Att._J.2_REALIZING_SELF-RELIANCE-_24_November_2014.pdf

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Contents

Abbreviation Introduction Why Afghanistan needs to be supported

Afghanistan becoming a full partner to the community of democratic nations Afghan security is essential to regional and global stability Making transition a success will reduce conflict and trans-border criminality Afghanistan’s geographical position affects natural resource management

Current Context Development cooperation has achieved a number of important successes Afghanistan has not been able to adequately institute growth-promoting reforms Irrespective of the conflict, formidable development challenges persist Heavier than expected toll of political and security transitions Meeting challenges by the new government

Improving Security and Political Stability Tackling the Underlying Drivers of Corruption

Actions to root out corruption from critical institutions Diagnosis of sources of corruption Proving credibility through a series of high profile actions Afghanistan will intensify efforts to control narcotic production and sale

Building Better Governance Reforming the electoral system Justice Sector Reform Professionalizing public administration Improving government efficiency and effectiveness Civil service reforms Strengthening public financial management (PFM) Improving sub-national governance Make cities the economic drivers for development

Restoring Fiscal Sustainability Strengthening enforcement and fighting corruption in customs Creating an Independent Revenue Authority Increasing tax income and strengthening tax enforcement Using the budget to manage policy Strengthening fiscal discipline

Reforming Development Planning and Management Improving strategic management Consolidating and streamlining priorities Development costs must be reduced

Bolstering Private Sector Confidence, Promoting Growth, and Creating Jobs Improving the Investment Climate Strengthening the Financial Sector

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Strengthen regulatory and supervisory capacity of the central bank Promoting growth in key economic sectors

Ensuring Citizen’s Development Rights Continue developing services but identify new delivery models for greater Empowering women A National Economic Empowerment Plan for women will be prepared Supporting Human Rights Improving the well-being of refugees and internally displaced persons (IDPs)

Development Partnership Regional cooperation for economic prosperity Reaffirming the financial commitment to Afghanistan Sustaining a budget in light of enormous security expenditure Changing the role of aid Enhancing our cooperation with civil society Alignment to enhance the effectiveness of financial assistance More on-budget assistance Adjusting technical assistance Reviewing the instruments of on-budget cooperation Sharing information Increasing local content

Conclusions

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Abbreviation

AEITI Afghanistan Extractive Industry Transparency Initiative

AHIRC Afghanistan Independence Human Rights Commission

AISA Afghanistan Investment Support Agency

AML/CFT Anti-money Laundering/counter Financing Terrorism

AYSCUDA Automated System for Customs Data

CAREC Central Asia Regional Economic Cooperation

CDCs Community Development Councils

DAB Da Afghanistan Bank/Central Bank

EITI Extractive Industry Transparency Initiative

EVAW Elimination of Violence Against Women

EVAW Law Elimination of Violence Against Women Law

FATF Financial Action Task Force

GDP Gross Domestic Product

HOO High Office of Oversight and anti-corruption

ICT Information Communication Technology

IDPs Internally Displaced Persons

ISAF International Security Assistance Force

MEC Monitoring and Evaluation Committee

MOCI Ministry of Commerce and Industry

NATO North Atlantic Treaty Organization

NPPs National Priority Programs

O&M Operations and Maintenance

OBI Open Budget Index

PEFA Public Expenditure and Finance Administration

PFM Public Financial Management

SOM Senior Official Meeting

TAPI Turkmenistan Afghanistan Pakistan and India

Tashkeel Staffing establishment or list of sanctioned posts

TMAF Tokyo Mutual Accountability Framework

TUTAP Turkmenistan Uzbekistan Tajikistan Afghanistan Pakistan

VAT Value Added Tax

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DRAFT

REALIZING SELF-RELIANCE

Commitments to Reforms and Renewed Partnership

Introduction

1. Afghanistan has entered a new phase in its history with the first-ever peaceful and demo-cratic transfer of political power. The Afghans, both men and women, braved intimidation, vi-olence and other challenges to cast their votes in the hope of a new era of peace and prosperity.

2. The newly formed Government of National Unity is committed to ensuring peace, stabili-ty, and security in the country; to realizing self-reliance by enhancing productivity, growth and revenues; to improving the welfare and well-being of the people through better opportunities, governance and respect for human rights; to deepening democracy by taking up electoral re-forms and institutional restructuring; and above all, to peaceful co-existence with its neighbors.

3. During its two months of existence, the Government has already reinstated optimism and hope through bold initiatives towards fighting corruption, better establishment of the rule of law, improving governance, and advancing relations with the International Community. Pros-pects for peace are on the rise and we hope to see the formal peace process launched in the near future.

