15th October 2025, Kathmandu
The latest World Economic Outlook report from the International Monetary Fund (IMF) has shone a bright and optimistic light on Nepal’s near-term economic trajectory.
IMF Projects Economic Growth
Following a challenging period, the Himalayan nation is set for a steady and significant acceleration in economic activity, with the IMF projecting a growth rate of 4.3% in 2025 and a further surge to 5.2% in 2026. These figures mark a definitive rebound from the slowdown experienced in 2023, where growth dipped to 2%, and a notable improvement from the 3.7% growth estimated for 2024. This positive outlook signals a period of gradual economic stabilization, underpinned by crucial internal reforms and strategic investments. By the close of the decade, Nepal is projected to settle into a solid average growth rate of 5%, cementing its path toward sustained economic prosperity.
Decoding the Drivers: The Engines of Nepal’s Economic Acceleration
The projected increase in Nepal’s Gross Domestic Product (GDP) is not merely a statistical rebound; it is being propelled by several deliberate policy actions and sectoral recoveries that are generating genuine momentum across the economy.
One of the most immediate and impactful drivers is the commitment to stronger public capital expenditure. The execution of key infrastructure projects, including vital post-flood recovery and reconstruction efforts, is injecting significant demand into the economy. This government spending is critical in creating jobs, improving connectivity, and enhancing the overall productive capacity of the nation. The timely and effective execution of this capital budget remains a priority for the government to meet the higher growth targets.
Simultaneously, key productive sectors are showing robust signs of recovery. The services sector, a major contributor to Nepal’s economy, is expected to be a primary growth engine, particularly as global and regional travel recovers. The continued revitalization of the tourism and related services industry is poised to bring in much-needed foreign exchange and stimulate local businesses. Furthermore, the recovery in merchandise imports, indicative of rising domestic demand, is expected to provide a substantial boost to the wholesale and retail trade sub-sectors.
The industrial sector is also forecast to expand robustly. This is heavily driven by significant expansions in the electricity and construction sectors. Government efforts to boost Nepal’s hydropower capacity are not only solving domestic energy needs but also paving the way for increased energy exports, a key source of long-term revenue. In the construction industry, supportive policies, such as extended loan repayment periods and prioritized payments to contractors, are expected to galvanize activity, contributing substantially to GDP growth starting in 2026. This sectoral growth is further facilitated by stable prices for critical commodities like oil and raw materials, coupled with increased liquidity and falling interest rates, which are making credit more accessible for private sector investment.
Policy Reforms: Laying the Foundation for Sustainable Growth
The IMF’s projections are strongly linked to the continuation and success of Nepal’s ambitious economic reform agenda being implemented under programs like the Extended Credit Facility (ECF). These structural reforms are designed to address long-standing vulnerabilities and create a more resilient, transparent, and growth-friendly business environment.
A central pillar of the reform effort is strengthening the financial sector. Decisive, data-driven monetary policy has already helped stabilize external reserves. However, authorities are now focusing on enhancing supervision and addressing asset quality concerns. Key initiatives include the prompt launch of a Loan Portfolio Review (LPR) for banks and amendments to the Nepal Rastra Bank (NRB) Act to bolster the central bank’s independence and governance. These steps are vital for maintaining financial stability and ensuring that credit is channeled effectively to productive enterprises, rather than fueling unproductive, fast-paced credit growth.
Furthermore, Nepal is making significant strides in improving its governance framework. Efforts to enhance the anti-money laundering/countering the financing of terrorism (AML/CFT) framework are progressing. By strengthening these institutions and moving towards international best practices, the government aims to increase investor confidence and attract greater international capital. Fiscal management is also being tightened through strategies aimed at accelerating capital expenditure execution and improving domestic revenue mobilization to ensure fiscal and debt sustainability.
The Outlook on Inflation and Global Headwinds
Amidst this growth narrative, the IMF forecasts a continuation of relatively stable price conditions, with inflation projected to moderate to 4.1% in 2025 and slightly increase to 4.2% in 2026. This expected moderation is crucial for preserving the purchasing power of consumers and maintaining macroeconomic stability. Key factors contributing to this stabilization include lower non-food and beverage inflation, reduced production cost pressures, and the stabilization of prices in India—Nepal’s largest trading partner—due to the currency peg.
However, the path to sustained growth is not without challenges. The IMF notes that the global economy is itself facing a slight deceleration, with world growth projected to slow from 3.3% in 2024 to 3.2% in 2025, and further to 3.1% in 2026. For a remittance- and tourism-reliant economy like Nepal, this global slowdown poses a risk, potentially impacting foreign exchange earnings. Domestically, potential risks are primarily tilted to the downside. These include the persistent challenge of under-execution of growth-enhancing capital projects, the risk of increased financial sector vulnerabilities if asset quality deteriorates further, and the potential for political instability to disrupt the crucial pace of reform implementation.
In conclusion, the IMF’s projections offer a compelling vision of economic recovery and stabilization for Nepal. The forecasted growth of 4.3% in 2025 and 5.2% in 2026 is a testament to the initial success of post-disaster recovery spending and ongoing structural reforms. By focusing on boosting capital expenditure, strengthening the financial sector, and capitalizing on the services and industrial recoveries, Nepal is strategically positioning itself to achieve a higher and more sustainable growth trajectory, steering its economy toward the projected 5% average growth by 2030.
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