Islamic Republic of Afghanistan

Context: Despite the sharp drawdown of NATO troops in 2014 and the deteriorated security situation, the National Unity Government (NUG) is making good progress in economic reforms and growth has picked up modestly. The coming electoral cycle is expected to usher in a period of political uncertainty, leading to a more difficult environment for reform implementation. The donor community continues to actively support Afghanistan, as demonstrated by the successful donor conference in October 2016, while the U.S. government recently reaffirmed its continued military support. Outlook and risks: The baseline scenario envisages growth at 2.5 to 3 percent in 2017– 18, too low to prevent unemployment from rising further. Inflation is expected to be modest, and buffers should remain comfortable. The outlook is subject to significant downside risks, including a possible further deterioration in the security environment, a shortfall in grants, or stalled reforms. The key upside risk is lasting peace, which would boost inclusive growth.