H.E. Dr. Anwar-ul-Haq Ahadi, Minister of Finance (Nov. 21, 2007)

How have you found the transition from working as a professor to becoming the Governor of Da Afghanistan Bank to your current appointment as Minister of Finance? And, what are the most significant accomplishments realized by the Ministry of Finance since you became Minister almost three years ago?

The transition was smooth in the sense that my academic background prepared me for reality regarding the kinds of policy questions I faced both in the Da Afghanistan Bank as well as at the Ministry of Finance. I had some experience in banking - three years of experience in commercial banking - and taught multi-policy. So realistically speaking I was well-prepared for my job. Of course in any job, you need the first three months to acquaint yourself with the institutions and issues and start to seek solutions. That is what I did and perhaps the first two months were enough for me to gain the insight relevant to the Central Bank. I think I achieved a lot in the Central Bank, such as changing the currency which led to the stabilization of the exchange rate. Our monetary policy was such that in the past few years the inflation has been relatively low. We changed the banking system from a state-controlled banking system to a private banking system. We liberalized the foreign exchange system, and it is probably one of the most liberal that you can find anywhere. So, we achieved a lot at the Central Bank.

The same applies to my role in the Ministry of Finance. I taught courses on international political economy, privatization and the essence of the institutions that are needed market-based economy. So when I came to the Ministry of Finance, I had the theoretical background and what I did is formulate in the concrete context of Afghanistan.

The number one issue for any Minister of Finance is to prepare the budget. I had to prepare my first budget in the first week in office. What we have done at the Ministry of Finance is work on domestic revenue. Afghanistan's domestic government revenues used to be extremely small. The first year of the Karzai Administration, we had US$ 118 million as our total domestic revenues. The year that I took over the Ministry of Finance our total domestic revenues was US$ 250 million. This year we are going to get US$ 750 million. When the Karzai Government started, government revenue as a percentage of GDP, was only 3.2%. This past year we exceeded 8%, and if we reach 10% that would qualify as a normal less-developed country's revenue. My objective is in next 2-3 years that our revenue will account for 10% of the GDP. According to London Conference, the Afghanistan Compact, we are supposed to reach 8% in the next two years. We have already met that target, but I would like to exceed that. So, that was our number one priority, to prepare the budget and increase domestic revenue.

We revised our taxation laws and now we have broadened the base for taxation. We are confident that our domestic revenues will increase. We have two main sources, customs and taxes. Our customs used to be US$ 60-70 million but this year it is close to US$ 400 million, at US$ 370 million. So, we have increased revenues both from custom revenues and from taxation.

We have also started work in other areas. For me, one major issue was Afghanistan's debt to other countries. We consider some of that in the past. We had questions on how to get rid of those loans because a lot were extended to the communist regime in Afghanistan, some during the 1970s but mostly in the 1980s. I am glad to say that is one of our major achievements.

In 2006, under the auspices of the Paris Club we negotiated successfully with our creditors, the Russian Federation, the United States and Germany, and just last August I signed a bilateral agreement with Russia which led to the writing off of US$ 10.4 billion debt that Russia had claimed. There is still about US$ 1 billion of debt left, not all being Russian but from other institutions as well.

We have been accepted into the Heavily Indebted Countries Initiatives and aim to complete the IMF program, the Poverty Reduction Growth Facility Program – basically the IMF conditionality, that comes with it. We have been under that program for the past year and half and we have been thus far successfully meeting the benchmarks that were specified. There is another year and half left for that program and when we complete it a lot of our creditors will write off 100% of the remaining debt, including some of the debt that we have incurred in the past few years from the World Bank and from the Asian Development Bank.

So to summarize, the debt relief is a major achievement for us. Increasing revenues is a major achievement for us. We have started privatization which is essential for restructuring the economy. And, we have broadened the tax base.

In May of 2006, you commented that Afghanistan is a "Virgin Market – where the business and investment environment continue to enjoy rapid improvements in terms of advances in domestic revenues, budget compliance and legal infrastructure." Can you elaborate on what strides the Government has taken towards achieving its vision of a democratic state, pluralist society and a market-based economy?

