(MENAFN) The World Bank has sharply reduced its economic growth forecast for Nepal, projecting a mere 2.1% expansion for the 2025-26 fiscal year, down from a previous estimate of 5.2%. The adjustment comes amid escalating political instability and economic challenges.

In its South Asia Development Update, published on Tuesday, the global financial institution cited the rising uncertainty from recent unrest as a key factor behind the revision. The country's fiscal year, which began in mid-July, is now expected to experience a significantly slower growth trajectory.

The political situation in Nepal took a dramatic turn on September 12 when the leader of the ruling coalition government resigned, prompting the formation of an interim administration. Protests across Kathmandu and other regions had put pressure on the government. In response, a new general election is set for March 5, 2026.

The World Bank also noted that investor confidence is likely to remain subdued, potentially stalling private investment and hindering construction activities outside of hydroelectric projects. Moreover, tourism—which has long been a critical source of foreign exchange and employment for Nepal—is forecasted to suffer, as foreign tourist numbers are expected to decline sharply due to the ongoing political volatility.

In a concerning development, Nepal saw a significant 18.3% drop in tourist arrivals in September compared to the same month last year.

The World Bank further highlighted the adverse impacts of recent protests, which have led to substantial asset losses in the insurance sector. Additionally, delayed rainfall in the key rice-producing region is anticipated to disrupt the agricultural sector, compounding the country's economic struggles.

Despite these setbacks, the World Bank projects that reconstruction efforts could drive economic recovery, gaining momentum in fiscal years 2026-27 and 2027-28.

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