PHOTOGRAPH: AMARJEET KUMAR SINGH / SOPA IMAGES / ZUMA PRESS / EYEVINE
NEPAL IS not supposed to be in trouble right now. It has $24bn in foreign exchange reserves, enough to pay for some 22 months of imports. Its current account is in surplus. Remittances are flowing in at record levels. It has just elected its most stable government in a generation, with a reforming prime minister and a credentialled finance minister who has already presented the most ambitious budget in the country’s history. In theory this is a country whose moment has arrived.
And yet the Asian Development Bank projects that Nepal’s economy will grow by just 2.7% in fiscal year 2026, down sharply from 4.6% the year before. The World Bank puts the figure even lower, at 2.3%. Nepal’s own statistics office, working from eight months of actual data, offered a more optimistic 3.85%. None of these agree. All of them describe an economy that was accelerating and has now hit a wall.
Nepal does not produce much. Its exports, carpets, pashmina and some processed goods, are small. Its manufacturing sector has been shrinking for three decades. What Nepal sells to the world is its people. Some 3.5m Nepalis work abroad, most of them in the Gulf states and Malaysia. The money they send home, some $12.64bn in fiscal year 2024-25, is larger than all the country’s exports combined, larger than all foreign investment and effectively the backbone of the entire economy. Households in Nepal’s hills and plains live on it. Banks are funded by it. The government’s foreign-exchange reserves are built on it.
That is also the vulnerability. The ADB’s downgrade for this year rests heavily on one factor: the conflict in the Middle East. Higher oil prices reduce disposable income for Gulf employers. Construction activity slows. Workers come home or send less. “Substantial downside risks remain, particularly from the Middle East conflict, which is affecting oil prices, tourism, and remittance flows,” said ADB’s country director for Nepal, Arnaud Cauchois, when the forecast was released in April. This is not a problem specific to Nepal. It faces every economy in South and Southeast Asia that has built its stability on the labour of workers in the Gulf. Bangladesh, Sri Lanka, Pakistan, the Philippines: all of them share some version of this exposure. Nepal happens to be the most legible example of what happens when it goes wrong, because Nepal has so few other economic levers to pull.
The second cause of the slowdown is entirely self-made. The September 2025 protests that swept the old government from power and ultimately produced the new reforming majority also cost the economy an estimated 1.3% of GDP. Hotels emptied. Supply chains stalled. Public investment ground to a halt under a caretaker government that had neither the mandate nor the appetite to spend. The first six months of the current fiscal year recorded growth of just 3.4%, barely half what the country needs to create enough formal jobs for a population in which more than one in five young people who want work cannot find it.
The optimistic view, held by the ADB itself, which projects growth recovering to 5% next year, is that these are temporary shocks. Political stability is returning, hydropower capacity is expanding and a government with a majority is better placed to execute spending than any Nepal has had since 1999. The budget presented on May 29th allocates Rs2.12trn, the largest in Nepal’s history, with explicit incentives for manufacturing, infrastructure and private investment.
The less rosy view is that this recovery has been predicted before. Nepal’s capital spending reached barely 28% of its annual allocation by May. The banking system carries non-performing loans of 5.6% officially and likely more in reality. A country with full reserves, a current account surplus and stable inflation should not be growing at 2.7%. The fact that it is tells you something important: the machine that converts external prosperity into domestic investment and jobs is broken, and a good budget alone cannot fix it. That lesson applies to most of South Asia. Nepal is just the country making it most seen right now. ■
