While Banking Sector Drowns, IMF Has "Plans" For Kabul Bank

The International Monetary Fund is worried about Afghanistan‘s economy .  The under-reported, though devastating charges of fraud and malfeasance that surround the September 2010 run on Kabul Bank threaten to bring down the nascent Afghan banking sector.  However, the fiasco has also had wide-ranging political effects in Afghanistan and within U.S. and NATO diplomatic circles—even if leaders in Washington have been fairly quiet about the story.

In fact, the story behind the scandal has gone viral within the community of diplomats and analysts interested in politics and life in Afghanistan. The New York Times reporter, Dexter Filkins published an astounding piece in this week’s New Yorker magazine; it is this week’s must read piece. The piece demonstrates how Kabul Bank bribed Afghanistan political leaders in order to avoid having its books looked into.  It seems, Kabul Bank was being run to enrich a handful of private citizens who essentially played with public money and bought real estate in Dubai that subsequently went bust.

The Central Bank of Afghanistan intervened to prop up Kabul Bank after the loans failed at a loss of nearly $900 million.  That intervention will likely impact inflation, already reeling from a jump from 5% in July 2010 to around 18% in January 2011.  The increased inflationary pressure is sure to  negatively impact the consumption behavior of the average Afghan family.  But that may be an issue of secondary importance for the international community. (It cuts the heart to think that may be so!)

Within the international development banking community, particularly the IMF, the strategy to save Afghanistan’s nascent banking sector will likely require pumping more liquidity into Kabul Bank, while investigating the sources of public and private corruption that consequently drove Kabul Bank into the ground.  Furthermore Kabul Bank is to go into receivership, with the aim of eventually winding it down.  It is a fair question to ask whether those simultaneous moves can be made, and whether if made, one can comfortably pick an institution that will be charged with the banks receivership.

What is fairly obvious is that something will be done; that something will be costly and will likely only benefit the culprits who brought down the banking system in Afghanistan. The IMF secures credit worthiness of a country’s investments and for now it has chosen not to sign up for another credit program in Afghanistan.  This might delay at least a few aid packages from hesitant aid donors.  Nevertheless Kabul Bank’s fortunes will require swift resolution, and donor countries are likely to put up aid funds in order to make sure their already massive investments do not collapse under the weight of the endemic fraud and corruption in Afghanistan.  So it is more than likely that politics and foreign aid donation will go on as before, without any serious changes to the rules of the game in Afghanistan’s economy.

Consider, the IMF has not yet moved decisively to directly intervene into the affairs of Kabul Bank.  A recent press release lays out plans and ideas, but does little to move things around on the ground.  For instance, the IMF takes for granted that:

“the authorities have taken measures to reassure depositors, put the bank under the control of the central bank, and suspended shareholders’ rights. They are now finalizing a comprehensive plan to address the outstanding issues with Kabul bank. The goal should be to design and implement a plan that is transparent, credible, and fully financed.”

Moreover, “this will require several immediate measures to ensure the stability and future development of the financial system, beginning with a clear communication to explain the steps to be taken to deal with the bank and protect the banking system.”

Certainly the goal should be to do a number of things, all at once.  But those plans are likely to be limited by feasible policy moves to actually achieve those goals.  Given the language employed in the press release, it is not obvious how donor entities will ensure any kind of feasible compliance with the suggestions of the IMF and other international and foreign institutions. Indeed, one cannot look to the Kabul government to ensure compliance of any sort to any international norm or best practice, at all.