Nepal’s Economic Outlook for FY25: Projected Growth of 4.5%, Driven by Key Sectors

Paddy production, a staple crop, is also poised for growth due to favorable weather conditions and government initiatives aimed at boosting agricultural productivity.

Nepal's economy is projected to grow by 4.5% in the fiscal year (FY) 2025, marking a notable increase from 3.9% in FY24, despite the country facing substantial challenges from natural disasters in late 2024. This positive economic outlook is underpinned by growth in key sectors, including domestic trade, hydropower generation, and agricultural production, particularly in paddy. These sectors are expected to be the driving forces behind Nepal's economic resilience and recovery, according to the World Bank’s most recent report, the Nepal Development Update: Leveraging Resilience and Implementing Reforms for Boosting Economic Growth, released on April 4, 2025.

Key Drivers of Growth

The World Bank report emphasizes that the country’s economic growth will largely be fueled by three primary contributors: the robust performance of the services sector, an expansion in hydropower generation, and improved agricultural output. The services sector is projected to experience continued growth, playing a pivotal role in the economy. Hydropower, a sector that has seen considerable investment and development in recent years, is expected to increase energy production, both for domestic consumption and export, enhancing Nepal's economic competitiveness.

Paddy production, a staple crop, is also poised for growth due to favorable weather conditions and government initiatives aimed at boosting agricultural productivity. These developments will help mitigate some of the adverse impacts from the natural disasters that affected the country in late 2024, which had posed significant challenges to infrastructure and agriculture.

A Vision for FY26 and FY27

Looking further ahead, the World Bank forecasts that Nepal’s economy will continue to expand at an average annual rate of 5.4% in both FY26 and FY27. This sustained growth trajectory is expected to be driven largely by the services sector, including tourism, retail, and information technology services. Continued investment in infrastructure and human capital, combined with the growth of the service-oriented economy, will contribute to long-term economic stability and job creation, according to the report.

The country’s economic resilience and diversified growth model are seen as crucial elements in achieving the ambitious targets outlined in Nepal’s 16th Plan, which aims to elevate the nation’s development and ensure a more robust economy. However, realizing these targets will require not just sustained growth but also the timely implementation of critical reforms and structural adjustments.

Risks and Challenges

Despite the optimistic forecast, the World Bank report highlights several risks and challenges that could affect Nepal’s economic performance. Geopolitical uncertainties, including shifts in global trade dynamics and regional tensions, pose potential downside risks. Nepal’s reliance on external trade and remittances means that changes in international relations or disruptions in trade routes could have significant consequences for the economy.

Another concern raised in the report is the potential further deterioration of asset quality within Nepal’s financial sector. Weaknesses in financial institutions could undermine the overall stability of the economy if not addressed. Additionally, the country’s frequent bureaucratic changes and policy inconsistencies may hinder the effectiveness of government initiatives. Delays in the execution of the capital expenditure budget have also been identified as a risk, especially as the government works to complete infrastructure projects critical to long-term development.

The Importance of Structural Reforms

The World Bank has emphasized that boosting private sector-led growth is essential to generating the jobs needed to support Nepal’s growing population. The report suggests that Nepal can capitalize on its track record of resilient growth by focusing on implementing key structural reforms aimed at improving the business environment. These reforms should focus on enhancing governance, reducing corruption, improving access to finance, and fostering entrepreneurship.

David Sislen, the World Bank’s Country Division Director for Maldives, Nepal, and Sri Lanka, commented, “Boosting private sector-led economic growth is critical to creating the jobs that Nepal needs. To achieve this, Nepal can build on its impressive track record of resilient growth backed by implementing key structural reforms.”

Insights from the National Planning Commission

Professor Dr. Shiva Raj Adhikari, Vice Chairman of Nepal’s National Planning Commission, reiterated the importance of efficient capital expenditure execution and the timely completion of ongoing infrastructure projects. He emphasized that the successful realization of Nepal's 16th Plan targets will require concerted efforts to execute the capital budget effectively and to ensure the proper implementation of major development projects.

“The Nepal Development Update provides valuable insights on recent economic developments and highlights Nepal’s resilient growth. Boosting growth further to meet the country’s 16th Plan targets requires effective execution of the capital budget and timely completion of ongoing projects,” Dr. Adhikari stated.

 

In summary, Nepal’s economy is projected to continue its growth trajectory, with a strong 4.5% growth forecast for FY25. This growth is expected to be driven by key sectors such as trade, hydropower, and agriculture, while the services sector will play a critical role in FY26 and FY27. However, the World Bank’s report also stresses the importance of addressing risks related to geopolitical uncertainty, the financial sector, and the execution of government reforms. To ensure that the country can meet its development targets and sustain its growth, timely reforms and policy consistency will be essential moving forward.