World Bank cuts growth forecast to 3.7% after Bhotekoshi floods

The World Bank has cut Nepal’s economic growth forecast for the current fiscal year to 3.7%, citing widespread damage from the August 26 Rasuwa floods to energy, transport and other critical infrastructure.

In its latest Nepal Development Update, the World Bank said disruptions to industry, trade, tourism and other services would weigh on economic activity. Growth is expected to rebound to 5.2% in FY2027/28 as reconstruction and rehabilitation gather pace.

The industrial sector is expected to bear the biggest impact. The floods damaged 12 hydropower projects, including seven operational plants with a combined capacity of 256.1 MW, as well as five projects under construction with a combined capacity of 395.02 MW. A 25 MW solar facility was also affected.

Damage to electricity transmission infrastructure disrupted an additional 149.6 MW, bringing total affected generation and transmission capacity to about 430.7 MW, or roughly 10.6% of the country’s installed hydropower and solar capacity.

The services sector is also expected to face significant disruption, particularly in trade, transport and tourism. More than 200 hotels and restaurants were damaged in affected districts, while access to destinations such as Langtang and Gosaikunda was disrupted ahead of the peak autumn tourism season.

The floods also severely damaged the Galchhi–Rasuwagadhi trade corridor, with more than 55 kilometres of the 82-kilometre route affected and about 40 kilometres completely washed away. Thirty-seven motorable bridges and 68 suspension bridges were also damaged.

The World Bank estimates direct physical damage at $1.66 billion, while the government’s preliminary assessment puts broader disaster effects, including losses to production, livelihoods and essential services, at about $2.7 billion. Total recovery and reconstruction needs are estimated at approximately $4.8 billion.

The bank expects reconstruction to begin supporting economic activity during FY2026/27. However, it warned that delays could prolong disruptions to transport, trade, tourism, hydropower generation and private-sector activity.

Nepal’s public debt is projected to rise from 45.1% of GDP in FY2025/26 to 46.8% in FY2026/27 and 47.9% in FY2027/28, driven largely by higher relief and reconstruction spending. Despite the increase, the World Bank expects Nepal to remain at low risk of debt distress.

The World Bank has urged Nepal to use reconstruction as an opportunity to “build back differently” by incorporating updated multi-hazard risk assessments, stronger infrastructure designs and alternative transport, energy and communications links.

It also recommends stronger early-warning systems, improved disaster monitoring and an integrated social protection system to help vulnerable households receive assistance quickly after disasters.

The report also projects South Asia’s economic growth at 6.9% this year, easing to 6.7% in 2027. It highlights artificial intelligence as a potential source of future growth through higher productivity, expanded exports and improved public services, while calling for stronger skills, digital infrastructure and clear regulatory frameworks.