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Bar News - January 14, 2011

Phil Walker: “Cautiously Optimistic” about Afghanistan


New Hampshire lawyer Phillip J. Walker, on leave in November from his post with the Ministry of Finance in Afghanistan, has been back and forth for a year as the ministry’s legal advisor. Walker said the Ministry of Finance is a key factor in the long term success of the Afghan government. "It’s actually an exceptionally well-functioning ministry, with very competent Afghan leadership and dozens of international advisors on staff."

Walker believes that the major challenge facing those working to promote the rule of law in Afghanistan is convincing people that the law is relevant. "Often people just do what they have to do and then try to make it square with the law after the fact. A core responsibility of the Ministry of Finance is to ensure that public funds are collected and expended in a legal and accountable manner. In fact, the ministry does a pretty good job of it," he said.

But in the justice system, for instance, everyone from the judges down through the police take bribes – in fact, the police pull motorists over for nothing and won’t let them go without collecting a bribe. "Otherwise, they could not support their families," said Walker.

"There are several major areas that occupy our attention in the Ministry of Finance at the present time," he continued. "Among them, one is how to stabilize and revitalize the banking sector. Another is to coordinate and spend donor assistance in a transparent and accountable manner."

The Collapse of Kabul Bank

Walker said that the collapse of Kabul Bank was possibly the biggest story of the year. Kabul Bank was, and remains, far and away the largest private bank in Afghanistan. In Afghanistan, the Central Bank, like the US Federal Reserve, supervises all the banks in the private sector. Surprisingly, Afghanistan has a pretty stable currency, due to sound management by the Central Bank. "Sound money and a robust banking sector have helped create a fair amount of consumer confidence," remarked Walker.

"That and substantial foreign investment has led to phenomenal economic growth rates over the past several years. The banking sector has been a real success story, at least up until now. Treasury operations through the private banks are pretty sophisticated as well. All government employees receive their salaries through direct deposit. Nobody is paid by check," he said.

The Kabul Bank is the largest Bank in Afghanistan, capitalized before the collapse at over a billion dollars, and with the largest network of branches throughout the country. During the summer of 2010, reports leaked out that it was in trouble due to bad real estate investments and corrupt management and, as might be expected, there was a run on the bank. "But the government took firm – and immediate – action; it sent police to control the crowds and briefly shut down the bank," said Walker. "The Minister of Finance went on TV and reassured everyone that their money was safe. By the time the banks re-opened a few days later, confidence had been restored."

Walker said that it appears that there is a very large hole in the bank’s balance sheets due to a number of bad loans and malfeasance by the bank’s management. "What happened to Kabul Bank is one small piece of the global banking crisis. The bank is currently under direct government management," he continued, "but the Ministry of Finance and the Central Bank will eventually re-launch the best parts of the bank into the private sector. The bank in fact is still functioning, but the government needs to sort out the toxic assets." He paused thoughtfully. "If the government has the guts to go after the personal assets of the bank’s owners and managers to make up the bank’s shortfalls, it will gain a lot of credibility…. We haven’t even done that in the United States."

Challenges with Donor Assistance
When asked to discuss donor help and why it had become such an issue (since it would seem that such help in a war-ravaged country would be much appreciated), Walker said, "Think of Afghanistan as the largest and most complex development project the world has ever seen, run through the Ministry of Finance. The funds come from a dozen different countries and international organizations. The numbers run into the billions of dollars. There are needs in every possible sector of society, and limited institutional capacity to spend the money. Some donors put their funds through the central budget. Others spend their assistance directly in the field. Some projects are taxable. Others are exempt from taxation. Individual projects can have dozens or even hundreds of subcontracting entities, each with complex contractual relationships with the donors and the government."

The challenge of spending or coordinating expenditure of this money in an efficient, transparent and accountable manner is formidable. "In fact we do a pretty good job," said Walker. "All this money goes through the Ministry of Finance and then out to the line ministries. The main problem at the moment is that the line ministries cannot spend the money fast enough. due to the checks we place upon them and their lack of institutional capacity."

The Ministry of Finance has been the chief recipient of donor help—salaries are some of the highest, so the Ministry attracts good people. "Since Afghanistan’s own resources are only sufficient to pay the salaries of those that run the government – and no more, such help is invaluable," said Walker.

Walker described the system of monitoring donor assistance. He said, "Actually, it’s one of my jobs to review the terms of donor agreements. The donors for the most part trust the government enough to put money directly into it, instead of spending their money separately to create projects." The government gets most of its development budget from donor assistance."

"The donors have very sophisticated methods for keeping track of their money," he went on, "and are always looking over the shoulder of the Ministry of Finance, and as a consequence the Treasury operations of Afghanistan are of a world-class standard." Walker said that while there is definitely corruption in the government of Afghanistan, in the Ministry of Finance, it’s rare.

When asked to comment on the war itself, Walker said that in Afghanistan, the war is 80 percent logistics. "At least that’s the part of the war we see in the Ministry of Finance. Getting goods and services to the military machine – well, just take fuel, for example. There are always long lines of tankers at the Afghanistan/Pakistan border. On the way to their destination, tens of billions of dollars are reputedly diverted, to pay off the warlords – and sometimes even the Taliban. By the time the gas actually gets to the Humvees, it ends up costing $200 a gallon."

What It’s Really Like

As for what it’s like to live in Afghanistan, Walker said there is a lot of beauty – many river valleys in a country that people often envision only as deserts and mountains and not much else. The rich river valleys produce much fruit. "In fact, Afghanistan has the best fruit I’ve ever eaten," he said. "And they have started producing sugar – I think there’s real growth ahead."

He said there are also many mines, many metals, some precious. "As for industry – they make beautiful rugs. Most of the rugs that people think come from Pakistan are actually made in Afghanistan.

"I’m cautiously optimistic about Afghanistan’s future," he concluded. "Of course, six months from now, everything could collapse, too…."

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