Afghanistan faces economic strains following a ‘series of shocks’ last year

Afghanistan’s fragile economy is grappling with a series of shocks that intensified in 2025, according to a World Bank economic update report released on Wednesday.

The report noted that Afghanistan has been hit by reduced foreign aid, prolonged crossing closures along the disputed Durand Line with Pakistan, natural disasters, and a significant return of refugees from Iran and Pakistan.

These pressures have driven an estimated 11 percent population increase in the fiscal year 2025, largely due to returning migrants, the World Bank stated.

While Afghanistan’s aggregate GDP grew by around 4.8 percent last year, reflecting a rebound in nonagricultural activity and private consumption, the growth has not kept pace with population expansion. As such, per capita GDP contracted by 5.6 percent, as rising inflation and higher trade and transport costs eroded living standards.

“The influx of returnees has temporarily boosted domestic demand, but also places additional strain on labor markets, housing, and social services,” the report noted.

Looking ahead, Afghanistan’s economy is projected to grow by 4.0 percent in 2026, driven by strengthening domestic demand, higher private investment, and improved absorption of returnees into the workforce. However, the report warns that ongoing conflict in the Middle East and disruptions to trade routes, particularly the 60 percent of Afghan trade that passes through Iran, pose significant risks.

“Border closures or sudden surges in returnees could further depress per capita incomes and fuel inflation,” the World Bank said. Trade rerouting may mitigate some effects, but the country remains vulnerable to regional instability.

Despite these challenges, analysts highlight that modest growth and ongoing private-sector activity offer some hope for recovery. The World Bank emphasizes that sustained economic resilience will depend on peace, stable trade corridors, and the ability to productively integrate returning populations into the labor market.

Afghanistan’s experience underscores the broader regional pressures in the Middle East, North Africa, Afghanistan, and Pakistan (MENAAP), where conflict and humanitarian crises continue to ripple through economies, affecting inflation, trade, and social stability.