Climate change in Nepal is no longer a distant risk; it is already triggering disasters that deliver immediate and severe economic shocks. In October 2025, heavy rainfall in Ilam district in eastern Nepal killed 39 people and displaced 711 families. The financial loss was estimated at around Rs 11.81bn, with 365 houses completely destroyed and 940 partially damaged across 10 local levels of the district.

Similarly, a cloudburst between Sept 26 and 28, 2024, triggered floods and landslides across central and eastern Nepal. The event brought the highest recorded rainfall since 1970 and caused an estimated loss of Rs 46.68bn. The damage was extensive: 41 road sections, including the BP Highway, the Prithvi Highway, and other major transport corridors connecting Kathmandu with the rest of the country, were washed away. The disaster also damaged 26 hydropower projects, 446 telecommunication units, 1,678 federal and provincial water supply and sanitation systems, and 44 bridges.

In human terms, the floods and landslides claimed 249 lives, left 18 people missing, and injured 177 others, underscoring the profound human cost of climate-induced disasters. In August 2024, a glacial lake outburst flood (GLOF) near the Sagarmatha region in Solukhumbu wiped out an entire village, including schools and hospitals.

Earlier, in mid-June 2021, floods and landslides in Melamchi and Helambu of Sindhupalchok district, around 70 km northeast of Kathmandu, inflicted devastating damage. Financial losses amounted to approximately Rs 58.86bn in Melamchi, despite its annual budget being only Rs 1.3bn, and about Rs 27.61bn in Helambu Municipality. These losses alone far exceeded the fiscal capacity of the affected local governments.

The disaster also severely damaged the Melamchi Drinking Water Project, a national pride project, directly affecting roughly three million people in the Kathmandu Valley who rely on it as their primary source of drinking water.

These incidents are not merely “natural calamities” to be treated as isolated events. A collective view clearly shows that they are, instead, climate-induced economic shocks that are likely to occur with increasing frequency.

According to the Climate Risk Index, Nepal ranks 10th globally among countries most affected by past climate-related hazards. This high vulnerability stems from the combined effects of climatic extremes, fragile and diverse geography, weak policy and institutional capacity, and development pathways that lack resilience to shocks. Climate change impacts are widespread across Nepal’s economy, with particularly severe consequences for natural resource–dependent sectors such as agriculture. Climate-related risks also undermine infrastructure, basic service delivery, and public health in both urban and rural areas.

Economic pillars at risk​​​​​​​

The Asian Development Bank estimates that Nepal could lose 2.2 percent of its annual GDP by 2050 due to climate change. This is no longer an issue to be left solely to the Ministry of Forests and Environment. Climate change is now directly affecting inflation, public expenditure, financial stability, and sustainable economic growth. Recent experience has shown that conventional economic systems can no longer withstand the emerging economic threats posed by climate change.

Agriculture contributes around a quarter of Nepal’s GDP, and more than 60 percent of the population depends on it for livelihood. Yet the sector remains highly vulnerable to climate change, as only around 20 percent of farmland has access to year-round irrigation and production is heavily dependent on rainfall.

Nepal’s paddy output is projected to decline in the current fiscal year for the first time in four years due to prolonged drought in Madhes Province, unseasonal rainfall in October last year, and increasing rural-to-urban migration. The World Bank warns that lower domestic paddy production could keep food price inflation elevated and raise the cost of living for low-income households, thereby exacerbating poverty.

Hydroelectricity, the backbone of Nepal’s energy security, is also highly vulnerable to floods, landslides, and silt deposition in hydropower dams. Likewise, Nepal’s highways, bridges, power transmission lines, and irrigation projects are built on fragile land structures, making them increasingly susceptible to climate shocks.

Climate change is also directly affecting tourism, one of Nepal’s largest contributors to GDP and the second-largest employment sector after agriculture. Studies show that climate impacts—rising temperatures, unpredictable rainfall, floods, landslides, loss of snow cover, retreating snowlines, and changes in river discharge and water quality—directly disrupt trekking and hiking activities. As Nepal is primarily known for nature-based tourism, these changes directly affect public revenue and private investment in the sector.

Climate-induced shocks have immediate and visible economic impacts. Floods destroy crops, driving up food prices and fueling inflation. Landslides wash away highways, disrupting supply chains and sharply increasing transportation costs. Damage to hydropower plants reduces electricity generation, leading to higher energy imports and widening trade deficits. At the same time, rising expenditure on disaster response diverts public funds away from education, health, and other productive sectors.

These impacts are not one-off events; they represent recurring supply-side shocks that repeatedly undermine economic stability and long-term development. As the International Monetary Fund notes, “Climate change is not just an environmental issue; it is a macroeconomic and financial stability challenge.”

