KATHMANDU: The World Bank (WB) has projected a slowdown in Nepal’s economic growth amid recent unrest and heightened political and economic uncertainty. According to the WB’s latest Nepal Development Update (November 2025), the country’s real GDP growth is expected to drop to 2.1 percent in FY26 under the baseline scenario, with a possible range of 1.5 to 2.6 percent.
The report noted that poverty rates (at USD 4.2/day) are slightly higher than earlier projections, reaching 6.6 percent in FY26 and 5.9 percent in FY27, compared to previous forecasts of 6.2 percent and 5.4 percent.
Reconstruction efforts are expected to begin in FY26 and gain momentum in FY27, supporting a rebound in GDP growth to 4.7 percent in FY27.
Sectoral outlook
The services sector is expected to drive the projected slowdown. Tourism activity is likely to decline sharply due to a drop in international arrivals, while insurance services may be affected by spillover effects from asset losses. Recovery is expected in FY27 as tourism rebounds, insurance shocks ease, and government measures—such as public property insurance—stimulate demand.
Industrial sector growth is projected to slow slightly in FY26. While hydropower-related industrial activity remains strong, non-hydropower private investment and construction are expected to be constrained by weakened investor confidence following unrest. Growth is expected to pick up sharply in FY27, supported by public projects and reconstruction initiatives.
Agriculture is projected to soften in FY26 due to delayed paddy planting, particularly in Madhesh Province, but should recover in FY27 with favorable monsoon conditions.
Finance Minister Rameshore Prasad Khanal said, “To restore business confidence and accelerate revival, the Government of Nepal has announced an integrated business revival plan, offering grants, tax exemptions, and operational support.” He added that public resources are being prioritized for infrastructure reconstruction and election preparation, with a reconstruction fund established to restore damaged public and private property, aiming to revive private sector activity and lay the foundation for a strong economy.
David Sislen, World Bank Division Director for Maldives, Nepal, and Sri Lanka, emphasized, “Boosting public investment is critical for growth, job creation, and prosperity. This requires reforms such as strengthening project planning, streamlining land acquisition and tree-cutting processes, improving cash management, and amending procurement laws to speed project delivery.”
Inflation, external account, and fiscal outlook
Inflation is expected to remain within the central bank’s 5 percent ceiling over the medium term, aided by easing global commodity prices, moderating inflation in India (transmitted through the currency peg), and softer cost pressures. However, potential declines in domestic paddy output may keep food inflation elevated in FY26.
The current account surplus is projected to widen to 7.3 percent of GDP in FY26, driven by rising remittances despite a projected increase in the trade deficit and lower tourism receipts. Imports, particularly of crude edible oils and construction equipment for hydropower, are expected to expand, with non-hydro construction demand widening the trade deficit further in FY27. FDI inflows are likely to remain subdued, though foreign exchange reserves should remain above the seven-month import cover regulatory minimum.
The fiscal deficit is projected to widen to 2.8 percent of GDP in FY26, driven by spending on reconstruction, elections, private sector relief, and outstanding liabilities. This will be partially offset by austerity measures, reprioritization of development projects, and relaxed virement rules. Nominal revenue growth is expected to slow due to weaker import growth and lower VAT and corporate income collections, particularly in insurance and tourism sectors. The deficit is forecast to narrow in FY27, financed through a mix of external concessional and domestic borrowing. Public debt is projected to rise slightly to 45.2 percent of GDP in FY26 before stabilizing.
The outlook is subject to mixed risks. Downside risks include natural disasters, persistent political uncertainty, higher NPLs, Nepal’s continued presence on the FATF Grey List, and disruptions to public services. Upside potential exists if the political transition succeeds and macroeconomic management is sustained, boosting investor confidence and economic recovery.
Recent economic developments
Nepal’s growth rebounded to 4.6 percent in FY25 from 3.7 percent in FY24, led by manufacturing and construction, supported by increased hydropower generation. Agriculture contributed positively with higher paddy output despite flood damage. The services sector saw mixed performance, with tourism slowed by Tribhuvan International Airport upgradation works and geopolitical tensions affecting Middle East flights.
Financial sector activity was subdued due to weak credit demand and rising NPLs, though wholesale and retail trade performed well, aided by higher merchandise imports and improved trade finance access.
Headline inflation fell to 4.1 percent in FY25, below the NRB’s 5 percent ceiling, with moderation in both food and non-food inflation partly offset by higher transport costs. The monetary policy remained cautiously accommodative, supported by comfortable reserves. The policy rate was reduced by 50 basis points to 5 percent, with lending rates falling sharply to a record low of 8.7 percent. Private sector credit growth remained modest due to weak demand and rising NPLs, which climbed to 4.6 percent. Banks maintained strong capitalization, with marginally improved profitability.
The current account surplus widened to 6.7 percent of GDP, supported by remittances, boosted by Nepali workers moving to higher-wage destinations like Japan and South Korea, a weaker rupee, and increased use of formal transfer channels. The trade deficit remained stable as exports and imports increased, particularly in edible oils and construction equipment. Foreign exchange reserves rose to cover 15.4 months of imports by FY25-end.
The fiscal deficit narrowed to 2 percent of GDP, aided by stronger revenue mobilization, including higher VAT, excise duties, and trade-based revenues. Total expenditure rose slightly to 22 percent of GDP, driven by capital spending, although execution remained weak at 63.2 percent. Recurrent spending declined marginally to 18.3 percent of GDP due to lower domestic interest payments and reduced fiscal transfers to subnational governments.
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