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Overview

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Country Context

  • Afghanistan’s economy is shaped by fragility and aid dependence. The private sector is extremely narrow, with employment concentrated in low-productivity agriculture (44 percent of the total workforce works in agriculture and 60 percent of households derive some income from agriculture). Private sector development and diversification is constrained by insecurity, political instability, weak institutions, inadequate infrastructure, widespread corruption, and a difficult business environment (Afghanistan was ranked 173rd of 190 countries in the 2020 Doing Business Survey). Weak institutions and property rights constrain financial inclusion and access to finance, with credit to the private sector equal to only three percent of GDP. Weak competitiveness drives a structural trade deficit, equal to around 30 percent of GDP, financed almost entirely from grant inflows. Grants continue to finance around 75 percent of public spending. Security expenditures (national security and police) are high at around 28 percent of GDP in 2019, compared to the low-income country average of around three percent of GDP, driving total public spending of around 57 percent of GDP. The illicit economy accounts for a significant share of production, exports, and employment, and includes opium production, smuggling, and illegal mining.
  • With an influx of aid since 2002, Afghanistan sustained rapid economic growth and improvements against important social indicators for more than a decade. Annual growth averaged 9.4 percent between 2003 and 2012, driven by a booming aid-driven services sector, and strong agricultural growth. A range of factors have since slowed economic and social progress, with the economy growing by only 2.5 percent per annum between 2015-2020, and gains against development indicators slowing or – in some cases – reversing. Aid flows decreased from around 100 percent of GDP in 2009 to 42.9 percent of GDP in 2020 (with the number of international troops declining from more than 130,000 in 2011, to around 15,000 by end-2014, to around 10,000 today). Declining grants led to a protracted contraction of the services sector, with an associated deterioration in employment and incomes. The security situation deteriorated, with the Taliban insurgency gaining control over increased territory and intensifying attacks on military and civilian targets, with civilian casualties totaling more than 10,000 per year between 2014 and 2019. The impacts of declining grants and worsening security were exacerbated by political instability following the disputed outcome of the 2014 presidential elections. The formation of the National Unity Government under an extra-constitutional power-sharing agreement led to administrative disruptions and slowed reform progress.
  • At the Geneva conference held in November 2020, donors renewed their commitment to aid support to Afghanistan for 2021-2024. However, several major donors provided only single-year pledges, with future support made conditional upon the government achieving accelerated progress in efforts to combat corruption, reduce poverty, and advance ongoing peace talks. Aid support is now expected to decline by around 20 percent from the previous pledging period (US$15.2 billion over 2016-2020) but could fall even lower if conditions are not met or if major donors further reduce commitment levels amid domestic fiscal pressures. Afghanistan now faces daunting challenges in sustaining recent development gains in the face of mounting political uncertainties, declining international grant support, and continued insecurity. Policy options are narrowed by the weak implementation capacity of government agencies, reflecting governance constraints, and tightly constrained macroeconomic policy options in the context of narrowing fiscal space and weak monetary transmission mechanisms.
  • World Bank Group engagement pursues a programmatic approach to support the Afghanistan National Peace and Development Framework (ANPDF II) that was presented by the Government of Afghanistan at the Geneva conference. Advisory work and operations focus on: macro-fiscal policy and management; finance, private investment, and job creation; public sector governance and anti-corruption; human capital development and service delivery; citizen engagement and social inclusion; urban development and infrastructure, connectivity and sustainability.

Last Updated: Mar 30, 2021

of working-age individuals in Afghanistan were engaged in some form of employment during the preceding month

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Afghanistan: Commitments by Fiscal Year (in millions of dollars)*

*Amounts include IBRD and IDA commitments

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In Depth