Cablegate: Finance Minister Zakhilwahl On Assistance Priorities

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PP RUEHDBU RUEHIK RUEHPOD RUEHPW RUEHSL RUEHYG
DE RUEHBUL #2632/01 2431128
ZNR UUUUU ZZH
P 311128Z AUG 09
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC PRIORITY 1257
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC 0877
RUCNAFG/AFGHANISTAN COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RUEABND/DEA HQS WASHINGTON DC
RUEHRC/USDA FAS WASHDC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

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E.O. 12958; N/A
TAGS: EAID ECON EFIN PGOV PREL AF
SUBJECT: Finance Minister Zakhilwahl on Assistance Priorities
and Post-election Economic Reforms

Ref: Kabul 2002

SUMMARY

1. (SBU) Afghan Finance Minister Omar Zakhilwahl confirmed to
USAID Mission Director William Frej his commitment to post-
election economic reform and listed as priorities the
restructuring and gradual privatization of state-owned Ariana
airline and merging Pashtany and Mille banks. He is concerned
about predatory anti-competitive practices of some larger
private-sector companies including airlines, and asked for
USAID technical assistance to develop competition policy
capacity and appropriate anti-trust legislation. Zakhilwahl
wants to move ahead on insurance sector regulatory reform to
provide greater safeguards for investors. To enhance revenue
collection and improve AfghanistanQs prospects for fiscal
sustainability, he vowed to continue his battle against
customs sector corruption, despite significant political
pressures from Parliament. Frej outlined USAIDQs newly
awarded $90 million Economic Growth and Governance Initiative
(EGGI) and confirmed U.S. support for the Civilian Technical
Assistance Plan (CTAP), a new multi-donor pilot program
providing a direct transfer of resources to the Ministry of
Finance to allow MOF to manage its own technical assistance
(Reftel). End summary.

ANDS IMPLEMENTATION AND OUTREACH BEYOND KABUL

2. (SBU) In an August 8 meeting with Afghan Minister of
Finance Zakhilwahl, USAID Mission Director William Frej
announced the award of the new USAID Economic Growth and
Governance Initiative (EGGI) to BearingPoint/Deloitte. This
new program will provide support for national and regional
economic policy development, central bank supervision, and
business-enabling environment reforms. The Minister and Frej
agreed that international and local Finance Ministry advisors
funded under EGGI will broaden their portfolios to support not
only the MinisterQs Office, but also the MinistryQs Policy
Unit and its Afghanistan National Development Strategy (ANDS)
implementation Unit.

3. (SBU) The EGGI program will support the implementation of
recently adopted financial and commercial laws that will
translate into increased access to finance through development
of mortgage, secured transactions for movable property, and
leasing products. EGGI will also address the ANDS priority of
extending outreach to provincial economic centers to help
connect AfghanistanQs regions with the center, including
through expansion of a new streamlined business registration
process which makes it easier for businesses to register and
will encourage their participation in the formal economy. The
Minister highlighted the challenge of providing appropriate
financial incentives and logistical support to encourage
Afghan government officials to work in the more difficult
regions of the country. Eventually, he said, the Ministry of
Finance will need to incorporate logistical costs into its
budget planning to avoid dependency upon external programming.
EGGI will help GIROA to provide services (not just exercise
authority) to better connect provinces with the center. The
program will also look to tie its efforts with other
stabilization programs on the ground.

PERSPECTIVES ON PRIVATIZATION AND STATE-OWNED ENTERPRISES

4. (SBU) Zakhilwahl noted his support for the eventual
privatization of state-owned flag carrier Ariana Airlines, and
Frej updated the Minister on USAIDQs current work reviewing
Ariana AirlineQs financial statements to better inform the
Ministry of the airlineQs financial status. Frej thanked
Zakhilwahl for his support in overcoming Ariana managementQs
resistance to providing this information. A final USAID
report on Ariana's financials will be shared for discussion in
the coming weeks.

KABUL 00002632 002 OF 003

5. (SBU) On restructuring AfghanistanQs two remaining state-
owned banks, Zakhilwahl said that Bank Millie has capable
management but that: a) management of Pashtany would be
removed following the election; b) merging the two state banks
is his personal preference; and c) opening up ownership of the
state banks to private sector investment in the coming year is
the best way to facilitate a gradual transition to private
sector leadership. Zakhilwahl noted, however, that Parliament
remains supportive of "national" banks and will likely seek to
maintain state participation in this sector.

