Nepal’s Economic Crisis (September 2025)

Structural Weaknesses in the Economy

Nepal’s economy has long depended on a narrow set of drivers. Remittances now account for roughly a quarter of GDPworldbank.org, as millions of Nepalis work abroad (mainly in the Gulf, Malaysia and India) to compensate for chronic underemployment at homeworldbank.org. This heavy reliance leaves growth vulnerable to labor-market shocks abroad. Conversely, the domestic industrial base remains weak – manufacturing has stagnated or declined from an already small baseworldbank.org. Key sectors like tourism and hydropower are underdeveloped and infrastructure gaps persist. Low labor productivity, poor logistics and limited digitalization further constrain growthworldbank.org. Governance and political instability compound these problems: thirteen governments since 2008 (several changes in 2024–25 alone) have weakened policy continuity and deterred investmenthudson.orghudson.org. Corruption and bureaucratic red tape remain high, raising the “cost of doing business” and limiting private-sector expansionimf.orgworldbank.org. In sum, Nepal’s growth has been constrained by a narrow economic structure and fragile institutions, impeding job creation outside agricultureworldbank.org.

Sectoral Breakdown and Vulnerabilities

• Tourism: Before September 2025, tourism was rebounding from COVID-19: more than 1.14 million visitors came in 2024, nearly reaching the 2019 pre-pandemic recordenglish.khabarhub.com. But the Gen-Z protests on Sept 8–9 triggered the worst violence in years – luxury hotels, including Hilton and Hyatt in Kathmandu and resorts in Pokhara, were torchedenglish.khabarhub.comreuters.com.

  

  Burning Hilton Hotel in Kathmandu during September protests (photo by Khabarhub). As a result, thousands of hotel and lodge bookings were cancelled, and Kathmandu’s airport was closed for daysnepalitimes.comreuters.com. Industry leaders estimate over ₹25 billion in damages to tourism infrastructureenglish.khabarhub.com. While tourism experts expect a rebound (Nepal’s key markets India/China remain intact and trekkers were largely unharmedenglish.khabarhub.comnepalitimes.com), the immediate shock has been severe: visitor arrivals in September 2025 plunged to ~25,500 from ~88,700 in Augustenglish.khabarhub.com.

• Remittances: Inflows of worker remittances (~$12 billion in 2024, about 23–25% of GDP) have underpinned consumption and poverty reductionworldbank.orgimf.org. However, recent trends are worrisome: remittances fell from 12.9% of GDP in H1FY24 to 12.4% in H1FY25worldbank.org as overseas migration slowed sharply (total new migrant outflows dropped ~26% in mid-2024, with a 74% plunge of Nepali workers to Malaysia)worldbank.org. The IMF projects remittance growth to decelerate further in FY25 due to this lagged effectworldbank.org. This squeeze comes at a time of rising private consumption and means fewer households have inflow buffers. Analysts warn that Nepal’s growth model – heavily reliant on remittances – is vulnerable to global demand in host economiesworldbank.orgworldbank.org.

• Agriculture: Although still the livelihood of ~66% of Nepal’s workforce, farming’s share of GDP has fallen (~27%)fao.org. Productivity remains very low: most farms lack modern inputs (fertilizer, irrigation, quality seeds)fao.org. Yields depend on an increasingly erratic monsoon and climate shocks (floods, droughts, pests), leaving output unstablefao.org. Consequently, Nepal imports a growing share of its food (notably rice, wheat and vegetables) – some reports suggest over 80% of food is now importedfao.org. This import dependence strains the trade balance and makes consumers sensitive to regional weather and market shocks. (For example, recent monsoons boosted paddy output and modestly lifted growth – agriculture is forecast to grow ~3.2% in FY25 – but any drought or flood would swing the sector downwardworldbank.org.) Overall, agriculture’s combination of low productivity, import dependence and climate vulnerability remains a drag on food security and rural incomes.

