This paper discusses economic developments, outlooks, and risks in Afghanistan. The economy is in difficultly. Deepening uncertainty about the political transition following the 2014 presidential election, corruption and weak governance, and a weakening security environment have complicated the implementation of reforms, undermined confidence and economic activity, and contributed to increased emigration. The overall budget had a deficit in 2015 as a shortfall in grants more than offset higher-than-projected revenue and lower spending. The trade deficit remained large, but substantial inflows of foreign aid kept the current account in surplus. The financial sector remains fragile and plays a limited intermediation role.

This paper discusses Afghanistan’s Request for a Three-Year Arrangement Under the Extended Credit Facility (ECF). The program sets out a structural reform agenda that focuses on institution building, fiscal and financial reforms, and measures to combat corruption to lay the foundations for scaled up private sector development. The envisaged reforms dovetail with Afghanistan’s National Development Framework currently being finalized. The program aims to preserve macro-financial stability by implementing prudent fiscal, monetary, and financial policies, and by maintaining external buffers and a flexible exchange rate regime. The IMF staff supports the authorities’ request for an ECF arrangement under an IMF-supported program.

This remote mission provided the authorities with advice in fiscal risk management. The mission covered three interrelated topics: (i) the Public Finance and Expenditure Management (PFEM) Law and fiscal risks oversight and management; (ii) the Stated-Owned Corporations (SOC); and (iii) the Public-Private Partnerships (PPP). This report focuses especially on reforms that could be implemented during the life of the next IMF program.