Download the latest Nepal Development Update (April 2026) here
Nepal’s economy faces structural constraints and persistent spatial inequalities. Growth has been moderate and uneven, private sector development remains constrained, and migration continues to be a dominant livelihood strategy. Remittances remain a critical stabilizer, supporting millions of households and helping to reduce poverty with extreme poverty (based on United States dollars (USD) 3.00/day, or Nepali rupee (NPR) 113 in 2023) falling from 21.5 percent in 2011 to 3 percent in 2023.
The political landscape underwent significant change recently. Youth-led anti-corruption protests in September 2025 escalated into widespread unrest, resulting in the resignation of the prime minister and the dissolution of the House of Representatives (HoR). The unrest caused economic losses estimated at around 1.3 percent of GDP. Under an interim government, snap elections for the HoR on March 5, 2026, led to the formation of a single-party majority government. The new government has a clear mandate to address structural constraints impeding growth, including improving policy predictability, simplifying tax administration, relaxing capital account restrictions, reducing corruption, and accelerating infrastructure investment.
Recent Economic Developments
In the first half of fiscal year 2025/26 (H1FY26), economic growth was stagnant at 3.4 percent (year-on-year, y/y), reflecting the impact of the September 2025 unrest and weaker agricultural performance. Heightened uncertainty following the unrest led to only a marginal increase in services sector growth and dampened new investment. However, robust growth in the hydroelectric sector partly offset these effects. Agricultural growth slowed, largely due to a contraction in main paddy production, affected by drought during transplantation in Madhesh—one of the country’s largest paddy-producing provinces—and excessive rainfall during the October 2025 harvest. The industrial sector, by contrast, benefited from a notable expansion in installed hydroelectric capacity, with nearly 385 MW added to the grid in H1FY26, up from 244 MW in H1FY25. Growth was further supported by higher production of refined edible oil production for re-export and ongoing construction of multiple hydropower projects which boosted the construction sub-sector.
On the demand side, overall growth was constrained by weaker non-hydro private investment and subdued public investment, reflecting a challenging domestic environment. However, high-frequency indicators point to a pickup in consumption—partly driven by higher public sector wages and compensation—and in exports of goods and services, supported by a surge in the value of refined edible oils for re-export.
Headline inflation declined sharply to a record low of 1.7 percent (y/y) in H1FY26 down from 5 percent (y/y) in H1FY25. Headline inflation remained well below the Nepal Rastra Bank (NRB)’s 5 percent ceiling. Falling food prices—including vegetables, spices, pulses, legumes, and cereal grains—drove this decline, reflecting favorable harvests, normal weather, and base effects from H1FY25. Non-food inflation edged up to 3.8 percent (y/y), led by higher prices for gold and silver, education, and clothing and footwear, while ghee and oil prices increased due to higher import costs amid a nominal depreciation of the NPR against the USD.
On the external side, Nepal’s current account surplus widened to 6.7 percent of GDP in H1FY26, underpinned by a 4.0 percentage points (y/y) rise in remittances to 16.6 percent of GDP, which offset a widening trade deficit. Remittance growth occurred despite a decline in international worker migration, reflecting a depreciation of the NPR, diversification to higher-wage destinations such as Europe and Japan, and greater use of formal and digital transfer channels. The trade deficit widened as imports—particularly intermediate goods such as crude edible oils from Argentina, Brazil, and other countries for re-export—outpaced export growth. Exports rose modestly by 0.7 percentage point (y/y) of GDP, largely supported by a sharp increase in refined soybean oil exports from 0.3 to 0.9 percent of GDP.
The widening of the current account surplus supported the accumulation of foreign exchange reserves, which rose to USD 22.5 billion by mid-January 2026. This covered the equivalent of 18.1 months of imports of goods and services in H1FY26, up from 14.7 months a year earlier, and more than double the NRB’s minimum regulatory requirement of seven months.
Amid low inflation and ample foreign exchange reserves, the NRB maintained a cautiously accommodative stance in FY26, while private credit expansion remained subdued, reflecting weak domestic demand. In H1FY26, the NRB lowered the policy rate by 75 basis points (bps) to 4.25 percent and adjusted the interest rate corridor to strengthen monetary transmission. Money market and lending rates declined, while real deposit rates rose, supporting robust deposit growth. Targeted regulatory measures supported households, productive industries, and sectors affected by the September 2025 unrest. Private credit, however, expanded only marginally due to subdued domestic demand. Broad money expansion was thus driven largely by net foreign assets. Asset quality deteriorated, with the gross NPL ratio rising to 5.4 percent, prompting higher loan-loss provisioning and targeted forbearance measures. Despite these challenges, the financial sector remained well-capitalized, with a capital adequacy ratio of 12.6 percent as of mid-January 2026, underpinned by additional regulatory safeguards.
The fiscal balance also deteriorated marginally in H1FY26, shifting from a small surplus to a marginal deficit of 0.3 percent of GDP, reflecting lower revenue collection. Total revenue (including grants) fell from 9.4 to 9.2 percent of GDP, driven mainly by declines in income tax—reflecting lower interest income and capital gains—and non-tax revenue from public enterprise dividends. Higher VAT, excise, and customs duties partially offset this decline, while tax expenditures rose to 0.8 percent of GDP. Total expenditure remained broadly unchanged at 9.5 percent of GDP, as higher recurrent spending for interest arrears, dearness allowances, and fiscal transfers to subnational governments was largely offset by lower capital spending, with only 12.1 percent executed in H1FY26, partly due to disruptions from the September 2025 unrest. Capital expenditure continues to lag behind debt servicing since H1FY22 with the gap widening to 2.2 percent of GDP in H1FY26, primarily due to amortization of domestic debt.
