months and weeks,” Lt. Gen. Asif Yasin Malik said. “We will undertake an operation when we want to, when it’s in the national interest.”
Witnesses said the fighters involved in the clashes were wearing fatigues. Some said the uniforms resembled those worn by Pakistani soldiers, and others said they looked like the uniforms of NATO troops.