The Pulse | Economy | South Asia

Regional Crises Are Dealing a Heavy Blow to Afghanistan’s Fragile Economy

For a country whose economy remains deeply dependent on regional trade routes, migration, and external assistance, instability on multiple fronts can quickly translate into economic crisis. 

While global attention remains focused on the escalating confrontation between Israel and the United States and Iran, Afghanistan – already one of the world’s most fragile economies – risks becoming one of the conflict’s most immediate economic casualties.

Afghanistan finds itself caught between two simultaneous regional crises. To the west lies the intensifying conflict involving Iran, Israel, and the United States. To the south and east, tensions between the Taliban and Pakistan have sharply increased over the past year, repeatedly disrupting trade and cross-border movement. Together, these developments threaten to place Afghanistan’s already fragile economy under even more severe pressure.

For Afghanistan, the consequences extend far beyond geopolitics. The country is already experiencing one of the world’s most severe humanitarian crises. Nearly half of the population depends on humanitarian assistance, while malnutrition among women and children continues to rise. In such conditions, even modest economic shocks can quickly translate into deeper social and economic instability.

Yet Afghanistan’s vulnerability is not driven by regional instability alone. Domestic policies have also weakened the country’s economic resilience. Since returning to power in 2021, the Taliban have imposed sweeping restrictions on women’s participation in education, employment, and public life. By excluding a large share of the population from the workforce and limiting the activities of international organizations that rely on female staff, these policies have reduced household incomes, weakened productivity, and discouraged international economic engagement with Afghanistan.

At the same time, Afghanistan faces a worsening environmental and disaster crisis. The country ranks among the world’s most vulnerable to climate change. Severe droughts, floods, and water shortages have repeatedly damaged agriculture and rural livelihoods. In recent years, powerful earthquakes – including a devastating quakes in July 2022 and August 2025 – have destroyed homes and disrupted local economies. Together, climate-related disasters and earthquakes have caused hundreds of millions of dollars in economic losses, placing additional strain on an already fragile economy.

Humanitarian needs remain extremely high. According to the United Nations Office for the Coordination of Humanitarian Affairs, roughly 85 percent of the funding required for humanitarian operations in Afghanistan remains unmet, forcing aid agencies to scale back essential services and leaving millions with reduced access to food assistance and healthcare.

These pressures are compounded by a sharp decline in international financial support. Following the Taliban’s return to power in 2021, much of Afghanistan’s development aid was suspended and foreign financial flows declined dramatically. Afghanistan had previously relied heavily on international assistance to finance public services and economic stability. The sudden contraction of aid, combined with banking restrictions and limited foreign investment, has left the country with few reliable sources of external financing.

Against this backdrop, Afghanistan’s heavy dependence on its neighbors for trade and transit routes creates additional vulnerability. Iran and Pakistan together account for roughly 35 to 40 percent of Afghanistan’s total trade and provide the country’s most important access routes to global markets. Instability in either country quickly translates into economic shock for Afghanistan.

Since the Taliban returned to power in 2021, Iran has emerged as Afghanistan’s largest trading partner. Bilateral trade now reaches roughly $3.5 billion annually, with nearly 95 percent consisting of Iranian exports to Afghanistan, including energy supplies, food products, and construction materials essential to the Afghan economy.

Food imports from Iran play a particularly important role in stabilizing Afghanistan’s domestic food supply. Regional tensions have already begun to disrupt this relationship. Tehran has introduced temporary restrictions on certain food exports as it prepares for possible escalation. For Afghanistan, which lacks significant strategic reserves of essential commodities, even limited disruptions could trigger shortages and sharp price increases. Food prices have already been rising steadily in recent months, and additional supply shocks could deepen inflation and food insecurity.

At the same time, Afghanistan’s economic ties with Pakistan have also come under strain. Since late 2025, tensions between Islamabad and the Taliban have led to repeated border closures and disruptions in commercial traffic. Pakistan was previously Afghanistan’s largest export destination, purchasing approximately $743 million worth of Afghan goods in the previous fiscal year.

The economic consequences have been immediate. Independent assessments suggest that border closures have contributed to shortages of food and medicine, while prices for some essential goods have increased by as much as 35 percent in domestic markets. Afghan traders say that even short-term border closures can result in the loss of entire shipments, particularly for agricultural exports that spoil before reaching international markets.

These disruptions effectively place Afghanistan between two economic choke points.

Regional infrastructure initiatives that once offered hope for Afghanistan’s long-term economic integration are also increasingly uncertain. Projects such as the Turkmenistan-Afghanistan-Pakistan-India (TAPI) gas pipeline, the CASA-1000 electricity transmission project, the China-Pakistan Economic Corridor (CPEC), and the proposed Uzbekistan-Afghanistan-Pakistan railway were designed to transform Afghanistan into a regional transit hub linking Central and South Asia. Yet rising regional tensions and persistent security risks have slowed progress on many of these initiatives, limiting Afghanistan’s long-term economic prospects.

