The World Bank has projected that Nepal’s economic growth will slow sharply to 2.3% in fiscal year 2026, down from 4.6% in FY25, according to its latest Nepal Development Update released on 8 April 2026. The slowdown is attributed to the ongoing conflict in the Middle East and the lingering economic effects of domestic unrest in September 2025, both of which are weighing on economic activity and increasing uncertainty around the country’s near-term outlook.
According to the report, the services sector is expected to be the most affected in FY26. Slower tourism activity, rising transport costs, and possible supply chain disruptions are likely to reduce momentum in one of Nepal’s key economic drivers. The World Bank also warned that if the conflict in the Middle East continues for an extended period, Nepal could face further pressure through lower tourist arrivals, weaker remittance inflows, reduced household consumption, and a broader slowdown in economic performance.
Despite the weak short-term outlook, the World Bank expects Nepal’s growth to recover over the medium term. Economic expansion is projected to improve to an average of 4.4% during FY27–FY28, supported by reconstruction efforts, continued investment in hydropower development, and higher consumption linked to the 2027 subnational elections. These factors are expected to help restore momentum once current domestic and external pressures begin to ease.
The report also highlighted several upside risks that could strengthen Nepal’s outlook if managed effectively. Improved political stability following the March elections, prudent macroeconomic management, the availability of sufficient financial buffers, and ongoing structural reforms could all help boost investor confidence. In turn, this could encourage greater private sector investment and contribute to stronger and more resilient economic growth.
David Sislen, the World Bank’s Division Director for Maldives, Nepal, and Sri Lanka, emphasized that stronger private sector-led growth will be essential for improving Nepal’s economic resilience and generating more jobs. He noted that achieving this will require Nepal to improve its business environment, expand foundational infrastructure, mobilize private finance, and support key sectors such as tourism, information technology, and agribusiness.
The Nepal Development Update was released alongside the World Bank Group’s South Asia Economic Update, which assesses broader regional trends. That report projects South Asia’s overall growth to slow to 6.3% in 2026 from 7% in 2025, mainly because of disruptions in global energy markets. Even with this slowdown, South Asia is still expected to remain the fastest-growing region among emerging-market and developing economies, with growth forecast to rebound to 6.9% in 2027.
The regional report also examines the growing use of industrial policy in South Asia, where governments are increasingly using targeted policy tools to shape economic activity rather than relying solely on markets. While industrial policy is being implemented in South Asia at roughly twice the rate seen in other emerging economies, the World Bank notes that the results have been mixed. It attributes this to challenges such as limited implementation capacity, constrained fiscal space, and smaller domestic markets in some countries.
Franziska Ohnsorge, Chief Economist for South Asia at the World Bank Group, said that although broad-based reforms should remain the top priority, carefully designed industrial policies can still help address specific market failures. She pointed to measures such as industrial parks, skills development, market access support, and better export quality standards as areas where targeted interventions could be useful.
Overall, the World Bank recommends that South Asian countries, including Nepal, pursue well-designed sectoral policies in areas such as urban development, tourism, and digital services while continuing broader reforms to improve the business environment, regulatory certainty, and institutional capacity. These reforms are seen as critical for boosting investment, strengthening resilience, and creating jobs over the long term.
