Kathmandu, Nov 13: The World Bank (WB) has said that reflecting the recent unrest and heightened political and economic uncertainty, Nepal’s real GDP growth is projected to slow to 2.1 percent in FY26 in the baseline scenario, with a potential range of 1.5 to 2.6 percent.
The WB stated this in its latest Nepal Development Update (November 2025) report launched here today.
According to the WB report, poverty rates (at USD 4.2/day) are slightly higher than previously projected, reaching 6.6 percent in FY26 and 5.9 percent in FY27 compared with 6.2 percent and 5.4 percent projected before the unrest.
Reconstruction efforts are expected to begin in FY26 and gain momentum in FY27, supporting a recovery in GDP growth to 4.7 percent in FY27.
The projected growth slowdown in the baseline is expected to be largely driven by the services sector. Tourism activity is projected to decline sharply, reflecting a significant decline in international tourist arrivals, while the spillover effects of asset losses are expected to weigh on insurance services.
The services sector is projected to recover in FY27 as tourism rebounds, insurance shocks dissipate, and government measures, such as insuring public property, support demand.
Industrial sector growth is projected to slow marginally in FY26 compared to FY25. Hydropower-related industrial activity is expected to remain robust, but non-hydropower-related private investment and construction is projected to be weighed down by weaker investor confidence following the unrest. Industrial sector growth is expected to pick up sharply in FY27, supported by public projects and reconstruction efforts.
Agriculture growth is projected to soften in FY26 due to delayed paddy planting, particularly in Madhesh Province, but is expected to recover in FY27 assuming 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, under which facilities such as grants, tax exemptions, and operational support have been arranged.”
According to the Finance Minister, priority has been given to public resources for infrastructure reconstruction and election preparation, a reconstruction fund has been established for the restoration of damaged public and private property, and these steps aim to restore private sector activities while laying the foundation for a strong economy, which is the goal of the Government of Nepal.
On the occasion, David Sislen, World Bank Division Director for Maldives, Nepal, and Sri Lanka, said: “Boosting public investment is critical for improving growth, creating jobs, and building prosperity for Nepalis. This requires implementing key reforms including strengthening project planning and budgeting, streamlining land acquisition and tree-cutting processes, improving cash management efficiency, and amending procurement laws and regulations to speed up project delivery.”
Inflation expected to remain within 5 percent ceiling
Inflation is expected to remain within the central bank’s 5 percent ceiling over the medium term. Easing global commodity prices, moderating inflation in India (transmitted through the currency peg), and softer cost pressures will help contain prices. However, these gains would be partially offset by a potential decline in domestic paddy output, which could keep food inflation elevated in FY26.
The current account surplus is projected to widen in FY26, driven by rising remittances despite a projected increase in the trade deficit and underperformance in tourism. The trade deficit is expected to widen slightly in FY26, led by imports of merchandise—particularly crude edible oils and construction equipment for hydropower— and more substantially in FY27 with higher demand linked to non-hydro construction projects.
Tourism receipts are expected to decline. These downward pressures on the external account are expected to be offset by robust remittance growth, resulting in a widening of the current account surplus from 6.7 percent of GDP in FY25 to 7.3 percent in FY26. The surplus is projected to moderate in FY27 as remittances level off. FDI inflows are likely to remain subdued over the medium-term. Foreign exchange reserves are expected to stay comfortably above the regulatory minimum of seven months of import cover.
The fiscal deficit is projected to widen in FY26 to 2.8 percent of GDP driven by increased spending on reconstruction, elections, private sector relief, and outstanding liabilities. These increased spending needs are expected to be partially offset by announced austerity measures and reprioritization of development projects, supported by relaxed virement rules.
Nominal revenue growth is projected to slow in FY26, reflecting weaker import growth and lower VAT and corporate income collections, particularly from the insurance and tourism sectors. The deficit is forecast to narrow in FY27 as revenues recover. Deficits are expected to be financed through a mix of external concessional and domestic borrowing within statutory ceilings. Public debt is projected to increase from 43.6 percent of GDP in FY25 to 45.2 percent in FY26 and stabilize thereafter keeping Nepal at low risk of debt distress.