With Nepal’s economy already showing limited momentum in H1FY26, the ongoing conflict in the Middle East is likely to further weigh on the outlook. The conflict is expected to affect Nepal through multiple transmission channels, including higher global commodity prices, potential moderation in remittance inflows, disruptions to aviation connectivity and tourism, and heightened investment uncertainty. The most significant channel is labor migration and remittances, given that 77.3 percent of Nepali migrant workers are based in the Middle East, with a high concentration in Saudi Arabia, Qatar, and the United Arab Emirates (UAE), which together account for around 37 percent of Nepal’s total remittance inflows. This exposes Nepal to shifts in labor demand and migration policies in these economies. Energy security represents another key vulnerability, as Nepal relies entirely on imported refined petroleum products from India, whose supply chain is closely linked to Middle Eastern markets, increasing exposure to global price shocks and inflationary pressures. The tourism and aviation sector is also at risk, as Middle Eastern carriers account for a substantial share of international flights and passenger traffic, making connectivity sensitive to regional disruptions. Other channels, including direct trade, are expected to have more limited near-term impacts due to relatively low trade exposure.
Economic Outlook
The baseline scenario assumes a temporary disruption to global energy markets in calendar year 2026, including reduced crude oil production and higher oil and natural gas prices, driven by transportation bottlenecks through the Strait of Hormuz, the world’s most critical maritime chokepoint for energy trade.
Real GDP growth is projected to moderate to 2.3 percent in FY26 amid the conflict in the Middle East and lingering effects of the September 2025 unrest. The slowdown is expected to be concentrated in services, as tourist arrivals decline during the March–May peak season, weighing on accommodation, food, and transport sectors. Higher fuel prices and moderating—though still robust—remittance growth are likely to reduce household purchasing power, dampening domestic trade and real estate activity. Industrial activity is also expected to soften, particularly non-hydro construction, as higher input costs and weaker investor confidence weigh on investment. Agriculture is projected to remain broadly resilient, though lower paddy production in Madhesh—reflecting drought conditions and reduced planting—will temper overall growth.
Growth is expected to recover and average 4.4 percent in FY27–FY28, driven by reconstruction, continued hydropower expansion, alongside stronger consumption associated with the 2027 subnational elections. Hydropower expansion will continue to underpin industrial activity, with a large pipeline of projects under construction despite higher costs, reflecting substantial sunk investments. Public construction is projected to pick up over the medium term, further supporting growth. Agricultural output is expected to recover, assuming favorable monsoon conditions and sufficient availability of fertilizers.
Inflation is projected to rise in FY26 and FY27, reflecting higher import and transportation costs. Consumer price inflation is expected to increase from 4.1 percent in FY25 to 4.3 percent in FY26, before rising further to 5.1 percent in FY27. Inflation is projected to moderate in FY28 as global commodity prices ease and inflation in India declines, which—through Nepal’s currency peg—helps contain imported inflation.
The conflict in the Middle East is expected to have modest but measurable effects on poverty, raising it to 6.6 percent in FY26 from 6.5 percent pre-conflict. While modest in aggregate, these changes mask significant welfare losses for vulnerable households near the poverty line. The number of poor people is expected to increase by 17,267 in FY26 due to the conflict. Slower growth, higher inflation, and a sharp decline in remittances—especially in rural areas—will weigh on household incomes. Limited social assistance and suspended labor permit issuance may further constrain support for vulnerable households, potentially widening inequalities.
Nepal’s current account surplus (CAS) is projected to increase from 6.7 percent of GDP in FY25 to 8.5 percent in FY26, supported by strong remittances, driven by the depreciation of NPR and diversification to higher-paying destination countries. In FY27–FY28, the CAS is expected to narrow as trade deficits continue to widen and remittance growth moderates. The trade deficit is projected to widen over the medium term, reflecting higher import prices and increased imports of goods in FY27 and FY28, notably for reconstruction, construction equipment for hydropower projects, and crude edible oil for re-exports.
The fiscal deficit is projected to widen in FY26, driven by lower revenues, while public debt is expected to remain contained, keeping the country at a low risk of debt distress. Higher expenditures—related to the March 2026 special election, increased dearness allowances, and settlement of outstanding liabilities, including concessional interest payments and export cash incentives—will further contribute to the widening deficit. Capital spending is expected to remain subdued amid implementation delays partly linked to the September 2025 unrest. Over the medium term, the deficit is projected to narrow as revenues recover with economic growth, and expenditures remain broadly contained. Financing is expected from a mix of external concessional borrowing and domestic debt, with public debt rising from 43.8 percent of GDP in FY25 to 45.5 percent in FY26 before declining in FY27–FY28, keeping Nepal at low risk of debt distress.
The risks to the outlook are tilted to the downside. Key downside risks include a prolonged conflict in the Middle East, which could reduce tourist arrivals and remittance inflows, dampen consumption and services activity, and slow overall growth. Disruptions in fertilizer imports could raise production costs and reduce agricultural output. Fuel supply constraints could also weigh on investment activity more broadly. Domestically, frequent natural disasters and the high share of uninsured assets pose significant risks to production, consumption, investment, and fiscal stability.
Financial sector vulnerabilities remain elevated, as further deterioration in banking asset quality could constrain credit growth, while Nepal’s continued presence on the Financial Action Task Force grey list may raise cross-border transaction costs and compliance risks. On the upside, expected improved political stability resulting from the formation of a majority government following March 5, 2026, elections, continued sound macroeconomic management, sufficient buffers, and progress in structural reforms to strengthen governance and the business environment could boost investor confidence, supporting stronger private investment and growth.
Last Updated: Apr 08, 2026
