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I. Current Development Trends and Issues
II. Implementation of the Country Strategy and Program
III. Portfolio Management Issues
>>IV. Country Performance and Assistance Levels
Afghanistan: Country Strategy and Program Updates 2004-2006

III. Country Performance and Assistance Levels

A. Proposed Lending Level

27. Afghanistan is making good progress in recovery and rehabilitation, but reconstruction and development will occur over a much longer horizon. A structured loan pipeline to implement a poverty reduction strategy and support reconstruction and development will require a fairly large lending program. Subject to the availability of resources, requirements for 2004-2006 are $600 million comprising $570 million in ADF and $30 million in Technical Assistance Special Fund (TASF). The loan pipeline prepared in collaboration with the Government totals $570 million for 12 programs and projects-an average annual lending level of $190 million: $170 million in 2004, and $200 million in 2005 and 2006 (Table A1.10, Appendix 1).11 This amount is in line with ADB's annual lending to Afghanistan of $167.2 million in 2002 and $150 million in 2003.

28. Thematically, the entire lending program for 2004-2006 would be allocated to economic growth. In terms of poverty focus, most loans, TAs, and other nonlending operations in the operational program are classified as core poverty interventions.12 Social development and gender concerns will be mainstreamed in loans and TAs to the extent practicable to engage community members, local government, and civil society in decision making for planning and implementing projects, and promote women's participation accordingly.

29. ADB supports the Government strategy of a private sector-led economic recovery. ADB's interventions are expected to total about $53 million in 2004 and $100 million in 2005.13 Depending on progress in policy dialogue with the Government to establish an environment conducive to investments and further discussions with cofinanciers, ADB could invest in the energy and transport sectors as well as in bank and nonbank financial institutions to develop Afghanistan's financial sector. ADB's private sector investments are expected to catalyze investments of about $240 million in 2004 and $450 million in 2005.

B. Nonlending Program

30. Under the 2004-2006 nonlending program ( Table A1.11, Appendix 1). ADB will provide grant capacity building and project preparatory TA totaling $30 million ($10 million per year) in support of governance reforms, capacity building, policy reforms and pilot projects in the transport, energy, natural resource management, governance, and financial sectors. Subject to the availability of resources, a TA pipeline has been prepared comprising 36 activities totaling $63.6 million (an average $21.2 million annually), including $33.6 million in grant cofinancing. The 2004-2006 program will include increased support for project preparatory TAs (12 totaling $15.35 million). Other nonlending pilot activities to be financed by bilateral and multilateral sources would cover renewable energy and biodiversity management, and grant-funded pilot efforts linked to loan-financed projects.

C. Summary of Changes to Lending and Nonlending Program

31. Several deviations from CSPU 2003-2005 are notable. First, the Government requested ADB to expand its current focus to provide loan assistance for governance and the financial sector. Second, the Government requested that ADB support at least one program loan per year.14 Third, the Government welcomed a diversification of ADB's program to include increased support for private sector investments and guarantees and reliance on cofinancing.

32. CSPU 2003-2005 proposed a 2004 lending program of $190 million in ADF resources, for the ASPL ($50 million), Herat-Andkhoy Road Improvement Project ($100 million), and the Regional Airports Rehabilitation I Project ($40 million). Although all three loans will be delivered as planned in 2004, the lending program was cut by $20 million, or about 11%, necessitating revisions in project scopes and mobilization of cofinancing. In 2004, an Afghanistan Investment Guarantee Facility ($5 million) to provide political risk coverage for foreign investors with small- and medium-scale investments, has been included. The 2005 program also includes support for a Power Transmission and Distribution Project ($50 million) and a private investment support facility ($2 million) to catalyze private investments. In 2006, a political risk guarantee of $100 million for the rehabilitation and development of gas-producing wells is included. TA will be provided in 2004-2005 for a road master plan ($2 million), renewable energy, environmental protection, and natural resource policy and planning ($2 million), and poverty and gender assessments ($550,000). A new TA in 2004 for capacity building for the MOF ($1.5 million) will replace planned support for a debt recording and management system. An advisory TA on security for ADB-financed projects ($1 million) will assist the Government in providing security for ADB projects. Cofinancing totaling $30 million will be sought for pilot projects involving water supply, river basin development, and community development. ____________________
  1. The CSPU 2003-2005 endorsed by the Board of Directors in June 2003 included a lending program totaling $190 million in 2004 and $200 million in 2005.
  2. Actual assistance levels will depend on country performance, including the Government's ability to sustain macroeconomic stability, proven commitment to implement policy and institutional reforms, absorptive capacity, debt sustainability, effectiveness in utilizing ADB's resources, and continued improvements in the governance dimensions of ADB operations. Afghanistan is still being treated as a postconflict developing member country, with lending levels determined under the exceptional circumstances provisions of the performance-based allocation policy. Although prepared within a medium-term framework, the CSPU focus is on the period January- December 2004.
  3. Comprising $10 million in banks and funds, $13 million in edible oil processing, and $30 million in telecom expansion in 2004; and $75 million in cement production and $25 million in petroleum storage and retailing in 2005.
  4. The Government requested the inclusion of program support for public service delivery reform ($80 million) in 2005, and financial market and private sector development ($80 million) in 2006.
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