Around 150 million cubic meters of water is used in Kabul each year, and 95 million cubic meters are preserved, the ministry said citing a survey.
The city faces a deficit of 35 million cubic meters annually.
Syed Waliullah Aqili, head of hydrology department with the Ministry of Energy and Water, said that water supplying companies, public bathrooms and factories producing non-alcoholic beverages are extracting water in populated areas of the city without having a license.
Based on the survey, Khair Khana, Dasht-e Barchi, Darulaman and Afshar areas are facing higher rate of decline in water level.
Energy and Water Ministry urged the Ministry of Urban Development and the Municipality to prevent increase of population in the areas.
Meanwhile, Deputy Energy and Water Minister Khan Mohammad Takal said that diverting water from Panjshir and Shah wa Aroos dam and Qargha dam would address the problem of water shortage in Kabul city.
The recent survey suggests that groundwater has become polluted in parts of the city, causing diseases including diarrhoea, skin problems and H.pylori.