World Bank Cuts Nepal Growth Forecast to 3.7% as Floods Disrupt Economy

The global development lender now expects Nepal's economy to grow 3.7 per cent in fiscal year 2026-27, which began in mid-July, down from its earlier projection of 4.2 per cent made in April.

In its report, *Nepal Development Update: Building Back Differently for the Future*, released on Tuesday, the World Bank said the August floods were expected to affect economic activity primarily through disruptions to energy, transportation, trade and tourism.

Agriculture as well as banking and insurance are also expected to be affected, although the World Bank assessed their potential impact on the broader economy as comparatively lower.

The energy sector, particularly hydropower, has emerged as the most significant channel through which the disaster is expected to affect economic activity. The floods damaged 12 hydropower projects, including seven operational facilities with a combined capacity of 256.1 MW and five projects under construction with a combined capacity of 395.02 MW.

A 25 MW solar facility was also affected. Damage to transmission infrastructure disrupted an additional 149.6 MW, taking the total affected generation and transmission capacity to around 430.7 MW.

The World Bank said the affected capacity represented approximately 10.6 per cent of Nepal's installed hydropower and solar capacity in FY26.

Transportation and trade are also major areas of concern because a significant share of Nepal's domestic and international commerce depends on a limited number of key transport corridors.

The floods have caused widespread damage along the Bhotekoshi and Trishuli river corridors. According to the National Disaster Risk Reduction and Management Authority, 1,455 people have been confirmed dead and another 5,285 remain missing following the disaster.

A Rapid Disaster Needs Assessment prepared by a joint technical team of the National Planning Commission and the National Disaster Risk Reduction and Management Authority estimated physical damage from the floods at 274.48 billion Nepali rupees, equivalent to around $1.93 billion.

Total losses and damages were estimated at 408.28 billion rupees, or approximately $2.87 billion.

The preliminary assessment estimated that more than 723 billion rupees would be required for reconstruction and recovery of affected infrastructure and assets. The Nepali government is also preparing a more comprehensive Post-Disaster Needs Assessment.

The World Bank expects industry to be the biggest drag on economic growth as damage to hydropower facilities, solar projects, electricity transmission networks and transport infrastructure affects electricity generation, production and the movement of goods.

The report cited the Rasuwagadhi Hydropower Project as an example of the prolonged disruption that flood damage can cause. The 111 MW project took nearly a year to fully restore generation after it was severely damaged by flooding in the Bhotekoshi, or Lhende River, on July 8, 2025.

The same project was again badly affected by the August 2026 floods, highlighting the potential for repeated flood damage to disrupt electricity supplies and generate substantial reconstruction costs.

Hydropower projects located outside the directly affected areas are expected to continue construction, although developers could face higher insurance premiums, reassessment of financing arrangements and cost overruns.

The services sector is also expected to face disruptions through the effects on trade, transport, tourism and financial activity. Agricultural losses are expected to have a relatively limited effect on overall economic output but could have significant consequences for livelihoods in the affected areas.

Tourism could face a more prolonged setback because of both physical damage and concerns over travel safety. More than 200 hotels and restaurants were damaged across affected districts, while access to major trekking and pilgrimage destinations such as Langtang, Gosaikunda and the Kailash Mansarovar corridor has also been disrupted.

Despite the near-term economic impact, the World Bank expects Nepal's economic activity to gradually recover in fiscal year 2027-28 as reconstruction gathers pace and damaged infrastructure and productive capacity are restored.