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Afghanistan economy under pressure as Pakistan shocks reshape trade flows

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Afghanistan’s economy continued to face strong headwinds in late 2025 as concurrent shocks — including mass refugee returns, drought, earthquakes, and shifting regional dynamics — strained growth and weakened investment momentum, according to the latest Afghanistan Economic Monitor released by the World Bank.

The report says that while low inflation and stable revenues have supported modest economic expansion, rapid population growth driven by large-scale returns from Iran and Pakistan has outpaced job creation, limiting improvements in average household incomes.

Inflation eased slightly in September 2025, with the Consumer Price Index falling 0.4 percent month-on-month as food prices declined. Fresh and dried fruits dropped by 4.6 percent due to seasonal harvests, while small increases were recorded in vegetables and spices.

Non-food inflation rose marginally, with housing costs climbing 1.7 percent amid rising rents in Kabul and other major cities. Year-on-year inflation slowed to 2.1 percent, down from 3.1 percent in August.

The Afghani strengthened against the U.S. dollar in both monthly and annual terms, but lower domestic inflation offset much of the nominal gain. The Real Effective Exchange Rate fell 1.1 percent, helping maintain Afghanistan’s external competitiveness against its major trading partners.

Trade flows were significantly disrupted by the mid-October closure of the Durand Line crossings with Pakistan, historically Afghanistan’s largest trade corridor. Despite the disruption, exporters quickly rerouted goods through Iran and Central Asia. The trade deficit narrowed slightly to $0.88 billion, supported by a 13 percent rebound in exports to $267 million.

Food exports — now the backbone of Afghanistan’s export economy — surged, reaching $ 238million in October and rising more than 22 percent over the first seven months of FY2025. India emerged as Afghanistan’s top export destination, accounting for 50 percent of October’s shipments, while Pakistan’s share declined sharply due to crossing closures.

Imports rose 2 percent month-on-month to $1.15 billion but fell 4.5 percent year-on-year. A structural shift toward Iran and Central Asia accelerated, with Iran supplying 29 percent of Afghanistan’s total imports so far in FY2025, followed by the United Arab Emirates at 19 percent.

The report warns that Afghanistan’s increasing dependence on food exports and redirected trade routes leaves the economy vulnerable to climate shocks and further regional instability, underscoring the need for strengthened infrastructure, diversified markets, and increased investment.

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Afghanistan moves to tackle housing shortage with new projects in Kabul

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Officials from the Ministry of Urban Development and Housing say efforts are underway to address the growing housing shortage across Afghanistan through new development initiatives in multiple provinces, including Kabul.

According to the ministry, 41 sites have been allocated in Kabul city for the construction of residential townships, with building work expected to begin soon.

The ministry said it is also working to expand housing investment in cooperation with the private sector as part of broader urban development plans.

Private sector representatives say investment in the housing sector remains a key priority, stressing that Afghanistan has strong potential for real estate development amid rising population growth.

Economic analysts also say the country offers favorable conditions for investment in housing and have called on the ministry to provide further incentives and facilitation for private investors.

They add that improved conditions could attract hundreds of millions of dollars in investment and create employment opportunities for thousands of people nationwide.

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Khalilzad calls for Afghanistan-Pakistan dialogue after airstrikes

He further noted that Türkiye has offered to support the process by hosting an operational coordination center in Ankara to facilitate monitoring efforts.

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Zalmay Khalilzad, former U.S. special representative for Afghanistan reconciliation, has called for renewed diplomatic engagement between Afghanistan and Pakistan following reports of Afghan operations targeting ISIS-K sites in Pakistan.

In a post on X, Khalilzad referenced the statement issued by Afghanistan’s Ministry of Defense regarding operations in Pakistan’s Balochistan and Khyber Pakhtunkhwa provinces, where militant hideouts were reportedly targeted.

He warned that rising tensions between the two neighboring countries risk further instability and urged both sides to resolve disputes through dialogue rather than escalation.

Khalilzad emphasized the need for a bilateral agreement ensuring that neither country’s territory is used by individuals or groups to threaten the security of the other. He added that Afghanistan has expressed readiness for such an arrangement.

He further noted that Türkiye has offered to support the process by hosting an operational coordination center in Ankara to facilitate monitoring efforts.

The former envoy also called on Qatar, Saudi Arabia, the United Arab Emirates, and Türkiye to intensify diplomatic efforts aimed at helping Afghanistan and Pakistan reach a peaceful and sustainable agreement.

His remarks come amid renewed tensions between Kabul and Islamabad, with growing international calls for restraint and dialogue to prevent further escalation in the region.

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IEA says Afghan air forces strike ISIS-K targets inside Pakistan

The ministry said initial assessments show that key pre-identified targets were successfully hit during the operation.

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The Ministry of Defense of Afghanistan announced on Friday that Afghan air forces carried out overnight strikes targeting Islamic State Khorasan Province (ISIS-K) positions in Pakistan’s Balochistan and Khyber Pakhtunkhwa provinces.

In a statement, the ministry said the targeted sites were being used by ISIS elements, allegedly backed by intelligence-linked networks, to plan and coordinate attacks against Afghanistan. It added that the locations had previously been connected to deadly attacks carried out inside the country.

According to the statement, strikes were conducted in the Gulistan area of Killa Abdullah district and the Shakar Ab Jungle Gardi area of Chagai district in Balochistan. Another operation reportedly targeted a facility in the Qambar Khel area of Orakzai district in Khyber Pakhtunkhwa, where senior ISIS-K figures were said to be active.

The ministry said initial assessments show that key pre-identified targets were successfully hit during the operation. It emphasized that Afghanistan will use all available capabilities to counter threats against its national security and prevent future attacks.

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