• Infrastructure and Capital Projects: Chronic delays in building roads, power plants and airports have become a major bottleneck. Notably, Nepal’s notoriously slow public investment (capital spending) has frequently under-executed budgeted projectshudson.orgworldbank.org. For example, the expansion of Tribhuvan International Airport is taking years longer than planned, temporarily reducing tourism and trade capacityworldbank.org. Similarly, multi-billion-dollar hydropower projects and cross-border transport links have been repeatedly pushed back due to bureaucratic hurdles and financing gaps. The IMF and World Bank warn that these hold-ups — along with cumbersome licensing and state-controlled ventures (e.g. a contested public dairy plant) — undermine efficiency and growthworldbank.orgenglish.khabarhub.com. In short, inadequate and delayed infrastructure investment limits business expansion and keeps many private-sector projects on hold.

Impact of the Aug–Sept 2025 Political Unrest

The wave of youth-led protests in early September 2025 severely disrupted Nepal’s economy. Demonstrators shut down Kathmandu and Pokhara, prompting 10-hour daily curfews and closure of businesses, shops and banksnepalitimes.comreuters.com. Transport ground to a halt: Tribhuvan airport was closed for ~36 hours (stranding thousands)nepalitimes.com, and key border crossings with India were intermittently blocked, choking cross-border trade. Such disruptions directly depressed economic activity and consumer spending. The stock market (NEPSE index) reacted sharply: on Sept 8, trading volumes spiked as the index fell ~1.3% (nearly 36 points)english.khabarhub.com. Nearly every sector lost ground, reflecting slumping investor confidence. Foreign exchange inflows from tourism and remittances remained strong, but sentiment turned cautious: banks flooded into government T-bills as lending stalledenglish.khabarhub.comenglish.khabarhub.com.

Damage to luxury hotels and government offices undermined confidence: a key hotel’s owner warned high-end tourism investors may be deterrednepalitimes.comenglish.khabarhub.com. Indeed, the arson attack on five-star hotels (Hilton, Hyatt, etc.) and parliament received global media attentionreuters.comnepalitimes.com, tarnishing Nepal’s image. A Kathmandu Post analysis noted that visuals of burning hotels could hurt tourism credibilitynepalitimes.com. In practical terms, dozens of hotels were vandalized or lootedenglish.khabarhub.com, retail and logistics firms reported curfews squeezing supply chains, and some factories halted shift production. The net loss was sizable: industry groups estimate over Rs 25 billion in damages to tourism aloneenglish.khabarhub.com. While economists point out no tourists were physically harmed and rallies were relatively briefenglish.khabarhub.comnepalitimes.com, the political crisis has raised fears among businesses. One Nepali CEO warned that the protests “will likely deter” foreign investors already wary of Nepal’s investment climatenepalitimes.com. In sum, the unrest imposed a sharp short-term hit on economic activity (empty hotels, falling retail sales) and injected fresh uncertainty into an already fragile economynepalitimes.comreuters.com.

Macroeconomic Indicators

• Currency, Forex Reserves and Balance of Payments: The Nepalese rupee remains effectively pegged to the Indian rupee (roughly NPR 132/USD in mid-2025) and has been relatively stable. This link tends to moderate Nepali inflation in line with India’s. Foreign exchange reserves were comfortable by historical standards: about $15 billion in early 2025 (covering ~9–10 months of imports)imf.org. The balance of payments showed a large trade deficit (goods and services) – on the order of 25–30% of GDP – largely financed by remittancesimf.orgimf.org. In FY2023/24 Nepal actually ran a small current-account surplus (roughly +3.8% of GDP) thanks to high remittance inflowsimf.org, but this swung back to a deficit of a few percent by FY25/26 as trade imbalances widenedimf.org. The IMF projects the current account deficit to widen modestly again by FY2027 as remittance growth slowsworldbank.org. Overall, foreign currency reserves and remittances continue to anchor external stability, though Nepal remains vulnerable to global shocks (as in 2022 energy shocks)imf.orgworldbank.org.

