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

Nepal's 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.

Economic Outlook

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.

Download 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 end-November 2025, Nepal’s active World Bank support to the public sector consists of 19 operations - 12 investment projects, four Program-for-Results, and two development policy credits (including one Cat-DDO) - with total commitments of about US$2.2 billion. Current engagements cover transport, energy, education, health, agriculture, water, urban governance, and public financial management.

Development policy operations focused on unlocking private investment and foreign direct investment, improving the business environment, and expanding finance to micro, small and medium enterprises, with IFC mobilizing over US$631 million in FY19–FY24.

In 2024, the Disaster Resilience Development Policy Credit used a Catastrophe Deferred Drawdown Option (Cat DDO) to enabling rapid liquidity for climate, seismic, and health shocks while advancing reforms such as decentralizing disaster management funds, launching a centralized electronic building permit system, expanding multi-hazard warnings, and strengthening health early warning systems - targeting millions with improved early warning access by 2027. Complementary development policy credit operations progressed hydromet policy and provincial forest regulations.

Clean energy efforts included IFC led $453M debt financing package and equity in Upper Trishuli 1, MIGA guarantees, and support for 661 MW of new capacity and expanded electricity access, while preparation for transformational hydropower projects continues.

Connectivity investments expanded and improved strategic and provincial roads, modernized urban services, and improved social protection delivery, including expanded social security coverage.

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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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