IMF projects 4.6% growth for 2026/27, contrasts government’s 7% target

The International Monetary Fund has projected a moderate recovery for Nepal’s economy in the coming years, signaling growth well below the government’s ambitious 7% expansion forecast.

In its latest Article IV Consultation and completion of the seventh and final review under the Extended Credit Facility (ECF), the International Monetary Fund estimates that Nepal’s real GDP growth will reach around 3% in fiscal year 2025/26 before gradually rising to 4.6% in FY 2026/27 and 5.3% in 2027/28.

The projections stand in contrast to the government’s target of achieving 7% growth, highlighting a gap between official expectations and multilateral assessments of economic momentum.

According to the IMF, the economic performance in 2025/26 reflect protest-related disruptions, weaker agricultural production, and subdued private investment amid pre-election uncertainty, as well as spillovers from the war in the Middle East.

A recent smooth transition of power to a single-majority government, an accommodative policy stance, and an expansionary fiscal policy for 2026/27 will support a gradual recovery in the private sector, allowing economic growth momentum to strengthen, it further noted. However, the near-term outlook remains constrained by structural weaknesses and external risks. These include subdued private investment, weak capital expenditure execution, and ongoing global economic uncertainty.

Inflation is projected to rise moderately but remain broadly aligned with the central bank’s 5% target, according to the report.

The IMF emphasised that sustaining reform momentum under the concluded ECF program will be essential for strengthening macroeconomic stability. The program, which provided a total of about $384 million in budget support, helped Nepal build financial buffers, improve monetary operations, and strengthen fiscal and financial sector oversight.

However, the Fund warned that risks remain tilted to the downside. These include vulnerabilities in the financial sector, rising non-performing loans, and potential underperformance in public investment. The report also highlighted the need for stronger governance, improved tax mobilisation, and more efficient capital spending to support long-term growth.

The Nepal Rastra Bank is expected to adjust monetary policy if inflationary pressures intensify, while fiscal policy is projected to remain expansionary in the short term before gradually shifting toward consolidation.

Despite the IMF’s cautious outlook, the government continues to project stronger growth of around 7%, banking on increased capital expenditure, infrastructure development, and improved investor confidence. Economists, however, note that achieving such a rate would require significantly higher investment efficiency and sustained reform implementation beyond current trends.

The IMF concluded that Nepal’s medium-term outlook is “broadly favorable,” but stressed that durable high growth will depend on consistent policy execution, stronger institutions, and improved business conditions.

In its assessment, it concurred that an expansionary fiscal policy is appropriate to support domestic demand in the near term, followed by a gradual, growth‑friendly fiscal consolidation to preserve debt sustainability.