The issue may be that the field code needs the path to work with the construction you're using. If you can be sure the pictures will always be in the same folder as the mailmerge main document, you can modify the field code by adding a FILENAME field thus:
{IF{INCLUDEPICTURE {IF TRUE "{FILENAME \p}\..\{MERGEFIELD Country}.png"} \d} {INCLUDEPICTURE {IF TRUE "{FILENAME \p}\..\{MERGEFIELD Country}.png"} \d}}
The above works in my testing, though your workbook has some active but unused rows at the bottom and this causes an extra page of labels with no data to be generated.

__________________
Cheers,
Paul Edstein
[Fmr MS MVP - Word]