The 'virgin market' is primarily related to the market aspect, not so much the pluralist society or democratic state areas. Let me first elaborate on what I meant by 'virgin market.' Because of the war, Afghanistan lost its productive capacity. Our imports are now more than almost US$ 4 billion. Our exports are not even US$ 500 million. We import a lot of our consumer goods. Most of these consumer goods should be produced in Afghanistan itself. I think there is a great opportunity for producers. This is a large enough market for import substitution, a market with an abundance of labor and with a competitive edge in some areas such as carpet weaving, in fruits that are specific to Afghanistan and food processing. What I meant by 'virgin market' is that anything you mention – whether it's the soft drink industry, the plastic industry, food processing – you mention it and we don't have it in Afghanistan; at least, we don't have the right amount. This is why it is abnormal to have such an imbalance in our exports and imports. We cannot continue with this sort of imbalance. The only reason why we are able to tolerate it now is because we are receiving grants and we are spending these grants on some of these goods.

I think there is great opportunity for people. I know some small entrepreneurs who have started businesses in Afghanistan - from restaurants to small hotels - and they have done very well. People, some living in Afghanistan but many coming to Afghanistan, see it as a place to make a fortune. Quite a few of them succeed. Really this is the place for the entrepreneur – to come, study the market, find out what is needed by the consumer, make an assessment – and I am pretty confident that they will make a good profit. There are two reasons for this. Firstly, a major factor is the proximity of the market. Secondly, our tax rates are much lower than other countries. If they make money, they keep most of that money. Also, we have given them the advantages that they can do whatever they want with their money. Some countries have stipulations that you have to reinvest a certain percentage of your profits in that country. Afghanistan is totally liberal in that sense. It is really the entrepreneur who decides what amount he wants to reinvest and what amounts he wants to take out of the country. That is what I meant by this being a 'virgin market.'

Unfortunately, the security situation is a negative and we hope that will improve so we can focus on the advantages Afghanistan has to offer. Another hindrance was the lack of infrastructure, but we are remedying that and I believe the roads are now more accessible. Moreover, the cost of transportation has declined dramatically. I believe the cost of power will change substantially within a year time. By removing these obstacles, the environment will be more welcoming. Communication used to be a problem but is no longer a problem. Otherwise, I think that the opportunities are great in Afghanistan.

What have we done for establishing a market-based economy? The principles of market-based economy are that government should not be so much in the production of goods and providing services which can be provided by the private sector. We adhere to this and that is why we have solid policy on privatization. That is why we have allowed the private sector to become dominant in the telecommunications sector, where the private sector now accounts for about 90% of the business. Similarly, private banking probably accounts for more than 90% of the business in the banking sector. Now we are moving into insurance, and we will be privatizing some of the state-owned companies. From an institutional point of view, we have an independent central bank that formed its policy. We have a very liberal investment law, where as I mentioned, people can own 100% of their enterprises if they want. We have a very liberal foreign exchange regime, a very liberal trade regime and these are what it takes to establish a market-based economy.

As far as the quality is concerned, we have made more progress in that area than in other areas. The Bonn Agreement stipulated presidential and parliamentarian elections and these elections were held pretty much on time and were both quite competitive. We hope such continues. I think Afghanistan has a very free press, so now I think the challenge is to make the press more responsible and more quality oriented. But, it is very free. Similarly, we have an independent judiciary, though it will take some time to translate legal independence into actual independence. But, certainly it exists; all of the citizens have equality of rights or equality before the law. Women's rights are very strongly advocated, and our parliament is probably one of the few in the world with 28% of representation being women. Therefore, this is what I mean by establishing a democratic state and a pluralist society; a pluralist society in the sense that there are womens' rights, human rights, civil rights, and different ethnic groups so no one should feel that they do not belong. There are different sects of Islam and they should feel very much at home. I believe that this has been provided in the Constitution and other laws of Afghanistan. As the regime matures, I think this will become a living reality, so that is what I meant by a democratic state and pluralist society and market-based economy.

Regarding foreign assistance, earlier this year you criticized that only 15% of funds actually reach Afghanistan, with 85% not being disbursed due to being lost along the way or going back to foreign countries. Why is this, and what attention and measures are being directed to correcting problems associated with this?

There are a number of separate issues in this question. First, of the total amount of resources, the percentage that is given to the Government is about 30%, not 15%. The remaining two-thirds of the money are spent directly by donors themselves, or they are spending their money through international agencies. The Afghan Government receives one-third of the resources that are allocated to Afghanistan.

