AFGHANISTAN Incentive Program Development Policy Grant (P164882) ARTF Grant No. TF0A9090 Update on Disbursements from the Afghanistan Reconstruction Trust Fund 1. In line with the World Bank’s operational policy on Development Policy Financing (OP 8.60), disbursement of a multi-tranche loan is conditioned on: (a) satisfactory implementation of the program supported by the loan, including compliance with the program’s tranche release conditions; and (b) maintenance of a satisfactory macroeconomic policy framework. This document summarizes the progress made to the tranche release conditions (TRCs) for the release of a US$210 million Afghanistan Reconstruction Trust Fund (ARTF) grant under the Incentive Program Development Policy Grant to the Islamic Republic of Afghanistan. 2. The Program is supported by a SDR 62.6 million (US$90 million equivalent) IDA grant and a US$210 million grant from the ARTF. The IDA financing was approved by the Executive Directors on June 14, 2018 and the ARTF grant financing was approved by the ARTF Management Committee on July 9, 2018. The Program has been progressing on track. The first tranche of US$90 million of IDA grant is associated with three prior actions and was released on September 6, 2018 upon the Program’s effectiveness. The seven TRCs for the release of the seven tranches of US$30 million each of ARTF grant have been met by the Borrower. In addition, the Bank finds the macroeconomic policy framework of the Borrower satisfactory and consistent with the objectives of the Program for the purposes of releasing the tranches associated with the seven TRCs of the Program. Background 3. The Program supports continued progress with key reforms under the Afghanistan National Peace and Development Framework (ANPDF). Reforms supported by the operation are organized under two pillars: i) strengthening the policy framework to support state effectiveness, private investment, and social inclusion; and (ii) improving the policy and institutional framework for public financial management. The Program is the first in a series of three planned operations aligned with Government’s current three-year program of policy reforms. 4. The Program introduced innovations to the standard Development Policy Financing design, within the current framework of the Bank’s DPF Policy. First, the Program is composed of eight tranches. The first tranche of US$90 million of IDA grant is associated with three prior actions and was disbursed on September 6, 2018 upon the Program’s effectiveness. Seven tranches of US$30 million each of ARTF grant will be released upon the fulfilment of each tranche release condition. Second, disbursement amounts associated with TRCs are timing dependent. Tranches will be released in full if the associated TRCs are fulfilled by the targeted Completion Date (November 15, 2018). Tranches will decrement proportionally in amount if fulfilment of the TRCs extends past the targeted Completion Date. Tranche amounts will be 100 percent forfeited if TRCs are not met six months after the targeted Completion Date. Macroeconomic Policy Framework 5. The macroeconomic policy framework is adequate but remains exposed to substantial downside risks. Growth is expected to slow down to 2.4 percent in 2018 from 2.7 percent in 2017 amid growing uncertainty over parliamentary and presidential elections. Fiscal policy remains prudent, with a small 1 budget deficit expected in 2018. Inflation stays moderate within 3 percent and foreign exchange reserves reach over eleven months of import cover. The macroeconomic outlook is subject to substantial downside risks that were presented to the Executive Directors on June 14, 2018: (i) fiscal and external stability heavily hinges on aid flows which finance over half of budget and most of the large trade deficit; (ii) further deterioration in the security and political situation would severely undermine confidence and dampen growth. On the other hand, recent developments towards a peace agreement with the Taliban provide some cause for cautious optimism regarding prospects for an improvement in the security situation. Progress Against Tranche Release Conditions Associated with ARTF Grant Financing 6. The Program is on track, with all seven TRCs fulfilled before the targeted Completion Date (November 15, 2018). Timely completion of all TRCs allows full disbursement of all associated tranches. Three TRCs under the first pillar of the Program support private investment through the national roll-out of E-money and mobile payments, improved financial sustainability and investment capacity of power utility, and establishing a legal policy framework for strengthened irrigation and water management. Four TRCs under the second pillar support public financial management through strengthened management of public investment projects and O&M (Operations and Maintenance) expenditure, and improved tax administration with electronic tax services and correct categorization of tax payers. Below are the seven TRCs with respective fulfilment dates: Condition 1: The President issues a decree formalizing and defining Asan Khedmat (AK) responsibilities for integrating national IT infrastructure necessary to roll out the E-money and digital payment system. [Fulfilment: November 11, 2018] Condition 2: DABS (National Electricity Utility of Afghanistan) and MoF sign a Partnership Agreement to improve DABS’ performance over 2018-2020, including: i) a number of annual performance targets to be met by DABS; and ii) restructuring of DABS debt to MOF, conditional on performance improvements. [Fulfilment: November 12, 2018] Condition 3: The Recipient’s Cabinet approves an Irrigation Policy and a Dry Lands Agriculture Policy to increase the resilience of agriculture-based livelihood activities against climate change and strengthen management of water rights. [Fulfilment: October 30, 2018] Condition 4: MoF issues a revised Budget Circular 1 that: (i) clearly defines the time-bound process and requirements for project proposal submission from ministries and agencies, including the submission of project concept notes according to the standard template and guidelines provided by the MoF; (ii) requires all projects proposals to include cost estimates for operating and capital expenses needed for the project life-cycle. [Fulfilment: July 14, 2018] Condition 5: ARD (Afghanistan Revenue Department) rolls out an electronic taxpayer management system by making fast-track tax filing available in Large Taxpayer Office. [Fulfilment: September 19, 2018] Condition 6: ARD reviews and revises LTO (Large Taxpayer Office) and MTO (Medium Taxpayer Office) client lists to ensure correct categorization of taxpayers and risk-commensurate compliance and enforcement efforts. [Fulfilment: September 19, 2018] 2 Condition 7: Cabinet approves a revised O&M Policy to: (i) improve O&M expenditure management; and (ii) mandate piloting of the revised O&M Policy by four line-ministries in preparing their 2019 budget. [Fulfilment: November 14, 2018] Conclusion 7. In view of the satisfactory implementation of the Program, including compliance with the TRCs, as described in Schedule I, Section II, Part C of the ARTF Grant Agreement, and maintenance of a satisfactory macroeconomic policy framework, the Bank, as Administrator of the ARTF, has informed the Borrower of the availability of the seven tranches associated with TRCs in the amount of US$210 million. Disbursement of the seven traches was endorsed by the ARTF Incentive Program Working Group Technical Review on December 6, 2018, as per the ARTF Management Committee’s decision on July 9, 2018 which approved ARTF financing for the Program, subject to the fulfilment of conditions as described in the ARTF Grant Agreement. The Implementation Completion Report will be presented to the Board after the closing of the program on May 15, 2019. 3