Nepal's growth is projected to slow to 2.3 pc in FY26: World Bank

KATHMANDU: Nepal’s economic growth is projected to slow to 2.3% in fiscal year 2026, down from 4.6% in fiscal year 2025, the World Bank said on Wednesday.

The slowdown reflects the impact of the ongoing conflict in the Middle East and the lingering effects of domestic unrest in September 2025, the bank added.

The World Bank’s Nepal Development Update, titled 'Growth Under Pressure: Navigating Domestic and Global Shocks,' says the services sector will be the most affected in fiscal year 2026 as slower tourism, higher transport costs and potential supply chain disruptions weigh on activity. The report warns the outlook is 'highly uncertain' and says a prolonged Middle East conflict could further reduce tourist arrivals, dent remittance inflows, weaken consumption and slow overall economic activity.

Looking ahead, the World Bank expects reconstruction activities, continued hydropower expansion and consumption linked to the 2027 subnational elections to support a recovery, with growth forecast to pick up to an average of 4.4% over fiscal year 2027-2028.

"Boosting private sector-led growth will be critical to strengthening economic resilience and creating more jobs in Nepal," said David Sislen, World Bank Division Director for Maldives, Nepal, and Sri Lanka. "To achieve this, Nepal must improve the business environment, develop foundational infrastructure, mobilise private finance, and support priority sectors such as tourism, the IT sector, and agribusiness."

The Nepal update accompanies the World Bank Group’s twice-yearly South Asia Economic Update. The regional report, 'Working with Industrial Policy,' projects South Asia’s growth to slow to 6.3% in 2026 from 7% in 2025, largely because of disruptions in global energy markets, while noting the region still grows faster than other emerging-market and developing economies. Growth in South Asia is expected to recover to 6.9% in 2027.

The regional report also explores industrial policy, noting that governments in South Asia are using such policies at roughly twice the rate of other emerging economies but with mixed results.

Photo courtesy: World Bank Nepal

Photo courtesy: World Bank Nepal

Photo courtesy: World Bank Nepal

"South Asia's mixed success on industrial policy in part reflects the region’s limited implementation capacity, fiscal space, and market size in some countries," said Franziska Ohnsorge, World Bank Group Chief Economist for South Asia. "While broad-based reforms remain the priority, well-calibrated industrial policies could address specific market failures, including through measures such as industrial parks, skill development programmes, market access assistance, and improving export quality standards."

The World Bank recommends that Nepal combine targeted sectoral measures in areas such as urban development, tourism and digital services with broad improvements in the business environment, regulatory predictability and state capacity to support job creation and a more resilient recovery.