Afghan plans to deal with failed bank rejected by IMF

The International Monetary Fund has rejected Afghanistan's plan to deal with a failed bank at the centre of a corruption crisis, a step that has blocked tens of millions of dollars in aid and may put development projects worth billions more at risk.

Three diplomats involved in negotiations between the aid-reliant Afghan government, donor nations and the IMF said Kabul had failed to address the fund's concerns over the scandal-hit Kabulbank by a deadline last Saturday. That meant a scheduled payment of $70 million (43.3m) from the World Bank-administered Afghan Reconstruction Trust Fund (ARTF) was automatically withheld.

"It seems the IMF has rejected the Afghan government's latest proposal to solve the bank crisis," said one of the diplomats, who asked not to be identified.

Corruption, bad loans and mismanagement cost the politically well-connected Kabulbank, Afghanistan's biggest private lender, hundreds of millions of dollars in what Western officials in Afghanistan now openly call a classic Ponzi scheme.

US President Barack Obama voiced concern over the crisis during a video conference with Afghan leader Hamid Karzai last week, directly linking it to negotiations for the long-term relationship between the two countries, the Kabul-based diplomats said.

"There is a bigger political process at stake here. The political pressure here is that we've got to get this solved so we can go ahead with transition," one diplomat said.

The IMF said earlier this week that it was ready to move quickly to disburse loans to Afghanistan once Karzai's government fixed financial and corruption issues that led to the collapse of Kabulbank last year.

Mr Karzai's cabinet met to discuss the Kabulbank crisis last Thursday, and finance minister Omar Zakhilwal then sent a letter to the IMF at the weekend containing compromise proposals, one regarding the future auditing of banks, the diplomats said.

The IMF rejected the finance ministry's proposal as insufficient to guard against future abuses, they added.

Kabulbank, which has close ties to the Afghan leadership and their families, has about $926m (573.3m) in outstanding loans, of which around $579m is considered to be at risk. Afghan officials say about $347m will be recovered, but donors want more aggressive work done on asset recovery.

The bank doled out nearly half a billion dollars in unsecured, undocumented loans to a roster of Kabul's elite, including cabinet ministers and a powerful former warlord, anti-corruption officials have said.

No payments have been made by the ARTF for the past three months, diplomats said, because of the IMF's failure to renew its support programme over the stalemate. An IMF support package is a seal of approval most donors need before pledging aid, including the UK government.

The fund has been reviewing its support for Afghanistan since last September, when news of the Kabulbank scandal broke.

Western officials now fear a "cash crunch" will hit the Afghan government by late summer, risking even further political instability if wages for hundreds of thousands of civil servants funded by the ARTF go unpaid.

Karzai has accused foreign donors of contributing to the corruption scandal, saying they failed to act quickly enough to stem losses at Kabulbank and that they had given bad advice.

The finance ministry has also said the crisis was exacerbated by a flawed audit of the bank done by a Pakistan-based member of accounting firm Price waterhouseCoopers.

The withholding of aid began when the British government refused to pay $138m (85.4m) in promised aid in March.

The ARTF was also expected to funnel about $200m to support the Afghan government's recurrent costs this year. That represents about 25 per cent of Afghanistan's non-security wages bill, most of it in teachers' salaries. In the longer term, development projects worth billions of dollars are now at risk unless the IMF and the Afghan government are able to agree on a plan to liquidate Kabulbank.