Nepal’s economic growth has historically averaged around 4 per cent, with distinct periods of expansion and slowdown, reveals the latest semi-annual macroeconomic report released by Nepal Rastra Bank.
The historical growth outlook identifies a phase of economic vibrancy between 1986 and 1995 and a period of economic slackness from 1996 to 2005. The report mentions that the average growth rate between 1986 and 1995 exceeded the potential growth rate of 4.3 per cent, marking the decade a period of economic expansion.
Since then, economic growth has remained relatively stable around the potential rate, though the industrial sector has gradually weakened. According to the report, Nepal’s industrial sector expanded significantly from 8.2 per cent of GDP in 1975 to 22.2 per cent in 1995.
However, the country experienced premature deindustrialisation over the subsequent three decades since 1995, with industrial growth steadily declining and the sector’s share shrinking to 12.8 per cent of GDP in 2025.
During this period, Nepal also faced a decade marked by major shocks to the economy, including the devastating 2015 earthquake, political restructuring in 2015, the COVID-19 pandemic, and the recent Gen Z movement.
Over the past one decade (2014/15–2024/25), the economy grew at an average rate of 4.2 per cent, close to its potential growth. The 2015 earthquake led to a sharp slowdown, with GDP growth dropping to 0.4 per cent in 2015/16.
However, massive reconstruction efforts in the following year boosted economic activity.
Expansion in the construction sector contributed to an unprecedented industrial growth rate of about 17 per cent, which, along with strong performance in the services sector, helped achieve a GDP growth of 9 per cent in 2016/17.
The GDP growth, however, fell into negative territory in 2019/20 due to the COVID-19 crisis and has remained below 5 per cent thereafter.
The report shows that the service sector continues to dominate the economy, contributing more than 50 per cent to the GDP. This composition is gradually shifting, with the services sector expanding while the shares of agriculture and industry decline.
In 2014/15, agriculture, industry, and services contributed 30.3 per cent, 15 per cent, and 54.7 per cent to GDP, respectively. By 2024/25, agriculture’s share had declined to 25.2 per cent and industry’s to 12.8 per cent, while services expanded to 62 per cent.
Consumption-driven economy struggles as investment remains weak
Aggregate demand in the country is primarily driven by consumption, followed by private investment and government expenditure. Historically, private consumption has hovered between 85 and 90 per cent of GDP. Over the past five years, it averaged 87.8 per cent.
However, private investment experienced a sharp decline, falling from 21.7 per cent of GDP in 2021/22 to around 15.7 per cent in 2022/23, and has continued to decrease thereafter.
Both private consumption and investment demand contracted in 2022/23, likely due to a sharp decline in imports following government-imposed import restrictions aimed at easing pressure on the balance of payments.
Private investment demand remains about 30 per cent lower, and private consumption about 5.3 per cent lower, compared to 2021/22 levels, contributing significantly to the post-2021/22 economic slowdown.
Domestic demand, which weakened in 2021/22, has been gradually recovering. However, it stood at 121.5 per cent of GDP in 2024/25, still lower than the 131.5 per cent recorded in 2021/22.
The report notes that demand is gradually catching up, supported by a recovery in economic growth and positive sectoral performance.
Manufacturing, construction, and wholesale and retail trade sectors, which had registered negative growth over the previous two years, have rebounded. As a result, the overall economy is on a recovery path, although total demand has yet to return to its pre-COVID level.
