IMF approves new credit program for Afghanistan

Kabul: Afghanistan got a new line of credit on Tuesday from the International Monetary Fund, which said the struggling government had taken steps to address governance and accountability issues that surfaced during the Kabul Bank crisis.

The IMF said it had approved a three-year $133.6 million loan for Afghanistan, which had been without IMF backing for more than a year.

The decision reassures international donors - some of whom had withheld aid while waiting for the IMF to give Afghanistan a new stamp of approval after the bank scandal. It comes just weeks before an international conference on Afghanistan scheduled for Dec. 5 in Bonn, Germany.

The IMF suspended its credit program for the country because of mismanagement at Kabul Bank - the country's largest private financial institution - which made more than $800 million in fraudulent and questionable loans.

Kabul Bank became a symbol of the country's deep-rooted corruption.

The bank operated like a "Ponzi scheme" that resulted in "fraud of an unprecedented scale" for an impoverished country like Afghanistan, Axel Schimmelpfennig, the IMF's country director, told reporters in a conference call from the fund's headquarters in Washington.

The case has been closely followed by Afghans and international donors because it is a test of government officials' pledge to root out patronage and graft and to show accountability to world financial institutions such as the IMF.

"It is important that the authorities accelerate measures to enhance governance, including strengthening the banking law and financial sector supervision as well as the framework for anti-money laundering and combating the financing of terrorism," said Nemat Shafik, deputy managing director and acting chairwoman of the IMF.

She also urged Afghan authorities to be more ambitious about increasing domestic revenues, especially since international aid is expected to decline over the coming years, and to continue their work to introduce a value-added tax in 2014.

Schimmelpfennig said that while there was still work to be done, the IMF approved the new loan because Afghan authorities had made strides in reforming banking oversight, getting millions of dollars in Kabul bank loans on restructured repayment schedules and working to increase revenue for the government, which runs largely on international aid.

He also noted that Afghan lawmakers agreed last month to reimburse Afghanistan's central bank up to $825 million it cost to bail out the Kabul Bank - a sum that could decrease depending on how much loan money is recovered.

That recapitalization partly satisfied IMF conditions to extend new credit to Afghanistan, but the IMF also asked the Afghan government to strengthen oversight and regulation of the banking sector and work to improve revenue collection. The Afghan government has vowed to prosecute anyone accused of criminal activity related to the bank.

Criminal investigations against the bank's top two executives, several bank officials and others are under way. The two bank executives are Sherkhan Farnood, the former chairman of Kabul Bank and a world-class poker player, and Khalilullah Ferozi, the former chief executive officer. They were held in detention for a few months, but recently were given freedom for part of each day to work with officials to recover the lost money.

Farnood and Ferozi each had owned 28 percent of the bank's shares. President Hamid Karzai's brother, Mahmood Karzai, was the bank's third largest shareholder with 7 percent. Haseen Fahim, a brother of one of the nation's two vice presidents, also owned shares of Kabul Bank. Afghan officials have said that Mahmood Karzai and Fahim had repaid most of what they borrowed from the bank.

The Kabul Bank has been split into a "good bank" - now being run by the Afghan Finance Ministry - and a "bad bank," which is saddled with hundreds of millions of dollars in bad loans. Schimmelpfennig said the Afghan government hopes to put the "good bank" up for sale in the middle of next year.

In October, the Afghan Finance Ministry said that of the more than $800 million in fraudulent loans issued by Kabul Bank, more than $70 million has been recovered; $350 million in loans have been restructured for repayment; and $110 million in assets associated with the loans have been seized and transferred to the government. Some of the questionable loans were used to buy luxurious mansions in Dubai and invest in risky prestige projects like the airline and shopping malls in Kabul.

A forensic audit of Kabul Bank began last summer.

"Right now, the authorities think that the assets that they are trying to recover are to the tune of $935 million," Schimmelpfennig said.

Audits are being conducted on other Afghan banks as well.

Earlier this year, concerns were raised about the condition of Azizi Bank.

Fraidoon Mohtasheme, the bank's senior customer relations manager, told The Associated Press in an interview in July that accusations of liquidity problems were "baseless" and "politically motivated." He said the bank, which employs 2,500 people, had solid liquidity and was not involved in investments outside Afghanistan.

A review of the bank's books revealed that the institution had a few large exposures from individual borrowers and business sectors, Schimmelpfennig said.

The bank has agreed to increase its capital by $10 million this year and $10 million next year to put it in a stronger position.

In Washington, State Department spokesman Mark Toner backedthe IMF decision. "There's more work that needs to be done to reform and modernize Afghanistan's banking and financial system," he said. "But we are encouraged by the Afghan government's actions over the past year to deal with the Kabul bank crisis, as well as to respond to the International Monetary Fund's recommendations."