KATHMANDU, April 8, 2026-Growth in Nepal is projected to slow to 2.3% in FY26 from 4.6% in FY25, reflecting the impact of the ongoing conflict in the Middle East and the lingering effects of the September 2025 unrest, according to the World Bank's latest economic update. Looking ahead, reconstruction activities, continued hydropower expansion, and consumption linked to the 2027 subnational elections are expected to support a pickup in growth to an average of 4.4% over FY27-FY28.
Released today, the Nepal Development Update, Growth Under Pressure: Navigating Domestic and Global Shocks, says that the services sector is expected to be most affected in FY26, due to slower tourism activity, higher transport costs, and potential supply chain disruptions. The outlook remains highly uncertain. A prolonged conflict in the Middle East could dampen tourist arrivals, reduce remittance inflows, weaken consumption, and slow overall economic activity. On the upside, improved political stability following the elections in March, sound macroeconomic management, the availability of ample buffers, and continued structural reforms could strengthen investor confidence, boosting private investment and growth.
"Boosting private sector-led growth will be critical to strengthening economic resilience and creating more jobs in Nepal," said David Sislen, World Bank Division Director for Maldives, Nepal, and Sri Lanka. "To achieve this, Nepal must improve the business environment, develop foundational infrastructure, mobilize private finance, and support priority sectors such as tourism, the IT sector, and agribusiness."
The Nepal Development Update is a companion piece to the World Bank Group's South Asia Economic Update, a twice-a-year report that examines economic developments and prospects in the South Asia region. The latest South Asia Economic Update, Working with Industrial Policy, projects growth in South Asia to slow to 6.3% in 2026-from 7% in 2025-due to disruptions in global energy markets. Despite the near-term slowdown, South Asia continues to grow faster than other emerging-market and developing economies. Growth is expected to recover to 6.9% in 2027.
The regional report also includes an in-depth analysis on industrial policy-the range of policy tools governments are using to shape what an economy produces, rather than leaving it to markets alone. Governments around the world are increasingly using industrial policy, and in South Asia industrial policies are implemented at roughly twice the rate of other emerging economies. But these measures have delivered mixed results in South Asia.
"South Asia's mixed success on industrial policy in part reflects the region's limited implementation capacity, fiscal space, and market size in some countries," said Franziska Ohnsorge, World Bank Group Chief Economist for South Asia. "While broad-based reforms remain the priority, well-calibrated industrial policies could address specific market failures, including through measures such as industrial parks, skill development programs, market access assistance, and improving export quality standards."
The South Asia Economic Update recommends implementing carefully designed policy measures in sectors such as urban development, tourism and digital services, alongside broad-based improvements in the underlying business environment, regulatory predictability, and state capacity-all of which are critical for job creation.
