Nepal's economy to slow to 2.7 pc in FY 2026: ADB report

KATHMANDU: Asian Development Bank has forecast that Nepal’s economic growth will slow to 2.7% in fiscal year 2026, down from 4.6% a year earlier. The bank's flagship economic publication, Asian Development Outlook April 2026 report, projects a possible rebound to 5% in fiscal year 2027.

"The country's economic growth will significantly slow in fiscal year 2026 amid political uncertainties, including last year's civil unrest and the conflict in the Middle East," ADB Country Director for Nepal Arnaud Cauchois said. "While renewed political stability is expected to support reforms and bolster economic confidence, substantial downside risks remain, particularly from the Middle East conflict, which is affecting oil prices, tourism, and remittance flows."

At a press briefing on the Asian Development Outlook 2026, Jan Hansen, Principal Economist at ADB, said the effects of the Middle East conflict extend beyond energy and shipping. He warned that the conflict has created trade policy uncertainty, pushed up energy prices, complicated monetary policy, and is likely to exert significant pressure on inflation this year. Hansen also outlined three global scenarios for oil price movements across fiscal year 2026 and their cumulative impact on Asia-Pacific GDP growth and inflation.

ADB officials said the forecasts were based on assumptions finalised on March 10 under "exceptionally high uncertainty," and noted that developments since then point to a greater chance of more persistent disruptions.

In a presentation titled 'Nepal Economic Outlook,' Manbar S Khadka, Senior Economics Officer at ADB’s Nepal Resident Mission, said the economy should recover to 5% growth in fiscal year 2027 as the effects of recent shocks fade and domestic demand, hydropower exports and tourism strengthen.

Inflation is projected at 3.7% in fiscal year 2026 and to rise to 4.5% in fiscal year 2027 under an early-stabilisation scenario, the ADB said.

Khadka cited several domestic and external factors behind the slowdown and higher inflation: delayed agricultural output after the October floods in eastern Nepal; weak momentum in manufacturing and business investment; slow budget execution in construction; disruptions to tourist routes during the peak March-May season because of the Middle East conflict; and reduced out-migration and job opportunities abroad.

The ADB also said the Middle East conflict is expected to affect Nepal’s external balances. The current account surplus is forecast to widen to 7.2% of GDP in fiscal year 2026 from 6.7% in fiscal year 2025, supported by moderate remittance and export growth, but this will be partly offset by a temporary halt in out-migration, a higher import bill from elevated oil prices, and potential losses in tourism receipts. The surplus is then expected to moderate to 5.3% in fiscal year 2027.

The outlook remains subject to very high uncertainty and substantial downside risks, including a prolonged Middle East conflict, weak capital budget execution, financial sector vulnerabilities, climate hazards, global oil price volatility, and possible weakness in remittances linked to Gulf Cooperation Council countries if the conflict persists.