Afghanistan's public financialmanagement (PFM) system achieved significant improvementsbetween June 2005 and December 2007. Among 28 performanceindicators, 18 indicators improved, two indicatorsdeteriorated, and eight indicators remained unchanged. Amongthree indicators of donor practices, two deteriorated andone remained unchanged. In relation to other countries forwhich Public Expenditure and Financial Accountability (PEFA)assessments have been conducted, Afghanistan's ratingsare better than the average for other low-income countriesand in some areas better than the average for middle-incomecountries. The operating budget is credible as funding fromdomestic revenues and donors has been stable. However, thegap between the budget and realization remains significantin the development budget expenditures. Thecomprehensiveness of the budget is generally good, althoughreporting and especially transparency should be improved.However, fiscal risk oversight of state-owned enterprisesand municipalities is practically non-existent and thusproblematic. The budget process is based on multi-yearfiscal planning and comparatively detailed budgeting at thelevel of ministries and agencies, but so far has lacked thenecessary strategic prioritizations of resources by thecabinet early in the process. Payroll processing is highlydecentralized which contributes to timely updates of payrolland reconciliation of personnel and payroll records. Accessto a number of provinces by the external auditor and theAfghanistan Reconstruction Trust Fund (ARTF) monitoringagent is hampered by security concerns. External audit ofdonor funding is conducted according to acceptablestandards, but the quality of review of the annual budgetstatement and of regulatory audits needs to be improved.Arrangements are in place for the effective internal auditof treasury and revenue operations of government, butcapacity for internal audit in the line ministries is stillvery weak.
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