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Afghan delays in addressing banking problems imperil foreign aid

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The Afghan government has failed to take sufficient action to confront the scandal at Kabul Bank, forcing an impasse that has imperiled millions of dollars in foreign aid, according to U.S. and other Western officials.

Among the programs at risk is $70 million in funding from the International Monetary Fund, which would include money to pay Afghan civil servants. The IMF has refused to approve that effort until Afghanistan addresses concerns about its financial system, most of them related to Kabul Bank, the private institution that nearly collapsed last year after revelations of massive insider lending.

The Afghan government took over Kabul Bank last year, split it in two and used more than $800 million to bail it out. Western officials, however, are pushing for additional reforms to identify wrongdoers and collect enough of the outstanding loans to stabilize the country’s banking sector.

“What is discouraging to many countries is that there is no progress on this matter,” said one Western official, who spoke on the condition of anonymity because he was not authorized to publicly discuss the matter. “These financial-sector issues have not been tackled well, and the whole economic reforms are not progressing well. The donors are basically saying, ‘What is going on here? Why are there so many problems?’ ”

The political tension over the long-running issue built again this week as the central bank’s governor, Abdul Qadir Fitrat, abruptly resigned and fled to Virginia, saying he was afraid for his life and accusing the Afghan government of political interference in the resolution of the country’s banking problems.

Afghan officials countered that Fitrat was involved in corruption at Kabul Bank and was running away to avoid prosecution.

The Afghan government and the IMF reached an agreement in April to move forward on several reforms, but little progress has been made on fulfilling these measures, according to U.S. officials. Among the reforms, the IMF wants the completion of a forensic audit at a second institution, Azizi Bank, which has come under increasing scrutiny as officials seek to avoid similar problems there.

The Afghan government initially agreed to complete the audit but is now saying that simply starting the process should be sufficient, according to U.S. and other Western officials.

The IMF also wants a timetable for Azizi Bank to take measures in response to an inspection by the central bank. The officials spoke on the condition of anonymity because of the sensitive nature of the discussions between Afghanistan and its creditors.

The Afghan government and the IMF had also agreed that parliament would approve budgetary funding by the end of May to recapitalize Kabul Bank in an attempt to stabilize the financial system. That effort has failed to win parliamentary support.

Another outstanding issue is the slow pace of recovering Kabul Bank money taken by shareholders.

Of the more than $900 million in outstanding loans — many to high-profile borrowers such as two brothers of President Hamid Karzai and First Vice President Mohammed Fahim — the government has collected less than $100 million, officials said. Some current plans for repayment extend to at least eight years.

The IMF is seeking to ensure that the plans are legally binding and would provide for repayment within three years.

Omar Zakhilwal, the Afghan finance minister, publicly criticized the IMF last week and said that Afghanistan has gone a long way toward meeting the fund’s demands and that he was “running out of patience” with the situation. U.S. officials worry that the flight of the central bank governor will distract Afghan leaders from any effort to hold accountable the powerful beneficiaries of Kabul Bank’s largess.

IMF spokesman Raphael Anspach said the fund is committed to continuing negotiations, and he acknowledged that the Afghan government had made some progress, particularly in liquidating Kabul Bank. “Our overarching goal has been to assist the authorities to deal with the problems at Kabul Bank and protect the financial system and the economy,” he said.

© The Washington Post Company