6. (SBU) On competition policy, Zakhilwahl said he was
concerned about "predatory" practices by some private sector
companies, in particular Pamir Airlines. Pamir currently
prices tickets from Kabul to Dubai at around $100,
significantly below a market break-even in the $200 range, he
said. This practice could drive competitors out of air
transport business and weaken AfghanistanQs airline sector.
(Note: Minister of Commerce Shahrani has expressed similar
concerns to USAID officers. The EGGI program can provide
technical support to promote competition-policy capacity
building and the development of appropriate anti-trust
legislation.)

7. (SBU) AfghanistanQs insurance sector includes one private
company and one state-owned company. Zakhilwahl said he did
not see parliamentary opposition to the eventual privatization
of the state insurance company. He welcomed USAID assistance
with insurance regulatory reform and to moving the Insurance
Commission out of the Ministry of Finance to structure it as
an independent entity. Support for the regulatory reform of
insurance and other sectors such as mining, building on the
reform success in the telecom sector, is included in the EGGI
project design.

BATTLING CORRUPTION IN CUSTOMS

8. (SBU) In the area of customs reform and related revenue
generation, Zakhilwahl anticipated greater political support
for broadening AfghanistanQs tax base after the elections.
While Parliament supports customs reforms in concept, he said,
many members benefit from the current system of "variable
enforcement," and so often lobby the Minister for individual
exceptions and exemptions from payment of customs duties. The
Minister noted his recent removal of the Deputy of Customs in
Nimroz province in southwestern Afghanistan which sees
considerable trade with Iran but reports "unusually low"
tariff collections. Zakhilwahl said that he has faced
significant political pressure to reverse this decision but
that he has been able to uphold it. Frej and Zakhilwahl
discussed possible mechanisms to hold Parliament to higher
ethical standards including the potential to encourage
Parliamentarians to comply with regulations that require
senior government officials to declare assets. While
Zakhilwahl anticipated leeway for bolder action following the
election, he noted that Ministers require Parliamentary
confirmation before assuming their appointments or
reappointments.

STATUS OF CIVILIAN TECHNICAL ASSISTANCE PLAN

9. (SBU) Frej informed Zakhilwahl that the U.S., in concert
with the United KingdomQs Department for International
Development (DFID) and the Canadian International Development
Agency (CIDA), are prepared to quickly mobilize resources to
support implementation of the Civilian Technical Assistance
Plan (CTAP). CTAP responds to the GIROAQs request for
expanded technical advisory (TA) support. This plan would
recruit and place TAs in ministries throughout Afghanistan
using a two-pronged approach. The first step is to place 55
urgently needed TAs in ministries quickly using existing
mechanisms. The second step is to create a new National
Capacity Development and Technical Assistance Program (NCDTAP)
to help ministries prepare additional TA requests and provide

KABUL 00002632 003 OF 003

a basket funding mechanism to which donors could contribute.
The NCDTAP would identify the TA necessary for implementation
of the Afghanistan National Development Strategy (ANDS) and
aim to place an additional 500 - 1,000 advisors at the
national and sub-national levels.

10. (SBU) At the 12th Joint Coordination Monitoring Board
(JCMB) meeting on July 8, 2009, donors expressed support for
GIRoA efforts to prioritize its technical assistance needs and
take ownership of the planning and deployment of technical
assistance. A new Secretariat will be established within the
Ministry to manage the multi-donor pilot program that will
channel direct assistance of $30 million through the Ministry
of Finance over the next two years.

COMMENT

11. (SBU) This decision maximizes "Afghanization," critical to
President ObamaQs new strategy, and allows the GIROA to take
the lead in the recruitment, hiring, placement, and management
of these advisors with the appropriate oversight of the USG.
Specifically, the USG would help the MOF cost out the plan,
agree on a multi-donor/UNAMA management committee to assist
with the development of position descriptions, assist with
placement in the ministries, publish a solicitation,
participate in the selection of the advisors, oversee
performance, and transfer the funds to the MOF. This GIRoA-
led pilot program does not preclude hiring U.S. advisors as
part of the technical assistance team. (Reftel)

ZAKHILWAHL

12. (SBU) Widely viewed as one of the Karzai administrationQs
most competent Ministers, Omar Zakhilwahl expressed confidence
that he would remain in his position should President Karzai
win re-election. During his six-month tenure as Minister,
Zakhilwahl has demonstrated both clarity of conviction and the
ability to turn implement his organizational vision. His new
revenue action plan, bold steps to combat corruption, and
support for a vibrant private sector make credible his role to
press ahead a valuable reform agenda. If re-appointed in a
follow-on administration that wins a first or second round
solid majority, he should be well-positioned to help place the
right people in the right jobs as well as to promote reform.
Regardless of who assumes the position of Finance Minister,
ongoing USAID Economic Growth and Governance Initiative
programmatic support has laid a strong foundation to work with
the new GIROA administration.

EIKENBERRY

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