4. The new administration has significantly advanced the regional agenda for trade and sta-bility through the recent state visits to China and Pakistan. China will be providing support for the national infrastructure development plan with discussions underway for state investments in this sector. Relations with Pakistan are also moving ahead at an improved rate. The state visit to Pakistan produced specific concrete commitments to removing impediments to trade and transit, including agreements to co-present regional projects that would promote trade as well as rein-force regional stability.

5. These developments present an enormous opportunity to take the country forward on a path of growth, development and stability by addressing our most pressing challenges with re-newed vision and approach, while building on the success of the past 13 years. Yet while the potential for success is higher than it has been in decades, the risks of failure are also high. Dec-ades of conflict have produced deep distortions to the economy narcotics, corruption and ille-galities of different kinds are wide-spread, and the criminal economy elements are deeply em-bedded in both government and society. Rooting them out will require sustained political lea-dership, a more realistic long-term political vision for the country, and the deep commitment of both Afghanistan and its international partners.

6. Afghanistan presented its long-term development vision at the Tokyo Conference and committed to the Tokyo Mutual Accountability Framework (TMAF). The TMAF represented a new phase in the relationship between the Afghan government and the international community

5 | P a g e based on principles of mutuality and accountability. While a refreshed TMAF will be agreed at the Senior Officials Meeting (SOM) next year based on the new priorities of the government, we will follow through on implementing the remaining TMAF hard deliverables.

7. This paper is intended to present a candid statement of commitment to the reform agenda that can help Afghanistan move towards peace, recovery, productivity and growth. It will be equally candid in its discussion of our failings and the risks that Afghanistan is facing. Our or-ganizing theme is that the new government has the drive, confidence, and focus needed to make Afghanistan’s transitions a success and realize self-reliance in the transformation decade.

8. The paper is built around four propositions. The first proposition is that Afghanistan is facing an economic crisis with the transition taking a heavier than expected toll on the economy and the pace of reforms. Private sector confidence has slumped and a fiscal crisis is underway, with the government failing to mobilize adequate revenue to meet its development financing priorities. Restoring confidence and improving revenue mobilization are the essential pre-conditions for surviving transition and successfully building a democratic state. The second proposition is that in order to realize self-reliance in the transformation decade, in the face of likely reductions of donor assistance, more private investments and revenue-generating sources will be needed to trigger growth. Building the infrastructure for regional integration—trade and transit agreements, connectivity, cross-border investments —will be a fundamental part of our national strategy. Public funds will have to be channeled to sectors with maximum potential for growth, revenue, employment and aid-effectiveness will have to be substantially improved. The third proposition is that what look like economic and social problems have at their root failures of governance and a lack of serious commitment to fixing problems. Actions to fight corrup-tion, end patronage, and avoid collusive practices have been undertaken half-heartedly or un-dermined from within. The fourth proposition is that the lessons of the past decade show the ur-gent need for the senior most levels of the national government to take a stronger hand in man-aging the overall implementation of policy reforms and development assistance. Government leadership is needed to ensure that the agenda matches national priorities, capacities, and re-source envelopes within a multi-year strategic planning framework; to monitor performance and to enforce accountability; and to exercise appropriate flexibility to enable changes in response to a highly uncertain environment.

9. Each of these propositions is matched by a series of actions and commitments intended to give credibility to the claims through immediate and near-term actions, and to trigger a longer process of reform. Where possible, we will move quickly to implement actions. However, in many areas the reform process must involve consultation and coordination across a broad range of stakeholders. For these domains we will be signaling the government’s overall policy direc-tion and roadmap for change and then using the time between the London Conference and SOM to develop more detailed action plans.

Why Afghanistan needs to be supported

10. Afghanistan is gearing up to become a full partner to the community of democratic nations. Afghanistan’s successful transfer of power through a participatory democratic election make it, along with Indonesia, Malaysia, Tunisia, and Turkey, a leading ex-ample of democracy taking root in a Muslim majority country. Furthermore, both candidates in

6 | P a g e the 2014 Afghan election ran their campaigns on platforms of good governance, peaceful re-gional cooperation, and market-friendly growth. Ordinary Afghans turned out in high numbers throughout the campaign, and their sustained, vocal engagement showed that the modern Afg-han citizen increasingly demands accountability from their representatives, not just clan loyalty or patronage. Prior to the elections, the consultative Loya Jirga that endorsed the Bilateral Secu-rity Agreement confirmed again that Afghans want engagement with the world community, not withdrawal from it. Afghanistan’s current problems are challenging, but the long-term arc of its development is bending towards becoming a stable member of the world’s democracies.

11. Afghan security is essential to regional and global stability. Cross-border threats from non-state actors are persistent. Criminal networks fueled by narcotics and the illicit sources of income have entered into strategic alliances that seek to produce the instability and state weakness within which they can thrive and spread. These threats affect not just Afghanis-tan but the entire state system. Helping the Afghan government root out these networks and stop their further thread is in the interest of the entire world community.

