Recent projections by the World Bank (WB) and second-quarter estimates from the National Statistics Office (NSO) suggest that Nepal’s economy is expanding at a moderate pace and under increasingly complex external and domestic conditions.
The World Bank has projected a slowdown in Nepal’s economic growth in fiscal year 2025/26 to 2.3 percent compared to the 4.6 percent expansion recorded in the previous fiscal year. This anticipated deceleration is due to a combination of external shocks and lingering internal disruptions. According to the World Bank, the ongoing conflict in West Asia has introduced volatility in global energy markets and disrupted travel flows, both of which are critical for Nepal’s tourism-dependent services sector. At the same time, the aftereffects of the Sept 2025 unrest continue to dampen investor sentiment and delay economic normalization.
However, the NSO’s second-quarter data tells a more nuanced story. The economy expanded by 4.05 percent year-on-year based on seasonally unadjusted data at basic prices, indicating that growth has not stalled. However, the quarter-on-quarter growth is projected to remain at just 2.04 percent based on seasonally adjusted prices. Projections by the World Bank and the NSO suggest that although Nepal’s growth is holding up statistically, momentum is weakening.
Encouragingly, all 18 economic sectors recorded positive year-on-year growth in the second quarter, according to the NSO. This broad-based expansion suggests that the recovery is not narrowly concentrated but spread across the economy.
Some sectors have performed exceptionally well. Electricity and gas activities recorded the highest growth at 22.74 percent, followed by financial and insurance activities (12.51 percent), transport and storage (9.65 percent), accommodation and food services (5.18 percent), and wholesale and retail trade (4.11 percent). Agriculture, the largest contributor to the economy, grew by an estimated 2.21 percent year-on-year despite a decline in paddy output. Increases in cash crops, vegetables, fruits, and forestry products supported overall agricultural value addition, according to NSO.
Similarly, wholesale and retail trade, the second-largest sector, expanded by 4.11 percent due to higher domestic production and imports of tradable goods. In contrast, sectors such as water supply, sewerage and waste management (0.55 percent), public administration and defense (1.11 percent), and education (1.16 percent) posted relatively weak growth.
Several sectors have shown signs of stagnation. Water supply and waste management, public administration, and education all recorded growth rates barely above one percent. This reflects structural inefficiencies in public service delivery and human capital development which are crucial for sustaining long-term growth.
The World Bank has warned that the services sector, particularly tourism, could face headwinds if the West Asia conflict persists. A prolonged crisis could reduce tourist arrivals, weaken remittance inflows from Nepali workers in the region, and ultimately dampen domestic consumption. Higher transport costs and supply chain disruptions could further erode competitiveness and raise inflationary pressures, it added.
However, there are also reasons for cautious optimism. The political landscape appears more stable following the March elections when Rastriya Swatantra Party (RSP) emerged as the largest political force in the country with nearly two-thirds majority. This alone can improve policy continuity and investor confidence. Since the country’s macroeconomic fundamentals are relatively sound, with adequate foreign exchange reserves and manageable inflation, these buffers can help the economy navigate external shocks if managed effectively.
More importantly, the medium-term outlook remains positive. The World Bank expects growth to pick up to an average of 4.4 percent over the next two fiscal years, driven by reconstruction activities, continued hydropower expansion, and consumption linked to the 2027 subnational elections.
The World Bank has recommended improving the business environment, investing in foundational infrastructure, mobilizing private finance, and supporting high-potential sectors such as tourism, information technology, and agribusiness. Without these structural reforms, it says Nepal risks remaining trapped in a low-growth equilibrium.
Among its South Asian peers, Nepal’s projected growth outpaces only that of the Maldives. India is expected to grow at 7.6 percent in the current fiscal year, while growth in Bangladesh, Bhutan, Sri Lanka, Pakistan, and the Maldives is projected at 7.1 percent, 3.9 percent, 3.6 percent, 3.0 percent, and 0.7 percent, respectively.
