SATV Kathmandu Oct 08: The World Bank (WB) has narrowed down Nepal’s economic growth rate to remain at a mere 2.1 percent for the current fiscal year (FY) citing the political unrest triggered by the Gen Z movement.

Earlier, the WB in its report in April had projected Nepal’s economic growth at 5.2 percent, while the Asian Development Bank had also projected the growth rate at 5.1 percent for FY 2025/26. In the new estimation of the WB, the country’s economic growth rate has been downsized by 3.1 percentage points.  

Unveiling its South Asia Development Update on Tuesday, the WB has attributed the recent protests that have disrupted both public and private infrastructure, risks from political instability, climate shocks and weak investor confidence in Nepal for the slower economic growth of the country.

As per the WB’s report, Nepal achieved an annual average economic growth of 4.3 percent during FY 2011/12 and FY 2023/24. With activities supported by robust hydropower production, a rebound in industrial output and a pickup in agricultural production, the country’s economic growth increased to 4.6 percent in FY 2024/25 from 3.7 percent in the previous year.

Nepal experienced its worst unrest in decades in September. The multilateral lending institution warned that continued political turmoil and uncertainty could push the economy to contract by 1.5 to 2.6 percent.

“International tourist arrivals are expected to decline sharply and asset losses will affect the insurance industry. Weaker investor confidence is expected to impede private investment and non-hydro construction. Delayed rainfall in a major rice-producing province will hamper the agricultural sector,” reads the WB’s report.  

The WB however has shown a ray of hope that the reconstruction efforts could be expected to support the economic recovery in FY 2026/27 and gain momentum in FY 2027/28. “Although many South Asian countries may benefit from exposure to artificial intelligence (AI) in the coming days, Nepal however might not do so due to its lowest exposure to AI in the region because of its large agricultural workforces with lower average skill levels.”

In the South Asian region, the WB projected economic growth of 4.8 percent for Bangladesh, 7.3 percent for Bhutan, 6.5 percent for India, 3.9 percent for the Maldives, and 3.5 percent for Sri Lanka in 2026.

Meanwhile, the WB has said growth in South Asia is on track to exceed earlier expectations and reach 6.6 percent in 2025, but is expected to slow to 5.8 percent in 2026. While this short-term outlook is subject to downside risks, over the longer term, AI could promote growth by boosting productivity especially among those 15 percent of South Asian workers who are in jobs where AI strongly complements human labor.

The region has faced several public uprisings, such as those that led to the collapse of the government in Nepal in September, in Bangladesh in 2024, and in Sri Lanka in 2022. With continued trade tensions, weak global trade and investment could lead to a period of slow global growth, which could spill over to South Asia.

The WB further states that high debt makes several South Asian countries’ fiscal positions vulnerable to an increase in interest rates or a decline in growth rates, with any stresses quickly transmitted to the financial system because of banks’ sovereign debt holdings. AI could boost productivity, but also has the potential to disrupt labor markets. Rising tariffs in major export markets may undermine efforts to improve manufacturing. Mounting geopolitical pressures might raise energy costs and weaken energy security, reads the report.