Nepal, however, is not alone. More than 1,800 people across Indonesia, Malaysia, Thailand, and Sri Lanka lost their lives to extreme flooding during November and December 2025. The damage was estimated at around $25bn, severely affecting food markets and regional trade. In the United States, wildfires in California forced insurance companies to withdraw coverage, with total losses estimated at around $250bn.

Fiscal burden of reconstruction vs prevention 

Extreme environmental changes are no longer exceptions; they are steadily becoming a dominant economic force. The costs are especially high for a country like Nepal, where public financing is limited. While public finance systems are meant to manage risk and support growth, Nepal’s fiscal policy still treats climate change as an exception rather than a structural risk.

Each year, billions of rupees are spent on post-disaster rescue, relief, rehabilitation, and reconstruction—often financed through budget cuts in other sectors or increased borrowing. Between 2012 and 2020, for example, the government spent an average of Rs 50bn annually on disaster response.

Over time, this pattern contributes to fiscal deficits and reduced development expenditure. Climate change also lowers the productivity of public investments. Washed-out highways during the monsoon, hydropower losses due to siltation, and damaged irrigation channels illustrate how environmental shocks can render public investments inefficient.

The economics of climate change sends a clear message: prevention is far more cost-effective than reconstruction. Investing in flood control, slope stabilisation, early warning systems, and climate-resilient infrastructure reduces future government expenditure on recovery and rebuilding. Fiscal policies that overlook climate risks are not just short-sighted—they are unsafe.

Financial risk 

Climate change also poses growing challenges for monetary policy. In Nepal, floods, landslides, and droughts reduce food production and supply, driving inflation. These shocks are not temporary; treating them as cyclical risks undermines monetary policy effectiveness.

Climate change is a silent predator within the financial system. Banks and financial institutions hold significant exposure to agriculture, hydropower, construction, and infrastructure—priority lending sectors that are also the most vulnerable to climate risks. When these sectors are hit, loan recovery weakens and non-performing assets rise. While the central bank cannot prevent floods, it can safeguard financial stability through measures such as climate stress testing, disclosure requirements, and prudent regulation. Treating climate risk as separate from monetary policy is a vulnerability, not neutrality.

Ignoring climate risks in economic policy creates hidden liabilities, including unforeseen public debt and stranded assets. Infrastructure built without climate considerations often loses its expected lifespan, leaving taxpayers to bear reconstruction costs. Similarly, investments that fail to account for climate risk may not deliver expected returns, exposing banks and insurers to losses.

Poor financial management in the face of climate change risks turning today’s savings and investments into tomorrow’s losses.

Government’s efforts for climate finance 

Nepal has made some progress toward a climate-resilient economy. The Nepal Infrastructure Development Bank (NIFRA) recently issued the country’s first green bond worth Rs 5bn, signalling the potential for climate-friendly infrastructure financed through domestic sources.

The government has also introduced the Carbon Trading Regulation, 2025, opening avenues for revenue generation through forest conservation and carbon sequestration. The Nepal Green Financial Taxonomy 2024 has been published to guide the classification of green economic activities, while the Environmental and Social Risk Management (ESRM) framework has been in place since 2018 for credit appraisal. These are encouraging developments.

However, these initiatives remain insufficient. Green finance is still disconnected from core fiscal and monetary policies. The NIFRA green bond is limited in scale, carbon trading faces uncertainties around pricing, certification, institutional capacity, and market access, and green classifications do not yet meaningfully influence bank lending, budget priorities, or public investment decisions.

In effect, green finance remains a “project” rather than a “system.” Without alignment across fiscal policy, monetary policy, and financial regulation, these initiatives remain fragmented and largely symbolic. Climate change, meanwhile, continues to embed itself in Nepal’s budget, inflation dynamics, and bank balance sheets.

Way forward 

The question for policymakers is no longer what to do, but how to unify efforts. The Ministry of Finance must adopt a climate-sensitive budget that prioritises resilient infrastructure, integrates green bonds and carbon trading, aligns tax policy with climate goals, and coordinates public investment decisions.

The central bank and financial regulators should incorporate climate risks into inflation management and financial stability frameworks, conduct climate stress tests, and incentivise credit flows toward climate-resilient and sustainable projects. Climate change is not separate from the economy—it is now a driver of economic instability.

Floods, landslides, and melting snowcapped mountains are not just environmental symbols; they are warnings for inflation, financial stability, and public finances. If climate risks remain isolated from economic policymaking, they will translate into higher public debt, weaker financial systems, and constrained development—costs future generations will bear.

Climate-resilient infrastructure, climate-friendly investments, and responsible financial regulation can gradually reduce losses and guide Nepal toward sustainable growth. Nepal’s message must be clear: economic policies designed for yesterday’s climate can no longer secure tomorrow’s growth.