Kathmandu, Dec 11 (NationPress) The Asian Development Bank (ADB) has forecasted that Nepal's economy is expected to witness a decline in growth during the fiscal year 2025-26, primarily due to political instability adversely impacting the non-agricultural sector, along with delayed monsoon rains and flooding harming agricultural productivity.

In its latest 'Nepal: Macroeconomic Update' published on its website, the ADB indicated that the country's economy is anticipated to expand by 3 percent in the fiscal year 2025–26, which commenced in mid-July, a reduction from 4.6 percent in fiscal year 2024–25. This growth forecast is only half of the 6 percent target established by the Nepali government for the ongoing fiscal year.

The ADB highlighted that the performance of various economic sectors is projected to be weaker than the previous fiscal year, which will subsequently decrease overall economic growth.

Political instability is anticipated to significantly affect the manufacturing sector, with growth expected to drop sharply to 1.7 percent this fiscal year from 3.8 percent a year earlier, as increasing political uncertainty hampers production. “With uncertainty clouding the investment landscape, both domestic and international investors are likely to take a more cautious approach, postponing capital investments and project commitments,” the ADB noted.

The civil unrest on September 8–9 has eroded private-sector confidence, undermining prior progress and making it challenging for businesses to replicate last year’s results.

During the Gen-Z protests in early September, Nepal encountered significant destruction of both public and private infrastructure, resulting in the deaths of several demonstrators. The protests, driven by disorganized youth, led to the downfall of the influential government led by former Prime Minister K P Sharma Oli, paving the way for the new administration under Prime Minister Sushila Karki.

Preliminary estimates suggest that the private sector has suffered losses amounting to around NPR 36 billion (0.6 percent of GDP) and remains cautious as business sentiment continues to be low, according to the ADB. In response, industry stakeholders are advocating for immediate relief measures, including loan rescheduling and restructuring, tax deferrals, and targeted refinancing support for severely impacted enterprises.

In recognition of these pressing issues, the interim government led by Karki introduced the 'Economic Revival and Business Recovery Plan' on September 21, primarily aimed at addressing the needs of the private sector and restoring economic confidence.

The ADB anticipates that domestic demand will remain subdued this fiscal year, as both consumer confidence and business sentiment continue to be depressed due to political instability. Despite an increase in remittances, private consumption expenditure is unlikely to grow as anticipated. Since the Covid-19 pandemic, Nepal's economy has struggled to achieve a full recovery. The private sector has consistently voiced concerns about weak market demand, resulting in reduced production. The political uncertainty following the Gen-Z movement has further exacerbated the situation.

The construction sector is also projected to decline this fiscal year, as the execution of the federal capital budget continues to lag. According to the ADB, the private sector will focus more on retrofitting, refurbishing, and repairing damaged buildings and properties. “This slowdown in construction will also adversely affect mining and quarrying this fiscal year.” Overall, industry growth in construction is expected to decrease significantly to 2.1 percent in fiscal year 2025–26 from 4.5 percent the previous year.

Wholesale and retail trade are expected to decelerate as consumers adopt a more cautious stance, further dampening the momentum in one of the economy’s most dynamic sectors. Accommodation and food service activities are also likely to contract this fiscal year, as hotels have experienced a drop in occupancy following the civil unrest.

Foreign-branded hotels, including the Hyatt Regency and Hilton, suffered significant damage during the violent protests. The Hilton was completely destroyed, while the Hyatt remains closed for maintenance. Arson and vandalism at hotel properties in Kathmandu and surrounding areas caused damage estimated at NPR 25 billion, according to the Hotel Association of Nepal.

Agriculture is projected to grow by 2.9 percent, down from 3.3 percent a year prior, as the delayed monsoon in the southern Madhesh Province and flood damages in October 2025 diminish paddy output and disrupt food supply chains. Paddy, which contributes approximately 6 percent to the economy, is expected to perform worse than the previous fiscal year.

In early December, Nepal’s central bank acknowledged that the economy is unlikely to achieve its targeted growth for the current fiscal year, citing delayed monsoon rains and crop damage, along with flood and landslide-related disruptions in other sectors.

Similarly, in early November, the World Bank warned that Nepal's economic growth could plummet to 2.1 percent in the current fiscal year, indicating the ramifications of September’s public unrest and the ensuing political instability.