Amid increasing uncertainty in the global economy, South Asia’s growth prospects have weakened, with projections downgraded in most countries in the region, including Afghanistan.

Stepping up domestic revenue mobilization could help the region strengthen fragile fiscal positions and increase resilience against future shocks, said the World Bank in its twice-yearly regional outlook – the South Asia Development Update – which was released on Wednesday.

According to the report, in Afghanistan, despite aid cuts, the economy is estimated to have grown by 2.5 percent in FY24-25, which was slower than the pace of population growth.

Growth is forecast to increase only moderately to 2.2 percent in 2025/26, the World Bank report stated.

Coinciding with the release of the South Asia report was the World Bank’s Afghanistan Development Update report which explained the situation in more detail.

Stating that while the country’s economy is gradually recovering, the outlook remains uncertain due to growing fiscal pressures, a widening trade deficit and persistent poverty and food insecurity.

The report stated that these factors continue to strain households and hinder inclusive growth.

However, Afghanistan recorded its second consecutive year of growth in 2024, the World Bank stated, adding that the recovery was largely driven by the agriculture sector.

Manufacturing and services remained subdued due to an unfavorable business environment, persistent export barriers and declining foreign aid.

Modest gains in private consumption and real estate investment contributed to growth, the report stated, adding that rising imports widened the trade deficit, increasing external vulnerabilities.

At the same time, rapid population growth and the return of refugees continue to strain job creation and public service delivery, further deepening the fragility of the economy.

Deflation meanwhile persisted in 2024, with food prices having declined sharply. Non-food inflation remained stable. Persistent deflation continued in 2024,

Poverty, food insecurity, and malnutrition however remained pressing challenges and despite modest wage growth, high unemployment and restrictions on women continue to strain livelihoods, the report stated.

Early this year, 14.8 million people faced food shortages, while acute malnutrition – now affecting 4.7 million women and children – is worsening. The World Bank warned that without urgent action, human capital development will be further undermined.

Fiscal pressures meanwhile remained high as domestic revenue mobilization, though relatively strong, is insufficient to offset the sharp decline in aid.

The report also stated that exports declined in 2024, while imports surged – widening the trade deficit.

The increase in imports however was driven by rising industrial demand and substitution of domestic consumer goods.

The afghani (AFN) currency, which had appreciated significantly in 2023 due to strong foreign inflows stabilized with slight depreciation in 2024 but the banking sector remained fragile.

The World Bank reported that economic growth is expected to slow to 2.2 percent in 2025 amid aid disruptions, before gradually recovering to 2.5 percent in 2026–27.

The organization however warned that while Afghanistan’s youth remain a vital source of resilience and untapped potential, urgent action to expand job opportunities for them is needed.