Nepal

Ten years after a Comprehensive Peace Agreement ended the conflict in Nepal, the 2015 Constitution restructured the country from a unitary state under a monarchy into a federal democratic republic. The 2015 Constitution introduced a three-tiered system of public administration comprising a federal government, seven provincial governments, and 753 local governments. Nepal’s political system is characterized by a multi-party democracy and a coalition-based government.

The rollout of federalism has begun in earnest, but serious implementation challenges persist. Since the adoption of the 2015 Constitution and the country’s transition to federalism, some progress has been made in establishing institutional structures, adopting key legislation, and building the core blocks of public financial management. At the same time, building a fully functioning federal system has been slow, with key legislative reforms still pending and roles and responsibilities often not fully defined. Challenges persist in establishing a fiscal system that fully aligns with the needs of the new federal structure. Additionally, broader political challenges hinder the administrative and policy decisions required to help the system reach its full potential.

Nepal’s poverty reduction story over the last 30 years is nothing short of remarkable; its poverty rate fell from over 55 percent in 1995 to 0.37 percent in 2022 (based on the $2.15 poverty line), a feat as impressive as almost any country in history. Yet, it has done so without transformative domestic growth, investment, or job creation. Nepal’s greatest challenge now is to realize its full potential by building an economy that creates sustained domestic growth and jobs.

Nepal’s reliance on remittances – which has been such an important element in the country’s poverty reduction story – has been central to the country’s growth but has not translated into quality jobs at home, reinforcing a cycle of lost opportunities and the continued departure of many Nepalis abroad in search of employment. A staggering 82 percent of Nepal’s workforce is in informal employment, far higher than global and regional averages.

Nepal is also highly exposed to natural disasters and climate shocks – it is the second most vulnerable country globally to mortality risk from multiple hazards, including earthquakes, natural disasters (including those exacerbated by a changing climate), and disease outbreaks. Growth and development in Nepal cannot happen without sustained efforts to reduce risks, prepare for crises, and build resilience across the economy to these threats.

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RECENT ECONOMIC DEVELOPMENTS

Real GDP growth moderated to 3.9 percent in FY26, from 4.4 percent in FY25, reflecting a slowdown in agricultural growth. Agricultural sector growth slowed to 1.6 percent, from 3.0 percent in FY25, mainly due to a 4.2 percent contraction in paddy production. Adverse weather conditions, including

drought during the peak paddy transplantation period in Madhesh, and excessive rainfall during the October 2025 harvest, weighed on production. In contrast, industrial sector growth accelerated to 5.7 percent, from 3.3 percent in FY25,driven by a 21 percent expansion in electricity generation

and higher hydropower capacity. Services growth moderated slightly to 4.2 percent, from 4.4 percent, as stronger domestic trade and financial and insurance services were offset by slower growth in transportation and accommodation and food services.

OUTLOOK, RISKS, AND CHALLENGES

The August 2026 flood is expected to have a material negative impact on Nepal’s economic prospects in the short term, with real GDP growth projected to slow to 3.7 percent in FY27, reflecting disruptions to industry and services. Industry is expected to be the main drag on growth, reflecting extensive damage to hydropower, solar energy, electricity transmission, and transport infrastructure, which will constrain electricity generation, production, and

the movement of goods. Services are expected to be affected through disruptions to trade, transport, tourism, and financial activity, while agricultural losses are expected to have limited effects on aggregate output but significant impacts on livelihoods in affected areas. Reconstruction and rehabilitation activities are expected to begin supporting economic activity in FY27 and gain momentum in FY28, as damaged infrastructure and productive capacity are progressively restored, supporting a recovery in real GDP growth to 5.2 percent in FY28.

BUILDING DIFFERENTLY AFTER THE AUGUST 2026 FLOOD

The August 26, 2026, flood highlighted the scale and complexity of disaster risk in Nepal’s Himalayan environment, demonstrating how a single extreme event can generate cascading impacts across communities, transport networks, energy infrastructure, livelihoods, and essential services. Recovery should therefore go beyond restoring damaged assets to reconsider how future development in highly exposed mountain environments can better account for changing and interconnected risks as well as avoiding the accumulation of risk in a concentrated area. Reconstruction planning should be informed by updated multi-hazard risk assessments that consider floods, debris flows, landslides, glacial hazards, and river-system dynamics, as well as the potential for cascading impacts across entire infrastructure networks. This includes greater attention to the location and design of critical infrastructure and to lifeline systems— transport, energy, communications, and other networks essential to maintaining connectivity and basic services.

Read the latest Nepal Development Update to learn more.

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The World Bank Group (WBG) has partnered with Nepal to expand opportunities, strengthen institutions, and build resilience for more than six decades. Nepal joined the IMF and IBRD in 1961. The first World Bank technical assistance grant to Nepal was in 1964 (a transport survey), and the first credit was in 1969 for telecommunications.

As of March 2026, Nepal’s active World Bank support to the public sector consists of 22 operations - 17 investment projects, four Program-for-Results, and one development policy credit - with total commitments of about US$2.3 billion. Current engagements cover transport, energy, education, health, agriculture, water, urban governance, and public financial management.

The International Finance Corporation (IFC) – the private sector arm of the World Bank Group has been supporting private sector–led growth and development in Nepal since 1966.

IFC supports private sector development in alignment with the Government of Nepal’s priorities and the WBG’s Country Partnership Framework, with a focus on creating more and better jobs, strengthening connectivity, and promoting green and resilient growth. By March 2026, IFC’s active investment portfolio in Nepal totaled US$257 million across 14 projects, complemented by a US$10 million advisory portfolio. The engagement spans the financial sector, infrastructure, manufacturing, agribusiness, services, and innovative funds, combining long term financing, equity, guarantees, and advisory services.

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Under the FY2025–2031 Country Partnership Framework (CPF), the WBG will prioritize three outcomes in full alignment with Government of Nepal’s 16th Development Plan: more and better jobs; strengthening connectivity and access to services; and enhancing resilience to natural disasters and climate risks. The CPF emphasizes selectivity, improving implementation, institutional strengthening under federalism, mobilizing private capital, “One WBG” solutions, and close cooperation with the Asian Development Bank (ADB), including through the Full Mutual Reliance Framework (FMRF) that makes it easier for Nepal to leverage the financing of both institutions for transformational investments by using the administrative processes of one or the other institution. ADB and the WBG together account for around 70 percent of official development assistance to Nepal and close to one-third of Nepal’s public capital budget.

Over the seven-year CPF, the WBG aims to make available about US$2.7 billion of financing to both the public and private sectors, with early focus on improving the investment climate, tourism-led job creation, air quality, digital connectivity and digitization of government services. Strong government ownership positions the CPF to deliver more jobs, better services, and greater resilience.

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