South Asia

Afghan row with IMF over failed bank threatens salaries

Men walk outside Kabul Bank
Image caption Kabul Bank was taken over by the Afghan central bank in September 2010

The Afghan finance minister has said he is "running out of patience" with the International Monetary Fund (IMF) after it rejected a plan to deal with the troubled lender Kabul Bank.

Kabul Bank nearly collapsed last year after it emerged it had made unsecured loans of hundreds of millions of dollars to the Afghan elite.

The IMF is blocking the release of $70m (£43m) in aid because of its concerns.

Unless a deal is agreed, Afghanistan may struggle to pay its civil servants.

The government uses Kabul Bank to pay salaries, including those of teachers, police and the army.

Diplomats told the Reuters news agency the Afghan government could face a "cash crunch" as soon as next month.

Kabul relies on aid for about 40% of its operating budget and for all of its multi-billion dollar reconstruction and development projects.

Finance Minister Omar Zakhilwal said further talks with the IMF would be "a waste of [his] time".

Concerns about abuses

Mr Zakhilwal said the IMF had asked the Afghan parliament to inject $73m into Kabul Bank in a supplementary budget. When parliament refused to do so, the IMF withheld its own release of $70m to the government.

"We are now negotiating with a partner who is not a willing partner to actually conclude this," the minister told a news conference in Kabul.

The ministry of finance sent two proposals to the IMF last week, but diplomats said these were not sufficient to guard against future abuses.

The Afghan parliament has now begun its 45-day summer break, and Mr Zakhilwal says it will not be recalled to deal with the crisis.

The IMF suspended its support programme last September when the Kabul Bank scandal came to light. Without the IMF's seal of approval, donors are unlikely to contribute funds.

Afghans rushed to withdraw their savings when it emerged that the bank had been lending money to government officials and their friends and relations.

Kabul Bank was bailed out by the central bank as part of efforts to prevent it from collapsing after former executives granted themselves off-the-books loans worth a reported $900m (£555m). In April, it was split into a "good" and "bad" bank.

The bank has almost $1bn (£600m) in outstanding loans at a time when many foreign governments and donors are warning that they will not make more aid payments until the bank's problems are dealt with by the IMF.

The World Bank says 97% of Afghanistan's gross domestic product (GDP) is linked to spending by the international military and donor community.

The fallout is all the more damaging as the country prepares for 2014, when the number of foreign troops is due to be substantially reduced.

Between now and then the government is hoping to finance a $820m (£506m) bail-out of the bank - with the ministry of finance announcing that it will ramp up its tax collection efforts to pay for it.

Public confidence in the banking system - never strong under the Taliban - has now been almost completely destroyed, correspondents say, with thousands of safes being sold over the last year to people wanting to hoard cash at home.

No payments have been made by donors into the Afghanistan Reconstruction Trust Fund (ARTF), the main vehicle for international aid to Afghanistan, for the past three months.

Payments to the ARTF have been stopped because of the continued lack of an IMF support programme, a seal of approval required by most donors before they pledge aid.

Kabul Bank was founded in 2004 by Sherkhan Farnood, a leading international poker player. Other co-owners included Mahmood Karzai, a brother of President Hamid Karzai.

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