Nepal economic growth outlook reduces to 3% for 2026 as IMF flags volatility risks

KATHMANDU: Nepal’s economic growth outlook has been sharply downgraded, with the International Monetary Fund projecting real GDP expansion of just 3.0 percent in 2026, a significant downward revision reflecting mounting macroeconomic vulnerabilities and external pressures.

In its latest Asia and Pacific Economic Outlook, the IMF reduced Nepal’s 2026 growth forecast by 2.2 percentage points compared to its October 2025 projection. The revised estimate signals a notable slowdown from the 4.6 percent growth recorded in 2025, underscoring structural fragility and uneven recovery dynamics in the Himalayan economy.

Despite the projected deceleration, the IMF expects Nepal’s growth to rebound to 4.6 percent in 2027, suggesting that the current slowdown may be cyclical rather than systemic—provided policy stability and external conditions improve.

IMF vs ADB: Diverging Yet Cautious Outlooks

While the IMF’s projection remains relatively more optimistic, the Asian Development Bank has issued an even more conservative estimate. In its Asian Development Outlook 2026, the ADB forecasts Nepal’s growth at 2.7 percent for 2026, followed by a stronger recovery to 5 percent in 2027.

Both institutions, however, converge on a key narrative: Nepal’s economic trajectory over the next two years will remain volatile, driven by external shocks, domestic demand constraints, and policy execution challenges.

Inflation to Stay Contained

Amid subdued growth, inflation dynamics appear relatively stable. The IMF projects Nepal’s average consumer price inflation at 3.1 percent in 2026, indicating that price pressures remain under control despite global uncertainties. This provides some policy space for authorities to focus on growth-supportive measures without triggering macroeconomic instability.

Regional Comparison: Nepal Lags Behind Emerging Asia

Nepal’s projected growth of 3 percent falls significantly below the average of 4.9 percent for emerging and developing Asian economies in 2026. The broader Asia-Pacific region is expected to grow at 4.4 percent, highlighting Nepal’s relative underperformance.

Major regional economies are set to outperform Nepal by a wide margin. India is projected to maintain robust growth at 6.5 percent in both 2026 and 2027, reinforcing its position as the fastest-growing major economy in the region. Vietnam leads Southeast Asia with a projected growth of 7.1 percent in 2026, followed by sustained expansion of 6.7 percent in 2027.

Bangladesh is expected to grow at 4.7 percent in 2026 before moderating slightly to 4.3 percent in 2027. Cambodia’s growth is projected at 4.0 percent, while Mongolia is anticipated to post a strong 5.3 percent expansion driven by mining sector momentum.

China, the world’s second-largest economy, is projected to slow to 4.4 percent growth in 2026 and further to 4.0 percent in 2027, signaling broader regional moderation.

Among advanced economies, Japan’s growth is forecast at just 0.7 percent in 2026, while South Korea and Australia are expected to grow by 1.9 percent and 2.0 percent respectively. Singapore stands out with a relatively strong 3.5 percent growth projection.

ASEAN economies are collectively expected to grow at 4.5 percent in 2026, led by Indonesia (5.0 percent) and Malaysia (4.7 percent), indicating sustained regional resilience.

Exchange Rate Stability Under Scrutiny

The IMF has also weighed in on Nepal’s exchange rate regime, particularly the peg between the Nepali rupee and the Indian rupee. While flexible exchange rates are generally considered effective “shock absorbers,” the IMF cautioned against any immediate shift in Nepal’s current system.

IMF official Thomas Helbling emphasized that Nepal’s fixed exchange rate serves as a “nominal anchor” and should only be reconsidered when macroeconomic conditions stabilize.

Reform Momentum and Fiscal Buffers

The IMF acknowledged Nepal’s ongoing reform efforts under its program framework, noting that policy measures have contributed to building fiscal buffers. The recent completion of the seventh review under the IMF-supported program—reaching a staff-level agreement—signals continued engagement and policy alignment.

The Fund reiterated its commitment to supporting Nepal through policy advice, surveillance, and capacity development initiatives.

Policy Imperatives Ahead

With Nepal’s economy still highly vulnerable to external shocks—including remittance fluctuations, import pressures, and global financial tightening—the IMF has urged the government to adopt targeted and calibrated policy responses.

Strengthening fiscal discipline, enhancing capital expenditure efficiency, and maintaining financial sector stability will be critical to navigating the current slowdown. Without decisive reforms and improved execution, Nepal risks prolonged underperformance relative to its regional peers in South Asia and the broader Asia-Pacific.

The downgraded growth outlook serves as a cautionary signal for policymakers, investors, and development partners, highlighting the urgency of structural reforms to restore momentum in Nepal’s economic trajectory.