12. Making transition a success will reduce conflict and help address trans-border criminality. Dealing with the conflict risks posed by the transition is not just a matter of maintaining Afghanistan’s security forces. The past decade has transformed much of the Afghan economy and social system in ways that now must be managed. Economic growth and tangible service delivery provide the critical anchors for stability as the Afghan economy and society begin their difficult re-adjustment to a civilian economy. Too sharp a cutback in the role of the state will sow the seeds for future problems. Weakened governments that are unable (or unwilling) to deliver basic services to their people are easy prey for dissident or radical groups, which we have already seen spread beyond the confines of any one state. By contrast, a func-tioning Afghan state that can continue down a path of reform that promotes growth and delivers basic services will be the best defense against instability in the region.

13. Afghanistan’s geographical position affects natural resource management across Central, South, East and West Asia. Afghanistan matters because it sits in the hub where many of Asia’s most important water resources have their origin. Competition for these resources and the potential for conflict will increase as Asian countries continue their de-velopment and as climate change forces re-negotiations to traditional water-sharing agreements.

Our government is firmly committed to promoting the shared prosperity that will flow from joined-up commitments to sustainable resource development. There is an immense opportunity to re-think the institutional arrangements for sustainable eco-management beyond national boundaries.

Current Context

14. Development cooperation has achieved a number of important successes.

The narrative of state-building failure in Afghanistan underplays the very real accomplishments that have been achieved in the last 13 years. The country in 2001 was almost bankrupt with most systems and infrastructure destroyed and state institutions either non-existent or non-functioning. Today Afghanistan’s per capita GDP is at $688 which is five times what it was 12 years ago. Revenues increased from 3 percent of GDP in 2002 to a peak of 11.6 percent in 2011 and the World Bank’s assessment shows that Afghanistan’s public financial management (PFM)

7 | P a g e systems have strengthened considerably over time. The Human Development Index has also improved significantly. Access to primary health care has increased from 9 percent of the popu-lation to more than 57 percent; maternal mortality has almost halved; and life expectancy has increased considerably. More than 9 million students (including 3.6 million girls) are enrolled in schools (compared to only 0.9 million boys and very few girls during the Taliban era). Thou-sands of kilometers of national and regional highways and provincial roads have been built, cut-ting travel times between population centers by three quarters. Civil aviation services have im-proved considerably, the Information Communication Technology (ICT) sector is thriving to-day, and access to electricity has more than doubled. Irrigated land has increased from 1.2 to 1.8 million hectares, significantly increasing agricultural production. During the past decade a strong and vibrant private sector, including foreign investors, has emerged investing in the vari-ous economic sectors. A vocal and lively civil society has also come up, with an open media providing a forum where a range of views are publicly debated. The role of women in society has grown, with many emerging as successful political, business and civil society leaders and role models.

15. Despite the successes, Afghanistan has not been able to adequately insti-tute growth-promoting reforms. While it is important to acknowledge Afghanistan’s achievements, it is equally important to acknowledge its failures. First and foremost has been corruption, a plague that infuriates the ordinary Afghan as much as it does our international partners. Second, because of the way aid has been delivered so far, Afghanistan became ad-dicted to help from the international community rather than using aid for moving towards sus-tainable economic growth, job creation, infrastructure development, investments and trade.

Third, while the criminal economy has flourished in Afghanistan, the legal economy has been hampered by regulatory incoherence and parallel institutions. Fourth, despite Afghanistan’s tremendous endowment of natural resources, which could lift the Afghan economy and improve the welfare of people, we have not yet been able to manage them well because of a lack of needed infrastructure and weak institutions and regulations. And last, while the urgency of end-ing the conflict and achieving a sustainable peace should be obvious, for more than a decade an agreeable path has not been formulated that could move disputes from the battlefield to the po-litical field.

16. Irrespective of the conflict, formidable development challenges persist. Po-verty remains high, with more than 36 percent of Afghans living below the poverty line. Stunt-ing and malnutrition, particularly among women and children, affect nearly half of the popula-tion. Another overwhelming challenge is to create sufficient number of jobs that can provide productive employment to the poor. While most Afghan children have access to education, many are still deprived, and the current low quality of education will require greater attention going forward. Basic health services, mainly financed by donors, will need to increase further with particular attention to excluded and vulnerable groups, while also addressing concerns about cost effectiveness and sustainability of delivery and financing models. Although some key infrastructure has been built, more resources will have to be invested in the sector. While the status of women has improved, the level of female participation in the economy remains far too low, and violence against women is a problem that must come to an end. Finally, corrup-tion, production and handling of narcotics, illicit economy and personal insecurity remain criti-cal impediments to development progress across the board, but particularly to the private sector.

