The International Monetary Fund approved a $133.6 million (84.3 million pound) loan programme for Afghanistan marking a fresh start to relations strained since last year by a bank corruption scandal.
The agreement is set to unleash up to $200 million in donor funding to Kabul, including $100 million held up since the start of the year by the dispute.
The IMF said it would immediately disburse $18.9 million of its loan to the Kabul government, Reuters reports.
“The approval of the (extended credit facility) allows our international partners to reengage on the development agenda in Afghanistan,” the Afghan finance ministry said in a statement.
The Washington-based lender suspended the Afghan program in September 2010 after reports of corruption, bad loans and mismanagement at Kabulbank, forcing the central bank to take over the major lender.
The extent of the problem became apparent in June, when a scheduled payment of $70 million from the World Bank-administered Afghan Reconstruction Trust Fund (ARTF) was automatically withheld in the absence of IMF support.
The government is currently conducting an audit of the bank and the IMF said it would likely go on sale in mid-2012.
The new three-year IMF loan will support Afghanistan’s economic programme to 2014, when foreign combat troops will withdraw and the government needs to shoulder more security spending to fight a Taliban insurgency, the IMF said.
Despite the presence of about 130,000 foreign troops, violence across Afghanistan is at its worst levels since the Taliban were toppled by U.S.-backed Afghan forces 10 years ago, according to the United Nations.
Foreign aid to the government is also set to slow over the next three to five years but will remain substantial.
The IMF said the government is committed to imposing a Value-Added Tax by 2014 under the programme, which would boost revenues by about 2 percentage points of GDP.
UK Secretary of State for International Development Andrew Mitchell said IMF agreement “marks an important step forward on the path to transition to Afghan control.”
“But the fight to tackle corruption does not end here,” he said in a statement and urged more economic reforms.
The United States urged Afghanistan to take more steps to meet IMF recommendations. State Department spokesman Mark Toner said the loan program “shows that the Afghan government is able to address serious reform issues.”
IMF mission chief to Afghanistan, Axel Schimmelpfennig, said the upcoming withdrawal of combat troops and prospect of less aid “helped focus minds” on reaching a program deal.
“The authorities have done a lot of convincing and a lot of building consensus within the government, which took some time and took a lot of (political) capital but eventually they got the consensus to move on,” he said on a media conference call.
The cost to Kabul from the Kabulbank scandal is around $825 million, although the Afghan authorities are hoping to recover assets to the tune of $935 million, Schimmelpfennig said.
“Of course in bank failures and fraud cases like this it is very rare that you actually do recover the full amount, so we don’t have an estimate of what the number is that will eventually be recovered,” he added.
The IMF demanded that some of the assets be recovered and urged the government to strengthen the financial sector to prevent another scandal.
Schimmelpfennig said the next IMF loan tranche due to Afghanistan would depend on finalizing agreements with Kabulbank shareholders that are willing to repay their loans, and a deal on the recapitalization of the central bank.
He said the government had committed to pursue criminal charges against the architects of the Kabulbank fraud but emphasized this was not part of IMF program conditions.
IMF support is a critical seal of approval closely watched by donors, who would normally suspend funding to a country at any sign of disapproval by the global lender.
IMF Deputy Managing Director Nemat Shafik said the Afghan authorities had taken steps to avoid a broader financial meltdown in the aftermath of Kabulbank crisis urged it to recover assets and bring those responsible to justice.
“Asset recovery and legal actions against the architects of the fraud have lagged and need to be pursued more forcefully,” she said.