Meanwhile, Afghanistan’s private sector continues to struggle. According to Afghanistan’s Chamber of Commerce, each day of border closure with Pakistan costs Afghan traders roughly $2.5 million. During previous shutdowns, thousands of trucks carrying Afghan exports were stranded at border crossings or delayed for weeks at Karachi port, with perishable agricultural goods spoiling before reaching international markets.

In response to these disruptions, Afghan traders have increasingly relied on Iranian ports such as Chabahar and Bandar Abbas as alternative transit routes to markets including India, Turkiye, and the United Arab Emirates. However, escalating tensions involving Iran now threaten to disrupt these routes as well. Losing reliable access to both Pakistani and Iranian transit corridors would severely damage Afghanistan’s export sector.

Another major source of pressure comes from the return of Afghan migrants. Over the past two years, both Iran and Pakistan have intensified deportations of Afghan migrants. According to United Nations estimates, more than 3 million Afghans have already been forced to return from the two countries.

For Afghanistan’s weak labor market, this represents a major economic shock. Migration has long served as an economic safety valve for the country. Hundreds of thousands of Afghan workers rely on employment abroad to support their families at home, sending remittances that are estimated to exceed $2 billion annually. Large-scale deportations therefore create a double economic shock: they increase pressure on Afghanistan’s fragile labor market while simultaneously reducing one of the country’s most important sources of household income and foreign currency.

Afghanistan today finds itself caught between two regional crises — the escalating conflict involving Iran and the continuing tensions between the Taliban and Pakistan, which Islamabad largely attributes to the presence of thousands of Tehreek-e-Taliban Pakistan fighters operating from Afghan territory.

For a country whose economy remains deeply dependent on regional trade routes, migration, and external assistance, instability on multiple fronts can quickly translate into economic crisis. If these pressures intensify simultaneously, Afghanistan risks not only deeper economic decline but also a widening humanitarian emergency.

Such an outcome would not remain confined within Afghanistan’s borders. Economic collapse in Afghanistan could trigger broader regional consequences, including increased migration, cross-border instability, and growing economic uncertainty across South and Central Asia.

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While global attention remains focused on the escalating confrontation between Israel and the United States and Iran, Afghanistan – already one of the world’s most fragile economies – risks becoming one of the conflict’s most immediate economic casualties.

Afghanistan finds itself caught between two simultaneous regional crises. To the west lies the intensifying conflict involving Iran, Israel, and the United States. To the south and east, tensions between the Taliban and Pakistan have sharply increased over the past year, repeatedly disrupting trade and cross-border movement. Together, these developments threaten to place Afghanistan’s already fragile economy under even more severe pressure.

For Afghanistan, the consequences extend far beyond geopolitics. The country is already experiencing one of the world’s most severe humanitarian crises. Nearly half of the population depends on humanitarian assistance, while malnutrition among women and children continues to rise. In such conditions, even modest economic shocks can quickly translate into deeper social and economic instability.

Yet Afghanistan’s vulnerability is not driven by regional instability alone. Domestic policies have also weakened the country’s economic resilience. Since returning to power in 2021, the Taliban have imposed sweeping restrictions on women’s participation in education, employment, and public life. By excluding a large share of the population from the workforce and limiting the activities of international organizations that rely on female staff, these policies have reduced household incomes, weakened productivity, and discouraged international economic engagement with Afghanistan.

At the same time, Afghanistan faces a worsening environmental and disaster crisis. The country ranks among the world’s most vulnerable to climate change. Severe droughts, floods, and water shortages have repeatedly damaged agriculture and rural livelihoods. In recent years, powerful earthquakes – including a devastating quakes in July 2022 and August 2025 – have destroyed homes and disrupted local economies. Together, climate-related disasters and earthquakes have caused hundreds of millions of dollars in economic losses, placing additional strain on an already fragile economy.

Humanitarian needs remain extremely high. According to the United Nations Office for the Coordination of Humanitarian Affairs, roughly 85 percent of the funding required for humanitarian operations in Afghanistan remains unmet, forcing aid agencies to scale back essential services and leaving millions with reduced access to food assistance and healthcare.

These pressures are compounded by a sharp decline in international financial support. Following the Taliban’s return to power in 2021, much of Afghanistan’s development aid was suspended and foreign financial flows declined dramatically. Afghanistan had previously relied heavily on international assistance to finance public services and economic stability. The sudden contraction of aid, combined with banking restrictions and limited foreign investment, has left the country with few reliable sources of external financing.