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17. The security and political transitions have taken a heavier than expected toll on the economy and the pace of reforms, pushing Afghanistan to a fiscal and confidence crisis. For many years the major driver has been external to the Afghan econo-

my. The infusion of ISAF expenditure drove economic growth, but the massive withdrawal that was planned for on the security side did not receive sufficient attention. The social and econom-ic impacts of the sharp scale-down of activities were considered to be marginal, but it is now clear that this was a miscalculation and the economic effects of withdrawal have been and will continue to be severe, creating a sizable fiscal gap in the afghan economy. Political uncertainty coupled with the deteriorating security situation aggravated the decline. Economic growth has fallen sharply to 1.5 percent (estimated) in 2014 from an annual average of 9.4 percent during 2003-12. Domestic revenues have fallen to 8.7 percent of GDP (projected) in 2014 from the peak of 11.6 percent in 2011. Despite austerity measures, the government faces an un-financed fiscal gap in 2014, with depleted cash balances and accumulating arrears. The crisis calls for urgent and immediate reforms, but it also provides Afghanistan with an opportunity to take bold actions.

18. The new government is determined to meet these challenges. Immediate re-forms are, therefore, being introduced to address priorities in seven critical areas: (i) improving security and political stability; (ii) tackling the underlying drivers of corruption; (iii) building better governance; (iv) restoring fiscal sustainability; (v) reforming development planning and management; (vi) bolstering private sector confidence and creating jobs; and (vii) ensuring citi-zen’s development and securing human rights. The full program will require a comprehensive and well-thought through reform strategy which we will present at the SOM in 2015. To launch this strategic discussion, we will seize all immediate measures to “walk the talk” of credible, substantive reform beginning with immediate actions to security, corruption and the culture of impunity.

Improving Security and Political Stability

19. Security and political stability are key prerequisites for economic development and for the success of the broad-ranging reform agenda now being proposed by the government. Pros-pects are improving. NATO/ISAF’s goals of completing the security transition by the end of 2014 are on track. Both the Bilateral Security Agreement (BSA) and the Status of Forces Agreement (SOFA) have been signed. The all-volunteer Afghan citizen’s army has shown itself to be resolute and capable. As with the civilian sphere, Afghanistan’s security establishment will be undergoing a wholesale program of governance reform to professionalise their core structure and modes of operation. Alignment between security and development objectives has been lacking. For example, security spending now occupies more than 60 percent of the Afghan budget, yet security procurement and spending are not factored into national development strat-egies or systems of accountability. As part of Afghanistan’s forward-looking reform program, civilian systems of procurement, human resource management, and financial transparency and accountability will be brought into the armed forces normal operating procedures.

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Tackling the Underlying Drivers of Corruption

20. Corruption remains endemic, increases the cost of development and service delivery, af-fects revenue collection, and damages credibility and legitimacy of the government in the eyes of its people and partners. The main drivers of corruption in Afghanistan have been collusive procurement practices, weak rule of law and abuse of the legal system, and arbitrary regulations that build in incentives to pay bribes. We will immediately tackle all three areas. Our strategy for fighting corruption rests on the twin pillars of strengthening enforcement and reducing op-portunities. Specific actions include the following:

• The high level Monitoring and Evaluation Committee (MEC) has made recommen-dations on a national action plan to reduce corruption. We will accept them and put them into practice immediately;

• The appeals court has issued judgments in conformity with the seriousness of crimes in the Kabul Bank case. On the basis of these decisions, the government will now be able to confiscate properties and recover assets from abroad.

• We will provide the Supreme Court with the resources needed to implement its comprehensive reform program that will ensure that judges are appropriately com-pensated, protected, and held to high standard of professional behavior.

• We will form an independent anti-corruption commission with time-bound prosecu-torial powers. Membership of this commission will be drawn from civil society and qualified legal specialists as well as from the government.

• We will reform and improve the Supreme Audit Agency,

• We will institute a requirement for all government officials to provide public decla-rations of their assets;

• Afghanistan will form a national procurement board staffed by qualified profes-sionals who will manage all large-value contracts using internationally recognized standards and procedures.

• To the extent possible, technical ministries will be confined to policy, strategy and monitoring. Physical construction will be outsourced through a professionally ma-naged national construction agency that uses standard cost registers and publicly audited accounts.

• We will introduce mobile banking services, which have been proven to reduce op-portunities for leakages. Mobile banking is particularly valuable for programs de-signed to help the poor.

• We will modify the existing laws, regulations and procedures which cause corrup-tion in the area of the provision of public services.

