By Paul Tait
KABUL (Reuters) - The International Monetary Fund has rejected Afghanistan's plan to deal with a failed bank at the center of a corruption crisis, a step that has blocked tens of millions of dollars in aid and may put development projects worth billions more at risk.
Three diplomats involved in negotiations between the aid-reliant Afghan government, donor nations and the IMF said Kabul had failed to address the fund's concerns over the scandal-hit Kabulbank by a deadline last Saturday. That meant a scheduled payment of $70 million from the World Bank-administered Afghan Reconstruction Trust Fund (ARTF) was automatically withheld.
"It seems the IMF has rejected the Afghan government's latest proposal to solve the bank crisis," said one of the diplomats, who asked not to be identified.
Corruption, bad loans and mismanagement cost the politically well-connected Kabulbank, Afghanistan's biggest private lender, hundreds of millions of dollars in what Western officials in Afghanistan now openly call a classic Ponzi scheme.
One Western diplomat in Kabul, speaking on condition of anonymity, described the bank stalemate as "the IMF's second biggest problem after the Greek bailout."
President Barack Obama voiced concern over the crisis during a video conference with Afghan leader Hamid Karzai last week, directly linking it to negotiations for the long-term relationship between the two countries, the Kabul-based diplomats told Reuters.
Ties between Washington and Kabul have been strained for years, with the Kabulbank crisis adding extra pressure just as the United States prepares to begin a gradual drawdown of its forces from next month in a transition process that will end with the withdrawal of all foreign troops by the end of 2014.
"There is a bigger political process at stake here. The political pressure here is that we've got to get this solved so we can go ahead with transition," one diplomat said.
The IMF told Reuters in Washington on Tuesday that it was ready to move quickly to disburse loans to Afghanistan once Karzai's government fixed financial and corruption issues that led to the collapse of Kabulbank last year.
Karzai's cabinet met to discuss the Kabulbank crisis last Thursday, and Finance Minister Omar Zakhilwal then sent a letter to the IMF at the weekend containing compromise proposals, one regarding the future auditing of banks, the diplomats said.
The IMF rejected the finance ministry's proposal as insufficient to guard against future abuses, they added.
Finance Ministry spokesman Aziz Shams, however, said he was not aware of any letter sent to the IMF. He said the ministry was cooperating with the fund and "there hasn't been any problem."
"WE WILL HOLD BACK MONEY"
Kabulbank, which has close ties to the Afghan leadership and their families, has about $926 million in outstanding loans, of which around $579 million is considered to be at risk. Afghan officials say about $347 million will be recovered, but donors want more aggressive work done on asset recovery.
The bank doled out nearly half a billion dollars in unsecured, undocumented loans to a roster of Kabul's elite, including cabinet ministers and a powerful former warlord, anti-corruption officials have said.
No payments have been made by the ARTF for the past three months, diplomats said, because of the IMF's failure to renew its support program over the stalemate. An IMF support package is a seal of approval most donors need before pledging aid.
The fund has been reviewing its support for Afghanistan since last September, when news of the Kabulbank scandal broke.
"On our side we are just waiting for resolution of the IMF issue. In the meantime, we will hold back money to the ARTF," another European diplomat said.
Western officials now fear a "cash crunch" will hit the Afghan government by late summer, risking even further political instability if wages for hundreds of thousands of civil servants funded by the ARTF go unpaid.
Representatives of donor nations voiced concern in a letter sent to the IMF earlier this month. The letter, a copy of which was seen by Reuters, said the government's operating budget was likely to be hit by the continued absence of IMF support.
The Afghan government has also expressed frustration with the senior IMF official leading negotiations.
An IMF team visited Afghanistan in February but the fund is represented in Afghanistan by only one official. "With a crisis this significant, one would expect the IMF to deploy a team of people to Afghanistan," one diplomat said.
Karzai has accused foreign donors of contributing to the corruption scandal, saying they failed to act quickly enough to stem losses at Kabulbank and that they had given bad advice.
The Finance Ministry has also said the crisis was exacerbated by a flawed audit of the bank done by a Pakistan-based member of accounting firm PricewaterhouseCoopers.
FINANCE MINISTER TURNS TO RUSSIA
The withholding of aid began with a warning shot when the British government refused to pay 85 million pounds ($137.6 million) in promised aid in March.
On top of the delayed payment of $70 million, the ARTF was also expected to funnel about $200 million to support the Afghan government's recurrent costs this year. That represents about 25 percent of Afghanistan's non-security wages bill, most of it in teachers' salaries.
In the longer term, development projects worth billions of dollars are now at risk unless the IMF and the Afghan government are able to agree on a plan to liquidate Kabulbank and rehabilitate Afghanistan's fractured financial sector.
Those projects are needed to help rebuild infrastructure shattered by three decades of conflict, including everything from roads and schools to power, water and other basic services.
Finance Minister Zakhilwal is in Russia on a 12-day visit, holding talks with officials including Russian Economy Minister Elvira Nabiullina and President Dmitry Medvedev. In July 2010, Russia scrapped almost all of Afghanistan's $12 billion debt.
A Russian official in Kabul told Reuters that around $470 million in debt remained. He said Zakhilwal was "in Russia for one goal only: debt relief." Russia has been tentatively flexing its muscles again in the region recently after the Soviet Union's disastrous occupation of Afghanistan in the 1980s.
(Additional reporting by Amie-Ferris-Rotman and Hamid Shalizi in KABUL and Lesley Wroughton in WASHINGTON; Editing by Miral Fahmy)