• Inflation, Debt and Fiscal Deficit: Inflation has moderated to around 5–6% in 2024/25, down from over 7% in 2023 (driven by falling non-food inflation)hudson.orgworldbank.org. Lower commodity prices abroad and the rupee peg to India are helping keep consumer prices in checkworldbank.org. Public debt stands near 50% of GDP (NBP’s projection)imf.org, or about NPR 5–6 trillion. This is high by Nepal’s standards but still within official sustainable targets. The government’s fiscal balance has been improving: for FY2024/25 the deficit was held to about 2.5% of GDP, after narrowing from previous yearsworldbank.org. Revenues are rising (with improved tax collection) and the fiscal deficit hit a multi-year low by early 2025worldbank.orghudson.org. However, capital expenditure remains low relative to debt serviceworldbank.orghudson.org. The World Bank notes that although debt is rising (to about 43% of GDP by FY2027), Nepal is managing to finance deficits largely with concessional loans and domestic bondsworldbank.org. In short, macro policy has been broadly prudent, but the outlook depends on keeping spending under control while stepping up revenue mobilization (the authorities have adopted a new revenue strategy)imf.orgworldbank.org.

• GDP Growth and Projections: Growth has rebounded from the COVID slump but remains modest. FY2022/23 real GDP grew ~3.1% (IMF data) and FY2023/24 about 3.9–4.0%imf.orgworldbank.org, as agriculture recovered and remittances boosted consumption. The World Bank estimates 4.9% year-on-year growth in H1 of FY25 (Jul–Dec 2024)worldbank.org. Going forward, the IMF projects 4.2% in FY2024/25 and 5.4% by FY2025/26imf.orgworldbank.org, supported by higher public investment (post-flood reconstruction) and more hydropower output. The World Bank similarly forecasts ~4.5% in FY2025 and ~5.4% average in FY26–27worldbank.org. Major growth drivers are expected in services (trade and tourism recovery) and construction/industry (new power exports and building projects)worldbank.orgworldbank.org. However, there are significant downside risks: continuing political instability, slower remittances, and under-executed projects could all drag growth below potentialworldbank.orgworldbank.org.

Unemployment and Labor Migration

Official surveys indicate roughly 10–11% unemployment as of 2024. Youth joblessness is much higher: about 20–21% of Nepalis ages 15–24 are unemployedfred.stlouisfed.org. Underemployment, especially in rural areas, is endemic. These labor-market pressures drive massive migration: by 2023 an estimated 7% of Nepal’s population lived overseas for workworldbank.org. Most are young men (but increasingly women) working in Gulf countries, Malaysia and India. The surge of youth protests partly reflects frustration at the lack of local opportunities. Trends suggest, however, that new migration flows have slowed (e.g. restrictions from Malaysia)worldbank.org. Many analysts urge Nepal to create better domestic jobs to reduce “brain drain” and convert remittance inflows into productive investmentworldbank.orgworldbank.org. For now, labor migration remains the single biggest source of foreign exchange (since workers send home 21–23% of GDP each yearimf.org), but this also means Nepal’s labor force at home is depleted of its most employable citizens.

Investment and Trade Outlook

FDI: Foreign direct investment in Nepal is still modest and very concentrated. Total FDI commitments in 2024 (almost all new projects) amounted to about NPR 333 billion (≈$2.5 billion)english.khabarhub.com. Significantly, over half came from just three countriesenglish.khabarhub.com and was channeled mostly into electricity (29% of the total), manufacturing industry (29%) and financial services (24%)english.khabarhub.com. New enterprises are rare due to bureaucratic barriers. The business community notes that much of the investment pipeline is stalled by land acquisition and regulatory delays. Nepal is also preparing to obtain its first sovereign credit rating and has a long-term goal to raise Nepal Rastra Bank’s rating above the current “BB–”english.khabarhub.com.

Trade and Borders: Nepal remains highly trade-dependent with its neighbors. In 2023, 64% of Nepal’s external trade was with Indiahudson.org. Nepal imports the bulk of its petroleum, machinery, vehicles and consumer goods from India, while exporting very little (only about $850 million in goods and services to India)hudson.org. This leaves a huge trade imbalance with India that Nepal hopes to partly offset via electricity exports (new power trade deals foresee 10 GW exported to India by 2030)hudson.org. Trade with China is much smaller (~$2 billion total in 2023, mostly imports)hudson.org, but Nepal is actively courting Chinese investors through Belt & Road infrastructure projects. So far ~$2 billion has been disbursed under Chinese loans, but project execution has been slowhudson.org. A recent example of deepening ties is the reopening of the Korala border crossing to Tibet (November 2024)english.khabarhub.com, which could boost Himalayan trade and tourism in the long run. In the short term, however, Nepal’s trade deficit remains large (over 25% of GDP) and a drag on reserves. Overall, Nepal seeks diversified partners but remains economically tied to India (visa-free regime, fuel routes, aid)hudson.orghudson.org. Any flare-up in India relations or disruptions (e.g. border closures) would quickly tighten balance-of-payments pressures.

