More frequent incidences of violence inAfghanistan, as well as delays in the elections process andcabinet formation, continued to fuel uncertainty andaffected investor confidence in 2014 and the first half of2015. Economic growth slowed to 1.3 percent in 2014, downfrom 3.7 percent a year earlier. Unlike in previous years,agriculture did not contribute much to growth in 2014.Production levels were high for a third year in a row butdid not supersede the strong output in 2013. Growth wasmainly driven by services and a slight expansion ofindustries where an increase in construction activitiesoutweighed lower production in manufacturing. Privateinvestment activities showed strong signs of slowdown in2014, evidenced by a drop of nearly 50 percent in new firmregistrations since 2012. The National Unity Government hasembarked on an ambitious reform agenda to revitalize theeconomy, tackle corruption, and improve investment climate.However, it will take time for these reforms to have animpact, and it is yet unclear how much they will mitigatethe high risks stemming from the fragile securityenvironment. Growing trends in security and pension and wagespending over the medium term require immediate attention.Afghanistan faces significant financing shortages for bothcivilian and security spending. Therefore, securingcontinued high levels of donor financing over the comingyears is of critical importance for fiscal stability in thecountry. The fragile security environment and financingconstraints, compounded by weak governance capacity, poseserious challenges to service delivery in Afghanistan. Anysetback in reform implementation would further slowdown thepace of human capital accumulation in Afghanistan and reducefuture prospects of growth and poverty reduction.
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