Disbursement is something different. The disbursement rate in Afghanistan, in the Ministry of Finance, was rather low. When I came, the disbursement rate was 33%. So if the world budgeted 100-million dollars, only 33-million dollars, or 33%, was spent. Last year, our disbursement rate was 56%. Therefore, in two years time we increased it by more than 20%. This year we are hoping to reach a disbursement rate of 65%. But of the amount that is actually contracted, last year was about 67% and this year we hope to increase it to over 70%.

Now, the amount of money that is allocated to that particular budget, really any agency is able to spend 100% because there are procurement laws and they are very cumbersome. But to make a comparison, the disbursement rate for expenditure by the Government of Afghanistan from the national budget is higher than the amount that has been spent by donors directly. Donors' disbursement rate is about 40%, so we are ahead of them. Sometimes the argument is made that 'we donors can't give more money to the Government of Afghanistan because they will not be able to spend it.' Actually, data indicates that our expenditure rate is higher than money that is being spent directly by donors, so we don't buy that argument.

There is a third dimension to this question which is, of the money given to Afghanistan what amount comes to Afghanistan and what amount is being spent outside? That is a problem as there is a pretty large amount that is not absorbed by our national economy. Again, there is a very serious difference in this regard since of the money being spent by the national government, about 80%, is absorbed within the national economy. Of the money that is not being spent by the national government, which is spent directly by the donors, only about 15%-20% goes to the national economy. Therefore, the argument we are making that more money should go through the budget is based on a number of reasons. One, a much larger proportion will be absorbed by the national economy and therefore the multiplier effect will be much larger; the non-direct economic impact will be much larger. Second, we believe that money being spent by the Government buys better value. Our procurement is such that our contracts are much cheaper so we get a better value. Third, the people are holding us responsible. This is money that comes in the name of the people of Afghanistan and they think that the Government is in charge of this. Even though I have repeatedly stated that we receive only one-third, still we are asked by Parliament, by people, by journalists to give an account of all the money. I think it would add to the legitimacy of the Government of Afghanistan if we were in charge. Moreover, the international community is constantly telling us that we should have greater ownership. If you want the Government to have greater ownership, why not channel most of the resources through the budget and hold us accountable? With all of the fiduciary responsibility of standards that are prevalent worldwide, we would adhere to those fiduciary responsibilities.

So, the answer is extensive since the question has three dimensions, what percentage of money comes through the Government and what percentage is spent directly; what is the absorption capacity or the absorption rate of money that is being spent by the Government and; accountability and whether our money is spent appropriately.

The Afghanistan Compact calls for timely, transparent and comprehensive exchange of aid related information. What is being done to maintain close cooperation and partnership between the Government and the donor community?

The data that we collect is public knowledge. It is on our website and we provide that as public domain. We collect data; the Ministry of Finance has the responsibility of aid coordination. We have asked the donors to provide timely data, and this is part of what is called the Paris Declaration on Aid Effectiveness. In 2006, most of our donors have signed on the Paris Declaration, and we are one of them. In fact, I think Afghanistan was the first country that provided that information. Still, we need more information. I have asked my aid coordination people and we also have advice from the World Bank to make the variables regarding which we seek data more comprehensive and to arrange it in such a way that it will be more useful and easy to use by the public so that it will help accountability. So, on that point we are really dependent on donors. If donors do not cooperate with us, there is not much we can do. I should say that in the past year, there has been some substantial improvement in aid coordination and data on aid that has been provided to us by donors. There are still some areas that we would like to see improvement and we ask donors to cooperate with us. But, I would like to take this opportunity and thank donors for being a lot more cooperative in the past year than previous years in providing data.

Another problem within the Government, with no exception to the Ministry of Finance, is corruption. How are you addressing the need to build capacity and empower the people while ensuring that reform programs don't present or promote opportunities for corrupt practices?

Of course it is our great desire to be able to do something about fighting corruption and to do something to fight the amount of corruption. It would really make the President and myself extremely happy if we had huge progress on this front. But, it is such a difficult fight because very often the enemy, while it is there, it is not very visible and therefore hard to tackle physically or via laws. It is one thing for the Government to be determined to fight corruption and it's another thing to be successful at it.

