KATHMANDU, March 8: Nepal’s economic growth has remained modest over the past several decades, averaging roughly four percent annually, according to a recent macroeconomic analysis released by the Nepal Rastra Bank (NRB). The report highlights long-term structural changes in the country’s economy, particularly the weakening role of the industrial sector and the increasing dominance of services.
The central bank’s report notes that Nepal experienced its most significant expansion during the late 1980s and early 1990s. Between 1986 and 1995, the economy recorded growth that exceeded the estimated potential growth rate of 4.3 percent. This period is often considered one of the most dynamic phases in Nepal’s economic history.
However, the momentum did not sustain in later decades. While the overall growth rate remained close to the potential level, the contribution of industries gradually declined. In the mid-1970s, the industrial sector contributed about 8.2 percent to the country’s Gross Domestic Product. That share expanded significantly and reached its peak of 22.2 percent by 1995.
Since then, the trend has reversed.
Over the three decades following 1995, Nepal’s industrial base has steadily weakened. By 2025, the sector’s contribution had fallen to just 12.8 percent of the national economy. Economists and analysts describe this trend as “premature de-industrialization,” meaning the country is losing industrial capacity before reaching higher levels of development.
Multiple Shocks Hit Nepal’s Economy
Experts say the weakening industrial performance cannot be explained by structural factors alone. Nepal’s economy has faced several major shocks in the past decade that disrupted economic momentum.
One of the most devastating events was the 2015 Nepal earthquake, which caused widespread destruction across the country and severely affected economic activities.
The same year also marked a major political transformation with the introduction of Nepal’s new constitution and the restructuring of the state into a federal system. These institutional changes brought opportunities but also short-term economic adjustments.
Later, the global outbreak of COVID-19 created another major shock for the Nepali economy. Lockdowns, reduced tourism, and supply chain disruptions pushed economic growth into negative territory during the fiscal year 2019/20.
More recently, large-scale youth-led demonstrations—often referred to as “Gen Z protests”—have also created additional uncertainty in the economic environment.
From Post-Earthquake Boom to Post-Pandemic Slowdown
Despite these setbacks, Nepal did witness periods of strong recovery. Following the 2015 earthquake, reconstruction projects significantly boosted economic activity.
In fiscal year 2015/16, economic growth dropped sharply to just 0.4 percent. However, the following year saw a dramatic rebound. Reconstruction efforts, infrastructure projects, and rising construction activity pushed the growth rate to nearly nine percent in FY 2016/17 — one of the highest recorded in recent decades.
During that same period, the industrial sector experienced exceptional expansion. Industrial output surged by nearly 17 percent, largely driven by construction-related demand.
The recovery, however, proved temporary. The COVID-19 pandemic disrupted economic activity again, causing Nepal’s economy to shrink in FY 2019/20. Since then, the annual growth rate has remained below five percent, reflecting slower investment and weaker demand.
Service Sector Becomes the Backbone of the Economy
One of the most notable trends highlighted in the report is the growing dominance of the service sector.
Over the past decade, services have consistently contributed more than half of Nepal’s economic output. In fiscal year 2014/15, agriculture accounted for 30.3 percent of the economy, industry contributed 15 percent, and services made up 54.7 percent.
By fiscal year 2024/25, the structure had shifted further. Agriculture’s share declined to about 25.2 percent, while the industrial sector dropped to 12.8 percent. Meanwhile, the service sector expanded significantly and now accounts for roughly 62 percent of the country’s GDP.
This shift indicates that Nepal is increasingly becoming a service-oriented economy, with sectors such as trade, tourism, banking, and transportation playing larger roles.
Consumption-Driven Economy with Falling Investment
Another key finding of the report is that Nepal’s economy remains heavily driven by consumption rather than investment.
Historically, private consumption has accounted for between 85 and 90 percent of GDP. Over the past five years, the average level of private consumption has remained around 87.8 percent of total economic output.
However, private investment has shown a worrying decline. It dropped from 21.7 percent of GDP in FY 2021/22 to about 15.7 percent in FY 2022/23 and has continued to fall since then.
Economists say that import restrictions introduced during FY 2022/23 contributed to a sharp slowdown in both investment and consumption. Compared to FY 2021/22 levels, private investment has decreased by nearly 30 percent, while private consumption remains about five percent lower.
This decline in demand is widely seen as a key factor behind the slowdown in economic growth in recent years.
Gradual Signs of Recovery
Despite the challenges, the report suggests that Nepal’s economy may be slowly recovering.
By fiscal year 2024/25, total domestic demand had reached about 121.5 percent of GDP. Although this remains below the 131.5 percent recorded in FY 2021/22, several productive sectors have started to show improvement.
Construction, manufacturing, and wholesale and retail trade — which had experienced negative growth for two consecutive years — are now returning to positive territory.
Even so, economists caution that the recovery will likely take time. While current indicators show improvement, Nepal’s economy has yet to fully return to the momentum seen before the pandemic.
For policymakers, strengthening industrial development and encouraging private investment are expected to be key priorities in the coming years if Nepal hopes to achieve stronger and more sustainable economic growth.
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