The outlook is subject to mixed risks. Key downside risks include rising frequency of natural disasters and persistent political uncertainty weighing on economic activity, higher NPLs straining the domestic financial sector, Nepal’s continued presence on the Financial Action Task Force Grey List, and disruptions to public services and core administrative processes reflecting damage to public infrastructure. On the upside, a successful political transition and sustained macroeconomic management could strengthen investor sentiment supporting a stronger economic recovery.
Recent Economic Developments
According to the WB, Nepal’s economic growth picked up to 4.6 percent in the FY25 from 3.7 percent in FY24. The rebound was led by manufacturing and construction, supported by increased hydropower generation. Agriculture also contributed positively with paddy output rising despite flood damage. The services sector performance was mixed. Growth slowed in tourism, affected by Tribhuvan International airport (TIA) upgradation works and geopolitical tensions that disrupted international flights to Nepal via the Middle East.
Financial sector activities were impacted by subdued credit demand and rising non-performing loans (NPLs). On the other hand, wholesale and retail trade performed well supported by higher merchandise imports and improved access to trade finance.
Headline inflation declined to 4.1 percent in FY25 from 5.4 percent in FY24 falling below the Nepal Rastra Bank’s (NRB) 5 percent ceiling. Both food and non-food inflation moderated although this was partly offset by rising transport costs due to higher public transport fares.
The monetary policy stance remained cautiously accommodative, underpinned by comfortable foreign exchange reserves and easing inflation. The policy rate was reduced by 50 basis points to 5.0 percent at the start of FY25 following a sharper 150-basis-point cut in FY24. As monetary easing continued, lending rates fell more sharply than deposit rates, reaching a record low of 8.7 percent.
Nevertheless, private sector credit expanded only modestly, as weak demand and rising NPLs constrained lending. The NPLs ratio climbed to 4.6 percent at the end of FY25 from 3.9 percent at the end of FY24. This increase occurred despite the introduction of forbearance measures for the construction sector and for small loans (up to NPR 50 million) in select sectors such as agriculture and fishing that had accounted for a large share of NPLs in FY24. However, banks maintained strong capitalization, and overall profitability improved marginally.
The current account surplus widened further in FY25 rising to 6.7 percent of GDP from 3.9 percent of GDP in FY24, supported by remittances. Healthy remittances were driven by Nepali workers moving to new, higher-wage destinations such as Japan and South Korea, a weaker Nepali Rupee, and increased use of formal transfer channels.
The trade deficit remained stable in FY25 as both exports and imports picked up sharply. Export growth was driven by refined edible oils – mainly soybean and sunflower oil re-exported to India – after India raised import tariffs on edible oils from non-SAFTA countries. Imports increased in parallel, reflecting higher crude edible oil purchases from major suppliers, including Argentina and Brazil. The widening current account surplus contributed to robust foreign exchange reserves, which picked up to cover 15.4 months of import by end of FY25.
The fiscal deficit narrowed to a nine-year low of 2 percent of GDP in FY25 supported by stronger revenue mobilization. Revenues (including grants) picked up to 20 percent of GDP in FY25 from 19.4 percent of GDP in FY24, bolstered by higher VAT collections, increased excise duties on alcohol and beer, and increased trade-based revenues from rising merchandise imports and higher customs duty rates.
Total expenditure increased slightly from 21.9 percent of GDP in FY24 to 22 percent in FY25 driven by larger budget allocations for capital spending rather than improved execution. Capital expenditure execution remained weak at 63.2 percent in FY25 (slightly lower than the 63.5 percent in FY24) held down by several challenges across the project cycle as discussed in detail in the special focus chapter. Recurrent spending declined marginally from 18.5 percent of GDP in FY24 to 18.3 percent of GDP in FY25, reflecting lower domestic interest payments and reduced fiscal transfers to subnational governments.