21. We are taking significant actions to root out corruption from critical institu-tions of the state. We are conducting a rigorous staff review in the critically important cus-

10 | P a g e toms and revenue departments. We will dismiss staff, including senior-most managers, who do not meet strict criteria for professional conduct, performance, or conflict of interest. We are de-lineating the roles, responsibilities and jurisdiction of anti-corruption institutions such as the High Office of Oversight and Anti-Corruption (HOO) and the Attorney General to focus them on the core function of enforcement instead of oversight. The government is committed to pre-vent the partnership between government officials and businessmen that reduces competition and creates monopolies.

22. Ministries will diagnose the sources of corruption and prepare anti-corruption action plans, to be issued as binding public documents. We are stream-lining and simplifying opaque and non-transparent processes across all governance systems that currently constitute the breeding ground for corruption. We will be doing this in a systematic way across all ministries. An illustrative example is the reforms proposed by the Ministry of Education which include an end to the practice of annual changes to the curriculum, direct payment of teacher salaries through mobile banking to end the problem of fictitious teachers, community oversight of teacher attendance through community development councils, and re-forms to teacher certification and testing systems that currently encourage bribe-paying by un-qualified candidates. Other ministries will produce similar reform proposals.

23. We will prove our credibility through a series of high profile actions. We have already shown our commitment to the anti-corruption agenda with the prosecution of the Kabul Bank case within two days of taking office. A second test of the government’s anti-corruption action program will come soon with the announcement of a tender for eleven mines.

We will invite international observers to evaluate the conduct of the tender, which we intend to use as a concrete example of our commitment to fair and transparent bidding from now on.

24. Afghanistan will intensify efforts to control narcotic production and sale.

The narcotics trade has major consequences for the social, political, economic, and security are-nas in the country as well as corruption, livelihood and health. The government will adopt a broad approach targeting both the production base as well as the handling and refining of nar-cotics. Strict and effective counter-narcotic measures will increase the costs of operating in the sector, with a particular focus on poppy-eradication and financial tracking. The government will complement enforcement with programs that provide licit alternatives for rural livelihoods.

Building Better Governance

25. The high levels of public participation in the election and the substance of the policy de-bates highlighted how much Afghans care about improving the performance of the government.

Previous approaches to governance reform have overly concentrated on the executive branch, with less investment in developing the capacities of the judicial and legislative institutions of the state. What Afghanistan needs now is a “whole of state” approach to stability, peace and prosperity. The judiciary must become the means to internalize and interpret the rule of law so that trust in rules and courts gets established. The executive branch then has to become the em-bodiment of rule based behavior. Our legislative branch needs to pass legislation about rules that can be implemented and internalised, not abstractly driven agendas that breed cynicism ra-ther than meet needs. Representation and voice must be channeled fairly and transparently

11 | P a g e through the political system rather than outside of it, and citizen’s aspirations turned into pro-grams that invest in people’s welfare.

With its popular mandate for reform, the unity government will be supporting a strong program of actions to increase government accountability, performance, and ability to deliver results from within the framework described above. Measures include:

• Reforming the electoral system: To insure that future elections in Afghanis-tan are fully credible, we are fully committed to carrying out a comprehensive reform of electoral laws and institutions, including introducing the e-Tazkeera.

• Justice Sector Reform. Ensuring the rule of law and restoring confidence of the people in justice institutions will be a foremost priority of the government. The gov-ernment will take steps for a comprehensive review of the qualifications of all legal professionals and make replacements and new appointments; an improved and more transparent case management system; a plan to reducing corruption in courts and pro-visions for improved legal aid and coordination mechanisms between justice institu-tions. An immediate action will be to review the cases of thousands of Afghans being illegally held in pre-trial detention, without charges or trials, thus reducing abuse, cor-ruption and pressure on the prison system.

• Professionalizing public administration. Going forward, we will focus on restructuring ministries and agencies to avoid any overlap and duplication of func-tions. Ministries will be instructed to prepare business process management plans that clarify their functions, streamline their structure, and align their performance mea-surements behind their attainment of results.26. Improving government efficiency and effectiveness. We are committed to creating a lean, effective, and appropriately paid public service. We have already ordered an austerity program across government and reduced or eliminated non-essential expenditure.

• Civil service reforms: Strengthening the core civil service and progressively re-ducing reliance on parallel systems and expensive contract staff are important priori-ties. The New Civil Servants Law, the Basic Organizational Law and the Administra-tive Procedures Law will be enacted and required regulations, procedures and guide-lines will be developed. These actions form the legal basis for strengthening cadre management in the civil service. We will ensure merit-based appointments within the civil service and eradicate the role of financial transactions in appointments. Business processes and service delivery arrangements will be rigorously simplified across the civil service. The e-Governance strategy of the government will be supported through targeted interventions in important service delivery and high spending ministries.

