Britain delays Afghan aid over lack of IMF deal

KABUL Wed Mar 9, 2011 7:57pm GMT

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KABUL (Reuters) - Britain said on Wednesday it would delay payment of 85 million pounds ($137.6 million) in aid to Afghanistan this year, a warning shot to the government in Kabul over its handling of a banking scandal.

The British Department For International Development (DFID) said the payment was being delayed because of the continued absence of an International Monetary Fund (IMF) support programme. IMF support is a crucial element for most of Afghanistan's donors who pour in billions of aid.

An IMF assessment team last month delivered a grim assessment to diplomats of the Afghan government's handling of the corruption scandal at Kabulbank, Afghanistan's biggest private lender, which has put at risk hundreds of millions of dollars through fraud, mismanagement and bad loans.

The Afghan government's inability to come up with a serious solution to the Kabulbank crisis so far could see the IMF withdraw its support for aid-reliant Afghanistan, which would automatically trigger an aid review among major donors.

The IMF has been reviewing its support for Afghanistan since last September, when the crisis at the politically well-connected bank emerged, and its executive board is examining a report by the assessment team which spent 11 days in Kabul last month.

In a statement given to Reuters late on Wednesday, DFID said it was delaying payment to the Afghanistan Reconstruction Trust Fund (ARTF), the main vehicle for donor funding, this financial year because of the continued lack of an IMF support programme.

It urged the Afghan government and the IMF to "agree a way forward as soon as possible."

The ARTF is administered by the World Bank and has farmed out more than $4 billion (2 billion pounds) in aid since 2002, according to its website (www.worldbank.org.af).

In many cases and to varying degrees, aid from donor countries and agencies is mandated on IMF support. Donors contribute about 70 percent of the Afghan state operating budget, itself dwarfed by billions more in direct aid.

CORRUPTION

The British government has delayed the payment of 85 million pounds for the current financial year, which ends on March 31, its total commitment to the ARTF for the period.

The timing of its financial year makes Britain the first of Afghanistan's major donors to have to address the lack of a renewed IMF support programme in Afghanistan.

"We plan for the delayed payments from this financial year to be carried over to fund the ARTF in the coming financial year," the statement said.

Even though the payment will likely be rolled over, the delay will come as a significant warning to the government of Afghan President Hamid Karzai, which has long been plagued by allegations of endemic corruption.

"An IMF programme is used by donors as an indicator of sound economic and financial management, and ensures that sufficient steps are taken to safeguard public funds, including aid," the DFID statement said.

Other British aid programmes would continue, it said.

The Kabulbank scandal, which has put at least $579 million at risk, has added a banking crisis to Afghanistan's troubles, which include a growing insurgency and political paralysis.

Kabulbank's main customers are thousands of small investors in one of the poorest countries in the world. It also handles salaries for about 300,000 civil servants and the Afghan security forces, which amount to about $100 million a month.

The IMF and the Afghan government are at loggerheads over what to do with Kabulbank: the IMF wants it placed in immediate receivership to stem losses but Kabul wants a gradual rehabilitation and then a sale in two or three years.

A decision by the IMF not to renew support could also have enormous political fallout. Among three senior Kabulbank executives and shareholders under investigation is Mohammad Haseen, the brother of First Vice President Mohammad Qasim Fahim.

Another major shareholder is president Karzai's brother Mahmoud Karzai, who owns about 7 percent of the bank but is not under investigation in Afghanistan.

Afghanistan's central bank took over Kabulbank last September but has since said the bank is stable. It argues against putting the bank into immediate receivership out of fear of sparking a run on other banks, as happened with Kabulbank last year.

(Additional reporting by Matt Robinson; Editing by Angus MacSwan)

For more Reuters coverage of Afghanistan and Pakistan, see: here)

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