Kathmandu-Nepal’s economic growth is projected to slow sharply to 2.3 percent in the fiscal year 2025 to 26, down from 4.6 percent in the previous year, as global and domestic shocks weigh on the economy, the World Bank said on Tuesday.

In its latest Nepal Development Update titled “Growth Under Pressure: Navigating Domestic and Global Shocks,” the World Bank said the slowdown reflects the ongoing conflict in the Middle East and the lingering impact of the September 2025 unrest.

The report noted that the services sector is likely to be the hardest hit, with slower tourism activity, rising transport costs and potential supply chain disruptions affecting overall performance. It warned that the outlook remains highly uncertain.

A prolonged conflict in the Middle East could further dampen tourist arrivals, reduce remittance inflows and weaken consumption, leading to slower economic activity, the report said.

Despite near-term challenges, the World Bank expects growth to recover in the medium term. Reconstruction activities, continued expansion in hydropower and consumption linked to the 2027 subnational elections are expected to support growth, which is projected to average 4.4 percent over fiscal years 2026 to 27 and 2027 to 28.

“Boosting private sector-led growth will be critical to strengthening economic resilience and creating more jobs in Nepal,” said David Sislen.

He said Nepal needs to improve its business environment, develop infrastructure, mobilise private investment and support key sectors such as tourism, information technology and agribusiness.

The Nepal Development Update was released alongside the World Bank Group’s South Asia Economic Update, which projects regional growth to slow to 6.3 percent in 2026 from 7 percent in 2025 due to disruptions in global energy markets. Growth in the region is expected to rebound to 6.9 percent in 2027.

The regional report also examined the growing use of industrial policy across South Asia, noting mixed outcomes due to limited implementation capacity, fiscal constraints and market size in some countries.

“Well-designed industrial policies can help address specific market failures,” said Franziska Ohnsorge, stressing the need for targeted interventions alongside broader economic reforms.

The report recommends focused policy measures in sectors such as urban development, tourism and digital services, along with improvements in regulatory predictability and state capacity to support job creation and long-term growth.