• Strengthening public financial management (PFM): Afghanistan has made significant strides in building credible and transparent systems for public finan-

12 | P a g e cial management as evident in Afghanistan’s ratings on the Open Budget Index (OBI)1 and Public Expenditure and Finance Administration (PEFA)2. Afghanistan PFM sys-tems are reasonably capable of effective controls over public finances, the budget process is transparent, and, in combination with donor oversight, PFM standards in-creasingly satisfy most donor fiduciary requirements. This has led to about $5 billion in on-budget civilian and security financing in 2014. The government will take all ne-cessary measures including through a new PFM roadmap, if needed, to enable donors to further increase their on-budget assistance

The government will maintain its commitment to continuously improve its PFM sys-tems by (a) applying whatever controls are needed to manage the budget and report reliably to all stakeholders on public finances; (b) building sustainable capacity in the spending ministries to improve their internal controls; (c) establishing government-wide internal audit under the Ministry of Finance; (d) strengthening the independence of the external auditor; and (e) harmonizing audit standards.

• Improving sub-national governance: With the majority of the Afghan popu-lation living in rural areas, improving sub-national governance is extremely impor-tant. The 2010 Sub-National Policy will be reviewed to provide greater clarity on the roles and responsibilities of sub-national officials and to strengthen links between planning and budgeting so that people across all provinces have a greater voice in their development. Governors, as representatives of the reform government, will be individually reviewed to ensure proper qualifications and performance. To demon-strate our commitment to enhancing development at the provincial level, a significant percentage of discretionary development spending will be assigned to provinces in the 2015 budget.

• Make cities the economic drivers for development. In order to do so we need to improve living conditions and service delivery in urban centers. Urbanization will need to be managed by reducing disparity between rural and urban areas and the-reby controlling rural-to-urban migration. The government plans to appoint mayors based on merit and a public consultation process. The government will prioritize mu-nicipal development by advancing revenue improvement plans in Afghan cities. Es-tablishing metropolitan development authorities and funds will allow for coordinated development planning and professionalized management.

Restoring Fiscal Sustainability27. The root cause of Afghanistan’s current economic weakness is the country’s dependence on aid and military expenditure rather than on a vibrant, functioning real economy. While the short-term fiscal crisis is discussed below, the proper solution to what will otherwise be periodic

1The Open Budget Index rates countries on how committed their government is to budget transparency and accountability.

2The Public Expenditure and Financial Accountability (PEFA) Program was founded in 2001 as a multi-donor partnership to assess public ex-penditure, procurement and financial accountability systems and develop reform and capacity-building actions.

13 | P a g e cycles of fiscal imbalance is for the Afghan state to provide the private sector with clear and se-cure property rights (both urban and rural), a reliable system of justice to protect them, and in-creased global and regional market access. Stable growth can become stable revenue. While a full explanation of the strategy to stabilize government revenue through predictable and sustain-able sources of growth coupled with increased enforcement of tax payments will be fleshed out by the time of the SOM, its priority areas are:• Developing natural resources through public-private partnerships that bring in rents, taxes, and profits;• Removing obstacles to trade and transit and ending smuggling that diverts revenue away from the treasury;• Negotiating expanded market access in regional and global markets;• Gradual formalization of informal economy and changing the compact between states and citizens to one where citizens pay taxes for services they tangibly benefit from;• Switching government payments to electronic transfers to eliminate losses in transit.28. Critical to the long-term sustainability of the economy will be bringing to fruition our efforts to promote trade and stability through regional integration. Afghanistan will now turn these early initiatives into operational programs for reform, investment, and cooperation with neighboring governments and the private sector. High-level working groups will concentrate on both the “hard” investments in connectivity, energy, and water resource development as well as on the “soft” but critical areas such as accelerated licensing, streamlined transit and visa re-quirements, and opportunities for securing financial guarantees.29. While the long-term solution to fiscal sustainability lies in reforms that expand the economy, in the short-term improving revenue mobilization has become an existential priority for Afghanistan. The new government is taking immediate and urgent steps to boost revenue collection. We will improve the governance of customs, revise the existing tax regime, and strengthen enforcement to reduce leakages and raise revenues through steps that include:

• Strengthening enforcement and fighting corruption in customs:

Within the first weeks of the new government, we have set the stage for a new wave of customs reforms. The customs action plan that was agreed by all con-cerned ministries will be strictly implemented. Controls at customs are being sig-nificantly enhanced by rebalancing customs officials across customs houses to re-flect traffic at borders, introducing additional randomized post-inspections, and mobilizing post clearance audit in major custom houses. Additional border cross-ing points will be established to reduce border leakages. We also intend to roll out the ASYCUDA valuation module countrywide. But most importantly, we have strengthened the enforcement powers of the customs authority through a Cabinet-endorsed memorandum of understanding between the Ministries of Interior and Finance which places the customs police under supervision and direction of the customs department. This signifies a major step towards the integration of admin-istrative and enforcement functions and it will allow us to extend performance-linked salary bonuses to both customs officers and customs police.