Against this backdrop, Afghanistan’s heavy dependence on its neighbors for trade and transit routes creates additional vulnerability. Iran and Pakistan together account for roughly 35 to 40 percent of Afghanistan’s total trade and provide the country’s most important access routes to global markets. Instability in either country quickly translates into economic shock for Afghanistan.

Since the Taliban returned to power in 2021, Iran has emerged as Afghanistan’s largest trading partner. Bilateral trade now reaches roughly $3.5 billion annually, with nearly 95 percent consisting of Iranian exports to Afghanistan, including energy supplies, food products, and construction materials essential to the Afghan economy.

Food imports from Iran play a particularly important role in stabilizing Afghanistan’s domestic food supply. Regional tensions have already begun to disrupt this relationship. Tehran has introduced temporary restrictions on certain food exports as it prepares for possible escalation. For Afghanistan, which lacks significant strategic reserves of essential commodities, even limited disruptions could trigger shortages and sharp price increases. Food prices have already been rising steadily in recent months, and additional supply shocks could deepen inflation and food insecurity.

At the same time, Afghanistan’s economic ties with Pakistan have also come under strain. Since late 2025, tensions between Islamabad and the Taliban have led to repeated border closures and disruptions in commercial traffic. Pakistan was previously Afghanistan’s largest export destination, purchasing approximately $743 million worth of Afghan goods in the previous fiscal year.

The economic consequences have been immediate. Independent assessments suggest that border closures have contributed to shortages of food and medicine, while prices for some essential goods have increased by as much as 35 percent in domestic markets. Afghan traders say that even short-term border closures can result in the loss of entire shipments, particularly for agricultural exports that spoil before reaching international markets.

These disruptions effectively place Afghanistan between two economic choke points.

Regional infrastructure initiatives that once offered hope for Afghanistan’s long-term economic integration are also increasingly uncertain. Projects such as the Turkmenistan-Afghanistan-Pakistan-India (TAPI) gas pipeline, the CASA-1000 electricity transmission project, the China-Pakistan Economic Corridor (CPEC), and the proposed Uzbekistan-Afghanistan-Pakistan railway were designed to transform Afghanistan into a regional transit hub linking Central and South Asia. Yet rising regional tensions and persistent security risks have slowed progress on many of these initiatives, limiting Afghanistan’s long-term economic prospects.

Meanwhile, Afghanistan’s private sector continues to struggle. According to Afghanistan’s Chamber of Commerce, each day of border closure with Pakistan costs Afghan traders roughly $2.5 million. During previous shutdowns, thousands of trucks carrying Afghan exports were stranded at border crossings or delayed for weeks at Karachi port, with perishable agricultural goods spoiling before reaching international markets.

In response to these disruptions, Afghan traders have increasingly relied on Iranian ports such as Chabahar and Bandar Abbas as alternative transit routes to markets including India, Turkiye, and the United Arab Emirates. However, escalating tensions involving Iran now threaten to disrupt these routes as well. Losing reliable access to both Pakistani and Iranian transit corridors would severely damage Afghanistan’s export sector.

Another major source of pressure comes from the return of Afghan migrants. Over the past two years, both Iran and Pakistan have intensified deportations of Afghan migrants. According to United Nations estimates, more than 3 million Afghans have already been forced to return from the two countries.

For Afghanistan’s weak labor market, this represents a major economic shock. Migration has long served as an economic safety valve for the country. Hundreds of thousands of Afghan workers rely on employment abroad to support their families at home, sending remittances that are estimated to exceed $2 billion annually. Large-scale deportations therefore create a double economic shock: they increase pressure on Afghanistan’s fragile labor market while simultaneously reducing one of the country’s most important sources of household income and foreign currency.

Afghanistan today finds itself caught between two regional crises — the escalating conflict involving Iran and the continuing tensions between the Taliban and Pakistan, which Islamabad largely attributes to the presence of thousands of Tehreek-e-Taliban Pakistan fighters operating from Afghan territory.

For a country whose economy remains deeply dependent on regional trade routes, migration, and external assistance, instability on multiple fronts can quickly translate into economic crisis. If these pressures intensify simultaneously, Afghanistan risks not only deeper economic decline but also a widening humanitarian emergency.

Such an outcome would not remain confined within Afghanistan’s borders. Economic collapse in Afghanistan could trigger broader regional consequences, including increased migration, cross-border instability, and growing economic uncertainty across South and Central Asia.

Reza Farzam holds a degree in Development Economics from Ruhr University Bochum in Germany. He taught at the Faculty of Economics at Kabul University for nearly 12 years. He has published dozens of analytical articles and research reports on Afghanistan’s economic situation in Persian-language media outlets. He currently working as an output editor with Afghanistan International TV.

Afghanistan economic development

Afghanistan-Central Asia relations

Afghanistan-Iran relations

Afghanistan-Pakistan relations

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