Nepal's economy expanded by an estimated 3.51 per cent in the third quarter of fiscal year 2025-26, according to preliminary data released by the country's National Statistics Office (NSO). The figure falls short of the 4.05 per cent growth recorded in the corresponding quarter of the previous fiscal year, underscoring the Himalayan nation's continued struggle to break free from a prolonged low-growth cycle.

Sectoral Performance: Winners and Laggards

Of Nepal's 18 economic sectors, 16 recorded positive growth during the review period. The standout performer was electricity and gas, which surged 24.88 per cent, driven by higher generation and distribution capacity. Financial and insurance activities followed at 10.27 per cent, buoyed by increased deposit mobilisation and credit disbursement, while transportation and storage grew 7.83 per cent.

The wholesale and retail trade sector — the second-largest contributor to the economy — expanded 5.25 per cent, supported by higher domestic production and import volumes. Agriculture, the single largest contributor to Nepal's GDP, grew a modest 1.58 per cent, down from 2.84 per cent a year earlier, weighed by a decline in paddy output. Modest growth in livestock, vegetables, fruits, and forestry products partially offset the paddy shortfall.

Manufacturing and Public Administration Slip into Negative

Only two sectors contracted: manufacturing and public administration and defence. Manufacturing's return to negative territory is particularly concerning — it had shown tentative signs of recovery in FY2024-25 after two consecutive years of contraction.

Hem Raj Regmi, Deputy Chief Statistician at the NSO, attributed part of the manufacturing weakness to the US-Iran conflict. 'It is a fact that Nepal's manufacturing sector has underperformed for a long time, and it is necessary to remove the bottlenecks preventing the sector from thriving,' Regmi said. 'The US-Iran war also partially affected the manufacturing sector. Industries such as plastics and pipes were affected, while the construction materials industry also suffered as higher oil prices increased transportation costs and contributed to a slowdown in construction activities in Nepal.'

Separately, data from Nepal's central bank shows that manufacturing industries operated at only 42.11 per cent of installed capacity in the first half of FY2025-26 — a stark indicator of structural underutilisation.

Public administration contracted largely because government resources were redirected toward conducting the parliamentary elections held on 5 March, according to Regmi, leaving routine administrative activities curtailed.

What Dragged Overall Growth Lower

The NSO noted that despite the positives, overall growth remained moderate. Key drags included a decline in imports of construction materials, lower paddy production, and reduced domestic output of certain commodities relative to the same quarter a year ago.

This comes amid a broader post-pandemic growth deficit. Since Covid-19 disrupted Nepal's economy, the country has failed to achieve a V-shaped recovery, hampered by persistent political instability. Before the pandemic, Nepal had recorded robust expansion, partly underpinned by post-earthquake reconstruction that was progressing at full pace.

Outlook as the Fiscal Year Closes

The current fiscal year is set to end in mid-July 2025. With Q3 growth trailing the prior-year pace and two sectors still in contraction, full-year GDP is unlikely to mark a meaningful acceleration. The NSO's preliminary estimates will be revised as more data becomes available. Analysts and policymakers will be watching whether electricity-sector momentum and financial-sector credit growth can sustain the economy through the final quarter.