Nepal

The growth momentum that strengthened in FY2024/25 was disrupted by two successive shocks in FY2025/26—one domestic and one external. Economic activity slowed in H1 FY2025/26 caused by the September 2025 unrest which heightened uncertainty, weakened business confidence, and delayed private investment decisions. In H2 FY2025/26, spillovers from the war in the Middle East will likely weaken domestic demand further. As a result, growth in FY2025/26 is revised down to 3 percent, well below potential. Going forward, the smooth transition of power to a single-majority government following the March 5 elections, is expected to reduce uncertainty and boost confidence. Inflation is expected to pick-up from current low levels but will remain around the Nepal Rastra Bank’s (NRB) target of about 5 percent. The external buffers will remain strong due to robust growth in exports, buoyant remittances, and strong tourism in H1 FY2025/26 which will more than offset projected higher imports and lower remittance growth in H2 FY2025/26. Non-performing loans have continued to rise, eroding bank capital. The financial health of the savings and credit cooperatives (SACCOs) remains challenging.