Afghanistan is a deeply fragile and conflict-affected country, where the security situation remains precarious. Civilian casualties have reached unprecedented levels since 2016. The country’s humanitarian challenges worsened, with increasing numbers of returnees and persons internally displaced by growing violence. Insecurity continues to affect livelihoods and economic activity, curtailing private investment and consumer demand. At the same time, difficult topography, vulnerability to climate change, and growing population impose additional constraints on development.
Output growth has slowed to an estimated 1.0 percent in 2018, down from 2.7 percent in the previous year. The decline was because of: a severe drought that affected wheat production and livestock pasture and, heightened political uncertainty and election-related violence, which dampened business confidence. Despite the lower agriculture output, inflation remained moderate at 0.6 percent on average in 2018, due to lower regional food prices and appreciation of exchange rate against major trading partners. Afghanistan has the third highest youth bulge worldwide: more than one-fifth of its adult population is aged between 15 and 24. Yet 55 percent of Afghans live in poverty, nearly 70 percent of the working-age population are illiterate, and youth unemployment is at 28 percent. Poor nutrition, especially of children, threatens welfare and education gains. Despite a 2 percent annual reduction, 41 percent of Afghan children under the age of five are still stunted.
Revenue mobilization is expected to stall, reflecting: i) exhaustion of revenue potential from measures implemented in 2018, including amnesty programs; and ii) weakening customs revenues in the context of political instability and weakened governance. Afghanistan still remains highly reliant on aid, with domestic revenues sufficient to finance only around half of budgeted expenditures. Afghanistan faces a difficult adjustment as aid flows decline from current very-high levels over the medium-term. New sources of revenues and foreign exchange receipts will be required.