Risks and Recovery Strategies

Nepal’s outlook is clouded by several risks. Externally, higher commodity prices or a global slowdown would cut into remittance and tourism earningsworldbank.orgworldbank.org. Domestically, the repeated political shocks and governance gaps could derail reforms: capital spending might again undershoot targets, and banks remain vulnerable (many corporate loans are of poor quality)hudson.orgimf.org. Nepal is also still on the FATF “grey list” for money-laundering, which could hamper foreign financing. Natural disasters (floods, earthquakes) are perennial threats that can instantly set back growth and strain public finances.

For recovery, both international agencies and local experts emphasize reforms and resilience-building. In the short term, authorities and stakeholders agree on the need to restore normalcy (ensuring security and reopening trade routes quickly). Financial institutions (IMF, World Bank) urge Nepal to shore up macro stability by mobilizing revenue and protecting the poor while also allowing for more growth-friendly spending on infrastructureimf.orgworldbank.org. They recommend strengthening public investment management so that planned highways, airports and power projects are completed on scheduleimf.orgworldbank.org. Governance reforms – combating corruption and easing bureaucratic barriers – are frequently cited. For example, the IMF review stressed “reducing the high cost of doing business, enhance[ing] the investment climate, improve governance, and strengthen anticorruption institutions”imf.org. The World Bank’s Country Economic Memorandum similarly calls for using remittances more productively (e.g. through migrant savings banks or diaspora bonds) and for diversifying the economy via exports, hydropower and digitalizationworldbank.orgworldbank.org.

Longer-term recovery strategies involve rebalancing Nepal’s growth model. Experts advise leveraging Nepal’s strengths (hydropower, tourism, demographic dividend) while addressing weaknesses. This means continuing to build roads, power lines and irrigation; deepening reforms to attract private capital (e.g. public–private partnerships for dams)worldbank.org; and improving skills and education so youth can fill new industrial and service jobs. Many analysts also highlight climate resilience – for instance, expanding insurance and better flood management to protect farmers and cities.

International institutions back these recommendations. The IMF-funded program to June 2025 attaches conditions to improve governance, boost revenue collection, and reform the banking sectorimf.orgimf.org. The Asian Development Bank forecasts that if prudent fiscal policy continues, GDP can firm to ~4.4% (FY2025) and beyond, but warns that rising imports and deficits warrant cautionadb.orgkathmandupost.com. Local think tanks echo the view that Nepal needs “a decisive policy shift” to reach its ambitious 7.1% annual growth target (16th Plan), through reforms that unlock private-sector-led growthworldbank.orgworldbank.org.

In summary, while Nepal faces a deepening economic crunch – marked by high youth unemployment, a weakening external balance and now political turmoil – policymakers and analysts see a pathway out in structural reforms and renewed private investment. If the recent unrest leads to genuine anti-corruption measures and more stable governance, some experts believe it could be a painful but necessary “course correction” for the economyenglish.khabarhub.comhudson.org. Continued support from the IMF/World Bank (for fiscal reform) and from neighbors (for trade and energy cooperation) will be crucial. Overall, Nepal’s recovery likely hinges on balancing short-term shock management (reopening markets, rebuilding confidence) with longer-run transformations (diversifying beyond remittances and agriculture, and strengthening state capacity)worldbank.orgworldbank.org.

Sources: Analysis and data from IMF and World Bank reports, Nepalese government and central bank statistics, and news/think-tank coverageworldbank.orgworldbank.orgimf.orgenglish.khabarhub.comnepalitimes.comreuters.com. All figures and quotes are drawn from these sources as of September 2025.