Unrest Erodes Nepal’s Growth Prospects

Nepal’s recent political turbulence is expected to slow down economic growth markedly. According to the World Bank’s latest South Asia Development Update: Jobs, AI, and Trade, Nepal suffered the worst unrest in decades in September after a social media ban prompted mass protests over corruption, giving way to widespread disruption and damage to both public and private infrastructure.

While the full extent of the loss is still being assessed, the World Bank flags deeper structural issues underlying the unrest: weak institutions, complicated business regulations, corruption, high trade and transport costs, and inadequate infrastructure—all of which have constrained private sector dynamism, job creation, and growth. 

Over fiscal years 2011/12–23/24, Nepal’s annual growth averaged just 4.3 percent, lagging regional peers, while youth unemployment reached nearly 22.7 percent in FY23.

Labor migration has continued to be a lifeline for many Nepalis, with remittances—about one-quarter of GDP—sustaining basic consumption. Still, there was some recovery in FY25: growth ticked up to 4.6 percent from 3.7 percent the previous year, driven by hydropower, industrial revival, and a rebound in agriculture.

Outlook Dims Sharply

The outlook, however, has turned sharply negative. The World Bank now projects Nepal’s growth to slow to 2.1 percent, with a potential range of negative 1.5–2.6 percent, in the current fiscal year 2025/26. This marks a sharp downgrade from the 5.2 percent growth forecast made in April, 2025.

Key headwinds include:

- A steep drop in tourist arrivals and erosion in the insurance sector due to asset losses

- A decline in investor confidence stalling private investment, especially in non-hydropower infrastructure

- Risks in agriculture from delayed rainfall in key rice zones

- A longer recovery path, though reconstruction efforts are expected to help rebound in FY 26/27 and beyond

The bank advises that recovery hinges on rebuilding investor trust through governance reforms, trade openness, and leveraging digital and human capital in the age of AI. Reforming business regulation, improving connectivity, enhancing labor mobility, and strengthening social safety nets are seen as critical to reverse momentum.