KATHMANDU — Nepal’s economy is expected to face a slowdown in the fiscal year 2026, as global and domestic challenges weigh on growth, according to the latest projections.

A key risk stems from disruptions in global energy markets, particularly due to transport bottlenecks in the Strait of Hormuz—a critical route for oil shipments. These constraints are expected to push up crude oil and natural gas prices, increasing import costs for energy-dependent economies like Nepal.

Growth to Moderate in FY26

Real GDP growth is projected to slow to 2.3 percent in FY26, reflecting the combined impact of the Middle East conflict and lingering effects of the September 2025 unrest.

The slowdown will be most visible in the services sector, as tourist arrivals decline during the peak March–May season. This is likely to hit hotels, restaurants, and transportation services.

Higher fuel prices and slower—though still strong—remittance growth are expected to reduce household purchasing power, weakening domestic trade and real estate activity. Industrial output is also forecast to soften, especially in non-hydropower construction, due to rising input costs and declining investor confidence.

Agriculture is expected to remain relatively stable, though drought conditions in Madhesh may reduce paddy production and limit overall sector growth.

Recovery Expected from FY27

Economic growth is expected to rebound, averaging 4.4 percent in FY27–FY28. The recovery will be driven by reconstruction efforts, expansion in hydropower projects, and increased consumption linked to the 2027 subnational elections.

Hydropower development will remain a key pillar of industrial growth, supported by a strong pipeline of ongoing projects despite rising costs. Public infrastructure spending is also expected to increase, while agricultural output may recover if monsoon conditions are favorable.

Inflation to Rise Before Easing

Inflation is projected to increase over the next two years, rising from 4.1 percent in FY25 to 4.3 percent in FY26, and further to 5.1 percent in FY27, driven by higher import and transportation costs.

However, inflation is expected to ease in FY28 as global commodity prices stabilize and inflation in India declines—helping Nepal manage imported inflation through its currency peg.

Poverty to Edge Up

The economic pressures are expected to slightly increase poverty levels, with the rate rising to 6.6 percent in FY26, up from 6.5 percent before the conflict.

An estimated 17,267 additional people could fall into poverty, as higher inflation, slower growth, and declining remittances—particularly in rural areas—affect household incomes. Limited social protection measures may further deepen inequality.

External Sector: Surplus to Rise, Then Narrow

Nepal’s current account surplus is projected to expand from 6.7 percent of GDP in FY25 to 8.5 percent in FY26, supported by strong remittance inflows and currency depreciation.

However, the surplus is expected to narrow in the following years as imports rise—especially for reconstruction, hydropower equipment, and edible oil—while remittance growth slows. The trade deficit is likely to widen over the medium term.

Fiscal Deficit to Widen Temporarily

The fiscal deficit is expected to increase in FY26 due to lower revenues and higher government spending, including costs related to the March 2026 elections, increased allowances, and settlement of outstanding liabilities.

Public debt will remain manageable, rising modestly to 45.5 percent of GDP before declining in subsequent years. Over the medium term, the deficit is expected to narrow as revenues recover alongside economic growth.

Risks Tilted to the Downside

The outlook remains uncertain, with risks largely on the downside. A prolonged Middle East conflict could further reduce tourism and remittance inflows, slowing economic activity.

Other risks include:

• Disruptions in fuel and fertilizer supply
• Natural disasters and low insurance coverage
• Weaknesses in the banking sector
• Higher transaction costs linked to Nepal’s status on the FATF grey list

Potential Upside

Despite the challenges, there is potential for stronger growth if political stability improves following the March 2026 elections. Continued macroeconomic stability and progress in structural reforms could boost investor confidence and attract private investment.

Bottom Line:
Nepal faces a difficult FY26 with slower growth and rising inflation, but medium-term prospects remain positive, supported by hydropower expansion, reconstruction, and potential political stability.