UPDATE 1-Afghanistan blames lack of support for bank crisis

Thu Feb 17, 2011 4:22pm EST

* IMF paints grim picture, support for Afghanistan in doubt

* Banking crisis muddies complicated Afghan picture

* U.S. official rejects Afghan claims

(Adds comments from U.S. Treasury, official)

By Paul Tait and Emma Graham-Harrison

KABUL, Feb 17 (Reuters) - The Afghan government said on Thursday inadequate foreign technical support and a bad audit had worsened a crisis at the country's biggest private bank, a scandal that could jeopardise Western aid to Afghanistan.

The fate of politically-connected private bank Kabulbank, which has lost hundreds of millions of dollars, was on the agenda at meetings between Afghan officials and a U.S. Treasury delegation led by Deputy Treasury Secretary Neal Wolin.

The Afghan Ministry of Finance said the U.S. and Afghan officials had agreed that the crisis was caused by poor management and supervision but exacerbated by...weak international support.

"Afghan and U.S. officials agreed that (the crisis)...was compounded by the erroneous audit by PricewaterhouseCoopers, and ineffective international technical assistance and supervision," a statement said.

A U.S. official with knowledge of the issues rejected the Afghan claim that both sides had agreed the international community contributed to the crisis.

But a Treasury statement about the meeting said only that Kabulbank was discussed as part of wider talks on the financial sector, and the U.S. team called for rapid action on the crisis.

"The Deputy Secretary met with Afghanistan's leadership to discuss the importance of Afghan efforts to reform and strengthen its financial sector and stressed the need for the Afghan government to take swift and decisive action to ensure a credible, effective resolution of issues related to Kabul Bank," the statement said.

The Afghan government and central bank have always been responsible for supervising their own financial sector, and aware of that role, said the official, who declined to be named because of the sensitivity of the issue.

International support has also been aimed at the financial sector overall rather than private banks -- focusing on issues like money laundering and capacity building, he added.

AID AT RISK

The International Monetary Fund (IMF) has painted a grim picture of the Afghan government's handling of the Kabulbank crisis, diplomats have told Reuters, an assessment that could lead to the fund ending its Afghan support programme.

The IMF and the Afghan government and central bank are at loggerheads over what to do with Kabulbank. The IMF wants it placed in receivership and sold quickly to stem losses but the government wants a gradual rehabilitation and sale.

Wolin said Washington backed the IMF.

"He (Wolin) also discussed the status of negotiations between the IMF and Afghanistan on a possible IMF program and expressed U.S. support for the IMF's position," the statement said.

The government's inability to come up with a solution since the scandal emerged last year has worried international partners who have provided billions of dollars in aid since the Taliban were toppled in 2001.

The crisis has worsened already tense relations between Afghan President Hamid Karzai's government and its Western backers at a crucial time, with the gradual handover of security responsibility to Afghan forces to begin mid-year.

A decision by the IMF not to renew support would have a knock-on effect among donor nations. The European Union has already said donors will have to review their commitments if the crisis is not resolved satisfactorily.

Aid from some donor countries and agencies depends on an IMF programme being in place. Donors contribute about 70 percent of the Afghan state operating budget and also spend billions in direct aid outside of Afghan control.

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