KABUL (Reuters) - An International Monetary Fund assessment of how the Afghan government handled mismanagement and fraud at the country's largest private bank is so bleak it could jeopardize critical donor support for Afghanistan and have devastating political consequences, diplomats said on Tuesday.
Corruption, bad loans and mismanagement cost Kabulbank hundreds of millions of dollars and the government's inability to come up with a serious solution could see the IMF withdraw its support for aid-reliant Afghanistan, four diplomats said.
That in turn would trigger similar responses from other international partners and agencies who would no longer be able to supply loans or aid without an IMF program in place.
The Kabulbank scandal, in which at least $579 million has been put at risk, has added a banking crisis to Afghanistan's troubles, which include a growing insurgency and political paralysis.
The International Monetary Fund and the Afghan government and central bank are at loggerheads over what to do with the politically well-connected Kabulbank: the IMF wants it placed in receivership immediately to stem losses but Kabul wants a gradual rehabilitation and sale.
The IMF team gave a briefing to Kabul-based diplomats representing donor nations late on Monday after meetings over the past 10 days with Afghan Finance Minister Omar Zakhilwal and Central Bank Governor Abdul Qadir Fitrat.
It will now report to its executive board before a decision is made whether to continue its Afghanistan program.
According to diplomats at the briefing, one IMF team member described the scandal as the worst banking crisis they had ever seen, relative to the bank's importance to the national economy.
One Western diplomat described the IMF briefing as "very pessimistic".
"There is a very strong feeling of frustration with Afghan authorities because there is a sense they want to bury their heads in the sand and hope this goes away," he told Reuters.
"There's been very little movement if any. There's a sense that the Afghan authorities have not fully grasped the consequences," said the diplomat, who asked not to be named.
In many cases and to varying degrees, aid from donor countries and agencies is mandated on an IMF program being in place. Donors contribute about 70 percent of the Afghan state operating budget, itself dwarfed by billions more in direct aid.
Britain would be the first major donor to have to formally address the problem when its financial year ends next month.
"It (withdrawal of IMF support) means that some other agencies can't give money, it's hugely serious," another Western diplomat based in Kabul told Reuters.
One of the next cards to fall would be the Afghan Reconstruction Trust Fund (ARTF), the biggest vehicle for donor funding. Between 2002 and April 2009, 30 donors contributed more than $3 billion to the World Bank-administered ARTF, according to the fund's website (www.worldbank.org).
Kabulbank's main investors are thousands of small customers in one of the poorest countries in the world.
It also handles salaries for about 300,000 civil servants and the Afghan security forces, who are being frantically trained up to take over from 150,000 foreign troops in a transition process due to start in July.
The security forces' salaries amount to about $100 million a month. The central bank says it will tighten rules for potential future bidders for the contract after the Kabulbank scandal.
The political fallout is potentially huge, mainly because of strong political ties between Kabulbank and the government.
Among three senior Kabulbank executives and shareholders under investigation is Mohammad Haseen, the brother of First Vice President Mohammad Qasim Fahim.
Another major shareholder is Mahmoud Karzai, who owns about 7 percent of the bank and is the brother of President Hamid Karzai, although Mahmoud Karzai is not under investigation.
President Karzai's credibility is already under question among his Western backers after fraud-marred elections in 2009 and 2010 and widespread concern about governance and corruption.
A U.S. diplomatic cable released by Wikileaks showed that then Afghan Vice President Ahmad Zia Massoud was stopped and questioned in Dubai in October 2009 when he arrived with $52 million in cash. He was later allowed to go on his way without saying where the money came from.
The IMF team, led by Enrique Gelbard, was due to leave Afghanistan on Tuesday and members were not available for comment. The IMF's resident representative, Wabel Abdallah, confirmed the briefing but would not comment on what was said.
"They told me not to speak about it," Abdallah told Reuters.
The Finance Ministry also confirmed the meeting but would not discuss its content.
Four Kabul-based diplomats have told Reuters that the IMF want the bank placed into receivership to stem potential losses. Fitrat says the central bank hopes to get most of the $579 million back and so far has commitments from debtors to repay $315 million.
Fitrat told Reuters this month Kabulbank was stable and would be sold by the central bank within three years. The government argues receivership might cause a run on other banks, as happened with Kabulbank when the scandal broke last year.
According to diplomats, the IMF believes that argument is "overblown", that very little has been done so far and there is not much chance of recovery because most of the money is in Dubai. It said the government "has to put its cards on the table and be honest with the public".
Withdrawal of the IMF program would also be a potentially embarrassing reversal for the IMF and World Bank.
In January 2010, the IMF and World Bank granted Afghanistan $1.6 billion in debt relief, saying it had completed a number of important reforms, was maintaining a stable macroeconomic environment and that authorities had "made progress in public financial management".
Additional reporting by Hamid Shalizi, Editing by Andrew Marshall