Context. Since 2002, Afghanistan has made important strides in building its economy, infrastructure and institutions, supported by large aid flows and despite security challenges. The first democratic transfer of political power that occurred in late 2014 provided a distinct chance to renew impetus in economic reforms on the basis of a clear and ambitious agenda proposed by the new national unity government. However, security challenges and delays in policy implementation during the new government’s settling-in period have held back a recovery in economic confidence, which has weakened economic growth performance, and, more recently, spurred an acceleration in migrant outflows. The IMF is supporting Afghanistan through technical assistance and a staff monitored program. Outlook and risks. The authorities have a clear plan for the “transformation decade” (2015-24), which is within reach, providing they implement economic reforms to build confidence in the economy, donors continue their support, and security improves. The main challenge is to boost confidence and co-operation among all stakeholders and thus solidify the hard-won achievements to date and build reform momentum to improve living standards for all Afghans. Risks are mostly on the downside and are related to adverse domestic or regional security developments, political instability, inadequate implementation of economic policies, and donor fatigue. Policy recommendations. The macroeconomic policy mix remains appropriate. The fiscal balance including grants should continue to remain broadly balanced to ensure sustainability; efforts should be stepped up to mobilize domestic revenue, prioritize spending and further improve budget management. Monetary policy needs to continue to foster confidence in the domestic currency, including by pursuing its commitment to a flexible exchange rate regime while maintaining orderly market conditions. Strong efforts are needed to implement vigorously the new banking, AML, an