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• Creating an Independent Revenue Authority The government will amend the legal and institutional framework for enforcement. Consideration is be-ing given to the creation of an autonomous, independent authority for customs and revenue. Such an authority would potentially be able to reduce interference from other state institutions, provide more flexibility in designing appropriate incentives, and offer greater independence in exercising HR decisions and punitive measures.

• Increasing tax income and strengthening tax enforcement: The government will pursue with parliament the expeditious passage of the VAT Law (with an appropriate rate) and the Tax Administration Law. In addition, we are ex-ploring application of new taxes and fees such as road tolls and increasing fuel im-port duties and other applicable fees. The government has begun to conduct risk-based taxpayer audits as part of strengthening and streamlining the tax clearance process for firms to increase domestic revenue collections in the short-term in lieu of taxes owed.

• Using the budget to manage policy. The current fiscal problems have ari-sen in part because spending commitments were made without regard to the status of the country’s budgetary limitations. However, using the budget as an effective instrument for managing national policy requires that the budget accurately reflect the full range of financial resources. To make this possible, the government is pro-posing two changes to the current practice. First, a working group between the se-curity sectors and the economic advisory council will bring security expenditures within the overview of Afghanistan’s budget systems. Second, all donor spending in Afghanistan will be recorded in the national budget, even if it is not spent through the treasury. These two reforms will let policy makers see the full land-scape of income and expenditure. Periodic high level reviews will track progress at consolidating budgetary information across all three of these main expenditure cat-egories.

• Strengthening fiscal discipline. The 2015 budget represents a fundamental change in the role of budget as an instrument for development planning which will reinforce fiscal discipline. Specific measures include providing budgetary guidance for the size of the civil service, consolidating the number of discretionary devel-opment projects, curtailing social benefit allocations, and ensuring adequate alloca-tions for operations and maintenance (O&M). We intend to revisit the legal frame-work for social benefit spending to enhance sustainability and tighten delivery sys-tems to eliminate benefits for unintended recipients. In the future, we intend to change the national development budget to a three-year cycle which will be guided by the national priorities laid out in the strategic development framework and the budget in turn will then guide government policies and planning. For instance, the size of the civil service (“Tashkeel”) will be guided by the allocation given to a ministry rather than vice versa.

Reforming Development Planning and Management30. Development management has become too complex and filled with too many small, un-sustainable activities. Improvements are needed in development planning, implementation and

15 | P a g e monitoring to effectively spent resources leading to concrete deliverables. The government will introduce immediate reforms in these areas:

• Improving strategic management. The Cluster coordination mechanism will be reinvigorated under the leadership of the National Economic Advisor to make planning more effective and results-oriented. The national budget-making process will be guided by the national strategic priorities and development strategy within a new three-year budget and expenditure management framework.

• Consolidating and streamlining priorities. National Priority Programs (NPPs) will be reviewed, prioritized and revised in a time-bound manner reflecting the new priorities of the government. The current 22 national priority programs are too many to manage properly. They will be reduced to no more than 10-12 and re-structured around results. Of particular importance will be a national infrastructure plan; an employment and human capital development plan; a national program for private sector development; and a national program for effective governance. Do-nor funding will be aligned with the deliverables of the NPPs. Systems to monitor implementation of NPPs and to measure their results will be reintroduced.

• Development costs must be reduced because money saved is money earned. Our cost of development is very high and unsustainable. Neighbouring countries are developing the same infrastructure for much less. We are aware of the special challenges our country is facing, like security, difficult terrain and non-availability of basic material in some cases, but still, there is scope for reducing costs. The government will assign high priority to this task, seeking cooperation from international partners in the process. A critical review of all off and on-budget development spending in Afghanistan will be taken up with an aim to increase cost-effectiveness and sustainability. In this regard, the government is reviewing its operations, including budget planning, procurement systems, and contract-awarding mechanism (especially sub-contracting) to identify where savings can be made. We will work with donors and development partners to ensure a joined-up effort on cost effectiveness.

