Image: Mehmet Turgut Kirkgoz
A nation that runs on remittances and tourists does not take kindly to instability. In the first month after “Gen Z” unrest shook Nepal in early September, international arrivals fell by nearly a fifth. The damage, however, goes far further than empty hotel rooms. Preliminary data from the Nepal Insurance Authority show non-life insurance claims worth Rs23.2bn ($174m), or 0.4% of last year’s GDP, had already been filed by mid-October. That surpasses the claims recorded after the devastating earthquake of 2015. These numbers offer a first glimpse of the economic shock. Real GDP growth is now projected to slow to just 2.1% in the 2026 financial year, down from 4.6% the previous year, according to the World Bank. Nepal’s climb towards prosperity has become steeper.
The services sector, which makes up more than half of the economy, will bear the brunt. Tourism is an immediate casualty. The months from September to November constitute the main season for trekkers and sightseers, whose spending supports a vast network of guides, lodges as well as transporters. The financial-services sub-sector is also set to contract. Domestic insurance companies face a record wave of claims, primarily for property damage. Though these insurers will absorb much of the initial blow, the wider economic cost is far greater. Industry groups estimate total losses, including to uninsured public property, at around Rs200bn. More than 80% of the destruction was not covered by any policy.
This disaster, however, reveals something new in the country’s economic landscape: a functioning domestic insurance market. After the 2015 earthquake, the country had no local reinsurers; claims were handled entirely by foreign firms. Now, thanks to a directive from the regulator, domestic insurers must cede a portion of their policies to domestic reinsurers. Two such companies, one state-backed and one private, will therefore shoulder a big share of the insured losses. This local capacity marks a small step in financial development. It also keeps a larger share of the risk within the country’s borders.
The fiscal accounts will feel the strain. Government spending is set to rise sharply to fund reconstruction of public infrastructure, relief for the private sector and an upcoming general election. At the same time, revenue growth is expected to slow. Weaker imports will slim down value-added tax receipts, and corporate income tax from beleaguered sectors like tourism and insurance will fall. The fiscal deficit is projected to widen to 2.8% of GDP this financial year. Public debt, though still manageable, is creeping up.
Elsewhere, the picture is somewhat cloudy. The vital stream of remittances, which peaked at 28.2% of GDP last year, is expected to remain strong. This inflow, sent home by Nepalis working abroad, will help maintain a comfortable current-account surplus. Hydropower development provides another bright spot. Projects totalling nearly 4,000 megawatts are under construction and should support industrial growth even as non-hydro construction stalls. Agriculture, however, has been weakened by delayed monsoon rains in a key rice-growing region, threatening to keep food prices high and squeeze poor households.
The greatest risk is to confidence. Investor sentiment, fragile at the best of times, may sour further. A “wait and see” approach among business owners could prolong the downturn. The banking sector, already grappling with weak asset quality, may tighten credit, restricting capital for recovery. Nepal’s continued presence on the global financial crime watchdog’s grey list does not help. The country’s growth model, reliant on tourism and remittances, is exposed to global shifts. A flare-up in trade tensions elsewhere could dampen both.
Yet the forecast is not uniformly bleak. A rebound is projected for the 2027 financial year, assuming political uncertainty recedes and reconstruction accelerates. The recent turmoil may even spur greater demand for insurance, and the government has decided for the first time to insure public assets. The economy has proved resilient before. Its foundations, though shaken, are not broken. The path to recovery, however, now means not only rebuilding what was lost but restoring the confidence that has been weakened, too. ■