Nepal’s growth to slow in FY26 amid middle east conflict and domestic disruptions: World Bank

KATHMANDU: Nepal’s economic growth is projected to slow to 2.3 percent in fiscal year 2025/26 (FY26) from 4.6 percent in FY25, reflecting the combined impact of the ongoing Middle East conflict and the lingering effects of domestic unrest in September 2025, according to the latest update by the World Bank.

The report, titled Nepal Development Update: Growth Under Pressure—Navigating Domestic and Global Shocks, was released on Tuesday, outlining both downside risks and medium-term recovery prospects for the Nepali economy.

Looking ahead, the World Bank projects that economic growth could recover to an average of 4.4 percent during FY27–FY28, supported by post-disruption reconstruction efforts, continued expansion in the hydropower sector, and increased consumption linked to the 2027 subnational elections.

The report highlights that the services sector is expected to be the most affected in FY26. Slower tourism activity, rising transportation costs, and potential supply chain disruptions are likely to weigh heavily on the sector’s performance.

The outlook remains highly uncertain, particularly due to external risks. A prolonged conflict in the Middle East could lead to a decline in tourist arrivals, reduced remittance inflows, weaker household consumption, and an overall slowdown in economic activity.

However, the report also points to potential upside factors. Improved political stability following Nepal’s elections in March, sound macroeconomic management, the availability of economic buffers, and ongoing structural reforms could help strengthen investor confidence and support private sector growth.

“Boosting private sector-led growth will be critical to strengthening economic resilience and creating more jobs in Nepal,” said David Sislen, Division Director for Maldives, Nepal, and Sri Lanka. He emphasized the need to improve the business environment, develop core infrastructure, mobilize private investment, and promote key sectors such as tourism, information technology, and agribusiness.

The Nepal Development Update accompanies the broader regional outlook published in the South Asia Economic Update, another flagship report by the World Bank Group that assesses economic trends across the region.

According to the regional report, economic growth in South Asia is expected to slow to 6.3 percent in 2026, down from 7 percent in 2025, largely due to disruptions in global energy markets. Despite this slowdown, South Asia is projected to remain the fastest-growing region among emerging and developing economies, with growth rebounding to 6.9 percent in 2027.

The report also includes an analysis of industrial policy, referring to government strategies aimed at influencing the structure of economic production. It notes that while such policies are increasingly being used worldwide—and at nearly twice the rate in South Asia compared to other emerging economies—their outcomes in the region have been mixed.

“South Asia’s mixed success on industrial policy in part reflects limited implementation capacity, fiscal space, and market size in some countries,” said Franziska Ohnsorge, Chief Economist for South Asia at the World Bank.

She added that while broad-based reforms should remain the priority, carefully designed industrial policies can help address specific market gaps. Suggested measures include the development of industrial parks, expansion of skills training programs, improved access to markets, and strengthening export quality standards.

The South Asia Economic Update recommends that countries like Nepal focus on targeted policy interventions in sectors such as urban development, tourism, and digital services, alongside broader improvements in the business environment, regulatory predictability, and institutional capacity to support job creation and long-term growth.