Economic Winds Shift: World Bank Projects Growth Slowdown for Nepal in 2026

KATHMANDU — The World Bank has issued a sobering economic outlook for Nepal, projecting the nation’s growth to plummet to 2.1% for the fiscal year 2025/26. This is a significant downgrade from the 4.6% growth recorded in the previous fiscal year and is primarily attributed to the ripple effects of the massive political unrest that shook the country in late 2025.

The latest Nepal Development Update, titled “Reforms to Accelerate Public Investment,” warns that the path to recovery is fraught with uncertainty, tethered closely to the success of the upcoming March 2026 general elections.

The “Unrest Tax” on the Economy

The primary driver of this slowdown is the aftermath of the “Gen-Z Movement” in September 2025. The protests, which led to the dissolution of the previous government, caused significant disruptions:

• Service Sector Hit: The services sector, particularly tourism, is expected to be the most affected. International arrivals saw a sharp 18% decline in the months following the unrest.

• Asset Losses: Property and infrastructure damage exceeding Rs 200 billion has strained the insurance sector and slowed down non-hydro construction projects.

• Eroded Confidence: Heightened political uncertainty has led to a “wait-and-see” approach from both domestic and foreign investors, causing private sector investment to stall.

Structural Hurdles and Agricultural Strain

Beyond the political landscape, the report highlights long-standing structural weaknesses:

• Public Investment Gap: Nepal’s capital spending currently sits at 7.9% of GDP, far below the 10-15% required to meet the country’s infrastructure needs.

• Youth Unemployment: With youth unemployment at 22.7%, the lack of domestic opportunity continues to drive labor migration, making the economy heavily dependent on remittances, which account for nearly a quarter of the GDP.

• Climate & Agriculture: Delayed monsoon rains in major rice-producing provinces are expected to hamper agricultural output, further dragging down the growth rate.

The Road to Rebound: 2027 and Beyond

Despite the bleak short-term forecast, the World Bank sees a “silver lining” on the horizon. If the March 5, 2026 elections proceed smoothly and a stable government is formed, growth is projected to rebound to 4.7% in FY27.

David Sislen, World Bank Division Director for Maldives, Nepal, and Sri Lanka, emphasized:

“Boosting public investment is critical for creating jobs and building prosperity. This requires implementing key reforms—strengthening project planning, streamlining land acquisition, and amending procurement laws to speed up project delivery.”

Government’s Response

Finance Minister Rameshore Prasad Khanal has pushed back against the more pessimistic scenarios, noting that the government has already launched an Integrated Business Recovery Plan. This plan offers:

• Grants and tax incentives for affected businesses.

• A dedicated Reconstruction Fund to restore damaged assets.

• Reprioritization of resources toward election security and infrastructure rehabilitation.