Nepal’s Growth to Slow Sharply Amid Global Turmoil, Recovery Hinges on Reform and Investment: World Bank

Nepal's economic momentum is set to weaken significantly in the coming fiscal year, as global geopolitical tensions and domestic instability weigh on key sectors, according to the World Bank's latest Nepal Development Update.

The report projects growth to slow to 2.3% in FY26, nearly halving from 4.6% in FY25, underscoring the vulnerability of the economy to external shocks and internal disruptions. However, a gradual recovery is expected, with growth averaging 4.4% over FY27–FY28, driven by reconstruction efforts, infrastructure expansion, and political-cycle spending.

Global Conflict and Domestic Unrest Weigh on Outlook

The slowdown is largely attributed to the ongoing conflict in the Middle East—a critical region for remittances and tourism—and the lingering economic impact of September 2025 domestic unrest.

The services sector, a major pillar of Nepal's economy, is expected to be hit hardest due to:

• Slower tourism arrivals

• Rising transport and logistics costs

• Disruptions to global supply chains

The World Bank warns that the outlook remains highly uncertain, particularly if geopolitical tensions persist.

"A prolonged conflict could reduce remittance inflows, dampen consumption, and further slow economic activity," the report notes.

Tourism and Remittances Under Pressure

Tourism and remittances—two of Nepal's most critical economic lifelines—face heightened risks:

• Tourism: Sensitive to global instability, with potential declines in international arrivals

• Remittances: Vulnerable to labour market disruptions in the Middle East, where many Nepali workers are employed

Any sustained decline in these inflows could significantly impact household incomes, consumption, and foreign exchange reserves.

Recovery Driven by Infrastructure and Political Cycle Spending

Despite near-term headwinds, the medium-term outlook is more optimistic.

Growth is expected to rebound to an average of 4.4% in FY27–FY28, supported by:

• Reconstruction activities following recent disruptions

• Continued hydropower expansion, a key export-oriented sector

• Increased public and private spending linked to the 2027 subnational elections

Improved political stability following recent elections and continued macroeconomic discipline could also help restore investor confidence.

Private Sector Growth Seen as Key to Resilience

The World Bank emphasises that private sector-led growth will be critical for long-term economic resilience and job creation.

"नेपाल must improve the business environment, develop foundational infrastructure, mobilize private finance, and support priority sectors such as tourism, IT, and agribusiness," said David Sislen, World Bank Division Director for Maldives, Nepal, and Sri Lanka.

Key reform priorities include:

• Simplifying regulations and improving ease of doing business

• Expanding infrastructure, particularly energy and transport

• Strengthening access to finance for businesses

• Promoting high-potential sectors like digital services and agriculture

South Asia Faces Broader Slowdown—but Remains Fastest Growing Region

The Nepal outlook aligns with broader regional trends outlined in the South Asia Economic Update, which forecasts growth across the region to slow to 6.3% in 2026, down from 7% in 2025, largely due to global energy market disruptions.

However, South Asia is still expected to outperform other emerging markets, with growth rebounding to 6.9% in 2027.

Industrial Policy Gains Momentum, But Results Mixed

The report also highlights the growing use of industrial policy across South Asia, with governments increasingly intervening to shape economic activity.

While such policies are being implemented at twice the rate seen in other emerging economies, their effectiveness has been uneven.

"Mixed results reflect constraints such as limited implementation capacity, fiscal space, and market size," said World Bank Chief Economist for South Asia, Franziska Ohnsorge.

Targeted interventions—such as:

• Industrial parks

• Skill development programmes

• Export quality improvements

• Market access support

—could help address specific bottlenecks if carefully designed and implemented.

Balancing Reform with Targeted Interventions

The World Bank recommends a dual approach:

• Broad structural reforms to improve the overall business environment

• Targeted industrial policies in sectors like tourism, urban development, and digital services

Strengthening regulatory predictability, state capacity, and infrastructure will be critical to sustaining growth and generating employment.

A Fragile but Recoverable Outlook

Nepal's economic trajectory in the coming years will depend heavily on how it navigates both external shocks and domestic reforms.

While near-term risks remain elevated, the combination of infrastructure investment, political stability, and policy reform offers a pathway to recovery—provided global conditions do not deteriorate further.