World Bank Forecasts Sharp Economic Slowdown for Nepal in FY26 Amid Unrest

Nepal's Growth Projected to Halve in Current Fiscal Year

KATHMANDU – The World Bank has projected a substantial slowdown in Nepal's economic growth, forecasting a rate of 2.1 percent for Fiscal Year 2026 (FY26). This represents a significant decrease from the estimated 4.6 percent growth recorded in FY25. The grim outlook is detailed in the World Bank's latest 'Nepal Development Update: Reforms to Accelerate Public Investment', released on November 13, 2025.

The report attributes the anticipated deceleration primarily to the impact of widespread public unrest in September 2025 and the subsequent political instability that has gripped the nation.

Impact on Key Economic Sectors

The services sector is expected to bear the brunt of the economic downturn, with tourism activity projected to decline sharply due to a significant drop in international arrivals. Furthermore, the insurance industry is likely to be affected by the spillover effects of asset losses incurred during the period of unrest. The World Bank described the overall economic outlook as 'highly uncertain', emphasizing that the trajectory depends heavily on the smooth progression of the political transition.

Prior to the recent disturbances, Nepal's economy had shown signs of recovery, with growth reaching 4.6 percent in FY25, driven by manufacturing, construction, and increased hydropower generation.

Government Response and Future Outlook

In response to the challenging economic environment, Finance Minister Rameshore Prasad Khanal announced the government's launch of an 'Integrated Business Recovery Plan'. This plan includes provisions for grants, tax incentives, and operational support aimed at restoring business confidence and accelerating recovery. Public resources have been reprioritized towards infrastructure rehabilitation and election preparations, and a Reconstruction Fund has been established to aid in restoring damaged public and private assets.

Despite the immediate slowdown, the World Bank projects a rebound in growth to 4.7 percent in FY27, contingent on reconstruction efforts gaining momentum and effective policy execution. However, the report also notes that poverty rates (at USD 4.2/day) are now projected to be slightly higher than previous forecasts, reaching 6.6 percent in FY26 and 5.9 percent in FY27.

Call for Enhanced Public Investment

The World Bank's report underscores the critical need to strengthen public investment management to foster higher long-term growth. In FY24, Nepal's capital spending across federal, provincial, and local levels stood at just 7.9 percent of GDP. This figure falls significantly short of the 10-15 percent of GDP annual investment required to meet the country's substantial infrastructure needs.

David Sislen, World Bank Division Director for Maldives, Nepal, and Sri Lanka, highlighted that 'Boosting public investment is critical for improving growth, creating jobs, and building prosperity for Nepalis.' The report recommends key reforms including improving project planning and budgeting, streamlining land acquisition, and amending public procurement laws to enhance capital spending efficiency.