We at the Ministry of Finance, myself personally, have asked the World Bank to study the issue of corruption thoroughly in Afghanistan – to tell me the modalities like what type or form of corruption exists, the amount of corruption, the causes of corruption and most importantly, how can we fight it. We want them to come up with concrete recommendations. Now, there is some concern that there is corruption with regards to the management of public finance. The World Bank made its recommendation and we implemented them all. We are quite confident - and I use the word 'quite' because I have not heard anything to the contrary - that there is no corruption in the management of public finance. What I mean is that there is no embezzlement of the public money, of the Treasury. I don't think we have paid anyone that we are not supposed to pay. I don't think we have overpaid anyone. The Minister of Finance is the Chair of the Procurement Commission; in the past I had delegated that to my Deputy. I have been chairing it directly for the past three or four months, and every Thursday from 2:00p.m.-5:00p.m., I deal with the contracts – whether the procedures were followed in accordance with the Procurement Law. And, with the Minister of Justice and the Minister of Economy we assess this quite meticulously. So, I am quite confident that there is not anything with regards to the management of public finance. The budget is spent well, the money is spent in accordance with the law, and auditors certify that the accounts balance at the end because we perform reconciliation.

The problem we have with corruption is in the delivery of services, and that is what many people are in touch with. I don't want to name any office, but they have people that come in contact with the Government and the Government employees will not provide services unless they get something. This is the area we need to fight, but I can't have an intelligence service person in each office to monitor this activity and report to me. We are waiting for recommendations from the World Bank on this. I think there are certain procedures that can probably help us. I think that for some people, procedures are not enough and I think there should be some cover-up operations. I think there should be an intelligence network to report on people and then perhaps a more intensive investigation before we refer the case to the Attorney General's Office. I think all of these should work and I am waiting for the specific recommendations from the World Bank.

We have taken a step at the Ministry of Finance which was to establish a complaint office one month ago that allows anyone to submit via a hotline. Anyone that encounters corruption or that is asked to make payment illegitimately can be quite anonymous and refer it to our office so we can investigate it. Of course, if they stand by their report, it would help us a lot. So, I do realize that it is a major problem and we are doing the best that we can in this area.

We are waiting for a professional opinion on this so we can implement those professional opinions. We have not yet received the specific advice, but after placing the request 15 months ago, they have submitted the first part of the report. That was on Public Finance and we have implemented that. They told us initially that it would take a year and a half to complete, so based on that I expect that they will disclose their recommendation relatively soon. It is my hope that they have concrete recommendations because really it does not help when people criticize the government but nobody can come up with a concrete recommendations as to what to do. It would be one thing if the international community or some international agencies made a specific recommendation of what should be done, but the government did not implement those recommendations. If that were the case, then of course we should be blamed. But, if they are lost and cannot offer any advice as to how we should fight it – and simply we repeat that it should be fought – that is not going to be terribly helpful.

I know my own approach to that is what I said, establish a complaint office and perform some intelligence work to discover who is misbehaving. I believe that in a lot of countries think operations pose a deterrence. It's not like Afghans are more corrupt than people from other nationalities; I don't believe in that. I think that in other places what is happening is that there is a deterrence. People are scared that they might be caught and if they are caught that they will be punished so severely that they don't dare do anything. This is what I think we need to do, to have very severe laws in this regard and the ability to punish violators. Also, we need to guard against harassment of honest people since occasionally some people may report someone who is not really involved – this we must watch out for. We need to catch a few people and make punishment severe so that it will establish an example and, at the same time, be meticulous as to not violate the innocent.

In your view, how much of a role has Japan played in the progress/development of Afghanistan?

Japan is a major donor. Japan has donated more than US$ 1.4 billion and for us Japan is strategic.

It is one of the four most major contributors, and its money is being spent in different areas. One area in which they have spent a lot of money and which they hold the lead position is demobilization, disarmament, and reintegration of the freedom fighters we used to have. I think that is a successful program. Now, they have the lead position on DIAG, doing the same thing but at the level of individuals. Japan has also been involved in education and is contributing a lot of money to the United Nations Development Programme (UNDP). I don't have the profile of Japan's assistance, but Japan is a major player and we would like Japan to continue to be a major player. We are very appreciative of our relationship with Japan and I am very pleased with the discussion that I have had with the Minister of Foreign Affairs, the Minister of Finance, the Chief Secretary to the Cabinet – they are all still very supportive and I am quite confident that Japan will continue to help Afghanistan in its effort to reconstruct and develop the country.