Afghanistan’s economy is expanding for a second consecutive year, supported by subdued inflation and firmer domestic revenues, even as rapid population growth, a widening trade gap and entrenched poverty continue to constrain the outlook.

According to the World Bank’s latest Afghanistan Development Update, cited by Himalaya Diary, gross domestic product is projected to grow by 4.3% in 2025, following estimated growth of 2.5% in 2024. Much of the recent momentum reflects demand generated by more than 2mn returnees from Iran and Pakistan, which has lifted activity in services and industry. Agriculture has remained relatively resilient, delivering a record irrigated wheat harvest despite severe drought, while mining and construction have also contributed to output.

The expansion has not translated into rising living standards. Population growth, estimated at 8.6% in 2025, is expected to push GDP per capita down by about 4%. Inflation, at around 2%, is among the lowest in the region, helped by stable food prices and a firmer currency, but also underlines the economy’s dependence on imports and vulnerability to external shocks.

Public finances have improved on the revenue side, with domestic tax receipts forecast to reach 17.1% of GDP in 2025 as enforcement tightens. At the same time, declining foreign grants are shrinking the overall fiscal envelope, reinforcing reliance on trade taxes and donor support.

The banking system remains fragile, weighed down by regulatory uncertainty, rising bad loans and weak credit growth. Liquidity pressures persist as a growing share of cash circulates outside the formal financial system, while the shift to Islamic finance and limited access to banking continue to hinder financial inclusion.

Labour market pressures are intensifying. Nearly a quarter of young Afghans are unemployed, and restrictions on women’s education and economic participation are eroding human capital and long-term growth prospects. These strains are being compounded by one of the largest return migration waves in recent history, with an estimated 4 to 4.7mn people returning between late 2023 and mid-2025, placing heavy pressure on jobs and public services, particularly in urban areas and border regions.

The World Bank argues that sustaining the recovery will depend on reforms to stimulate private investment, strengthen financial intermediation and diversify exports, while translating returnee-driven demand into durable employment. Improved governance, a more enabling environment for business and greater engagement with international partners will be critical if Afghanistan is to reduce its dependence on humanitarian assistance and move towards more resilient, inclusive growth.