Bolstering Private Sector Confidence, Promoting Growth, and Creating Jobs31. Afghanistan’s growth and job creation for the next decade will hinge on private sector growth and investment in extractive industries, infrastructure, services, agriculture and trade. To a large extent it will also hinge on peace and civic order allowing the legitimate private sector the security it needs to invest and grow.32. Improving Afghanistan’s business enabling environment is a top priority. In the past, coordination of investment climate reforms often lacked the political support needed to imple-ment and monitor business-friendly reforms. We have therefore created a National Economic Council at the highest level of government in order to elevate and coordinate important eco-nomic reforms. The government has prioritized the following initiatives:

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• Improving the Investment Climate: Fragility and conflict still represent the most binding constraints to private investment in Afghanistan. However, there are serious institutional challenges that need to be addressed. Currently, Afghanis-tan ranks near the bottom (183rd out of 189 economies) in the World Bank’s 2015 Doing Business Report which measures the attractiveness of the investment climate and ease of doing business in various countries. The government will significantly reform licensing and registration procedures. Reforms will include streamlining and unifying the system for issuing and renewing trade and investment licenses.

They will be integrated with the business registration system to establish a one-stop-shop for private businesses. Progress will be regularly monitored and dis-closed. We will clarify the role of the Afghanistan Investment Support Agency (AISA) and Ministry of Commerce and Industry (MOCI) to avoid duplication and ensure that the government provides high quality and low cost services to the pri-vate sector.

• Strengthening the Financial Sector is critical for restoring confi-dence of the private sector and partners. While since the Kabul Bank crisis many critical administrative and legislative improvements have been intro-duced, weaknesses remain. The commercial banking sector operates as a deposito-ry institution with very limited lending. Access to credit remains one of the main factors inhibiting the growth of the private sector. The government is committed to strengthen and restore confidence in the financial sector, increase the level of transparency, and improve access to finance. The government also met its com-mitments to pass anti-money laundering and antiterrorist financing laws that were made to the Financial Action Task Force (FATF) recommendations. The govern-ment will take measures for effective implementation of these laws.

• The government will strengthen regulatory and supervisory ca-pacity of the central bank to exercise effective regulatory and pru-dential oversight of all financial institutions, with a focus on enforcement. In par-ticular, DAB is to exercise effective Anti-Money Laundering / Counter Financing of Terrorism (AML/CFT) supervision of all financial institutions. The approval of the new Banking Law and accompanying regulations is therefore another priority.

To enable growth of the private sector, the government aims to play an enabling role to increase access to financial services. Strengthening the financial sector in-frastructure, including public credit registry, collateral registry and modernization of payment system, remains at the forefront of DAB efforts in this regard.

• Promoting growth in key economic sectors: Agriculture, transport, and extractive industries will be the main pillars of economic development over the next decade.

o Extractives industries will be a key source for revenue generation over the next few decades and beyond. The government is strongly commit-ted at the highest level to unlock the potential of minerals and petroleum by consolidating progress on the legislative and regulatory framework and by making heavy investments in critical infrastructure, particularly in railroads linking the major mining projects to outlet and port facilities and to an en-hanced national energy grid. Transparency and accountability will be a

17 | P a g e priority during development of the sector. Every effort will be made to le-verage major mining projects for enhancing regional economic cooperation, nation building, promoting economic growth and sustainable economic di-versification. Extractive industries will create upstream, downstream, and side stream opportunities leading to further economic growth and expanded employment.

The new government is also committed to designing a stable and predicta-ble extractive industries fiscal regime as one of the fundamental prerequi-sites for realizing the revenue potential that would ensure Afghanistan gets a reasonable share of the rents from extractive industries and attracts in-vestment despite some of the challenges in the country. The government is considering options for establishing revenue stabilization and investment funds to assist with infrastructure and other national development initia-tives. We are also developing capacity and systems in contract manage-ment, cadastre, revenue collection and inspectorate functions and a program to formalize the informal mining sector.

The government will amend the new minerals law to address important shortcomings in the transfer of licenses. The government will speed up the implementation of the law by issuing and re-enforcing the requisite set of mining regulations. The new government is strongly committed to the Ex-tractive Industry Transparency Initiative (EITI) process and will place ut-most emphasis on resolving issues that are currently inhibiting full com-pliance with EITI standards and improving our Resource Governance Index score. These include moving coordination of the Afghanistan Extractive In-dustry Transparency Initiative (AEITI) activities to the National Economic Adviser in the president’s office, publishing all extractive industry contracts under the open government initiative, preparing a high level engagement strategy for government-industry, and putting our full support behind civil society dialogue on extractive industries.

o Raise agricultural productivity. The government sees the agriculture sec-tor as the largest source for job creation and poverty reduction and is com-mitted to comprehensive development in the sector. The future role of the Ministry of Agriculture will centre on planning, regulation and enforcement instead of direct provision. Developing agriculture and increasing produc-tivity will require large, multi-sectoral investments in irrigation and the de-velopment of value chains. Given resource limitations, public investment will be very strategic and focus on those segments of agriculture which show the largest potential for expansion and job creation. Appropriately tai-lored support strategies will be needed for smallholders.

o Improve…