Nepal's Growth Plummets to 2.1% Amid Political Instability; World Bank Urges Sweeping Reforms
SDG 9: Industry, Innovation, and Infrastructure | SDG 16: Peace, Justice, and Strong Institutions
Institutions: Ministry of Finance | NITI Aayog
Economic Shock and Outlook
The World Bank’s Nepal Development Update: Reforms to Accelerate Public Investment (November 2025) reports that Nepal’s real GDP growth is projected to slow sharply to 2.1 percent in Fiscal Year (FY) 2026, down from 4.6 percent in FY25. This major slowdown is primarily attributed to the impact of the September 2025 public unrest (the Gen-Z movement) and ensuing political instability, with the services sector expected to be the most affected.
Outlook: Growth is projected to rebound to 4.7 percent in FY27, supported by reconstruction and rehabilitation efforts. However, the outlook remains highly uncertain, with continued political uncertainty cited as the biggest threat to recovery.
Fiscal Context: The current account surplus widened further to 6.7 percent of GDP in FY25, supported by robust remittances from Nepali workers moving to higher-wage destinations. Despite this external strength, the domestic Non-Performing Loans (NPLs) ratio climbed to 4.6 percent by the end of FY25.
Structural Challenge: The Chronic Public Investment Gap
The report underscores that ineffective public investment management is Nepal’s most significant obstacle to long-term growth and job creation.
Investment Deficit: In FY24, the government’s total capital spending (federal, provincial, and local levels) stood at 7.9 percent of GDP. This is significantly below the 10-15 percent of GDP required annually to meet Nepal’s infrastructure needs.
Execution Failure: This gap is not merely a budget problem, but an execution failure: capital expenditure execution remained chronically weak at 63.2 percent in FY25. The World Bank notes that the total value of the public capital stock has fallen sharply, from 74 percent of GDP in the mid-1990s to about 50 percent in recent years.
Government Response: The government has launched an Integrated Business Recovery Plan and established a Reconstruction Fund to address immediate damage and restore confidence.
Special Focus: Reforms to Accelerate Public Investment
Nepal faces significant infrastructure gaps due to weak execution of public investment projects. The report identifies bottlenecks in project planning, readiness, and implementation and provides recommendations:
Investment Planning and Budgeting: Improve project monitoring, rationalize underperforming projects, enforce project selection guidelines, and integrate multi-year budgeting.
Tree Cutting and Land Acquisition: Streamline processes, leverage digital solutions, improve Environmental Impact Assessments (EIAs), and standardize land valuation systems.
Cash Management and Virements: Enhance cash flow forecasting, reduce reliance on cash rationing, and simplify budget reallocation rules.
Procurement: Amend regulations to reject abnormally low bids, raise decision thresholds, streamline workflows, and improve contract management.
Policy Recommendations
The report outlines short-term (1-2 years) and medium-term (3-5 years) recommendations to address public investment bottlenecks, improve governance, and accelerate infrastructure development.
Nepal’s experience provides a cautionary tale for India, which also prioritizes massive public investment for growth. The central issue is that strong external stability (high remittances/reserves) is being undercut by chronic low execution rates of capital budgets, a problem frequently seen across Indian states. Furthermore, the need to streamline land acquisition and procurement laws in Nepal directly mirrors the primary administrative and legislative hurdles delaying infrastructure projects across India.
Follow the full update here: Nepal Development Update: Reforms to Accelerate Public Investment