Nepal’s Economic Growth Stuck Around 4% as Industry Shrinks and Service Sector Dominance Expands

Nepal’s economic growth has historically remained around an average of 4 percent, reflecting a relatively modest pace of expansion over the long term. According to the latest Macroeconomic Report released by the Nepal Rastra Bank on Tuesday, the country’s potential growth rate has been estimated at around 4.3 percent. The report identifies the period between 1986 and 1995 as a significant phase of economic expansion, during which the growth rate surpassed the estimated potential level. In the years that followed, however, economic growth largely stabilized around the potential rate, while structural changes within the economy gradually began to emerge.

One of the most notable structural shifts highlighted in the report is the steady decline of the industrial sector’s contribution to the national economy. In 1975, the industrial sector accounted for only 8.2 percent of Nepal’s Gross Domestic Product (GDP). By 1995, this share had increased significantly to 22.2 percent, marking a period of strong industrial development. However, over the past three decades, the sector has gradually contracted. By 2025, the industrial sector’s contribution had declined to just 12.8 percent of GDP. Economists have described this trend as a case of “premature deindustrialization,” where industrial activity begins to decline before a country achieves a fully developed economic structure.

The report also notes that Nepal’s economy has faced several major shocks in recent years, which have significantly influenced its growth trajectory. Among the most impactful events were the devastating earthquake of 2015, the political restructuring that followed in the same year, the global COVID-19 pandemic, and the more recent “Gen-Z movement.” These events disrupted production, investment, and overall economic activity, creating both short-term and long-term economic challenges.

Data from the past decade (Fiscal Year 2014/15 to 2024/25) shows that Nepal’s economy has grown at an average rate of 4.2 percent. Following the 2015 earthquake, the country’s GDP growth rate dropped sharply to just 0.4 percent in the fiscal year 2015/16. However, the subsequent reconstruction drive triggered a strong economic rebound. In fiscal year 2016/17, Nepal recorded an impressive growth rate of around 9 percent, driven largely by a surge in construction activities. During that period, the industrial sector recorded an exceptional growth rate of nearly 17 percent, according to the central bank’s report.

The momentum, however, was short-lived. In fiscal year 2019/20, the COVID-19 pandemic pushed Nepal’s economy into negative growth as lockdowns and disruptions severely affected economic activity. Although the economy has gradually recovered since then, overall growth has remained below 5 percent in recent years. Analysts suggest that the recovery has been slower than expected due to weak domestic demand and cautious private sector investment.

Another major trend identified in the report is the increasing dominance of the service sector in Nepal’s economic structure. In fiscal year 2014/15, agriculture contributed 30.3 percent to GDP, industry accounted for 15 percent, and the service sector contributed 54.7 percent. By the end of the decade, in fiscal year 2024/25, the share of agriculture had declined to 25.2 percent while the industrial sector’s share dropped to 12.8 percent. In contrast, the service sector expanded significantly, contributing around 62 percent of the country’s GDP. This shift indicates that Nepal’s economy is becoming increasingly service-oriented, with sectors such as trade, tourism, banking, and communication playing larger roles.

The report further highlights that Nepal’s aggregate demand remains heavily dependent on consumption. Historically, private consumption has accounted for around 85 to 90 percent of GDP. Over the past five years, the average share of private consumption has remained high at approximately 87.8 percent of GDP. This indicates that economic activity in Nepal is driven more by spending and imports rather than strong domestic production or investment.

At the same time, private investment has shown a noticeable decline in recent years. Private investment, which accounted for 21.7 percent of GDP in fiscal year 2021/22, dropped sharply to 15.7 percent in 2022/23 and has continued to weaken since then. The report attributes much of this decline to import control policies introduced in 2022/23, which significantly affected both consumption and investment activities. Compared to 2021/22, private investment fell by nearly 30 percent, while private consumption remained about 5.3 percent lower. Economists consider this slowdown in private sector activity to be one of the primary reasons behind the recent economic slowdown.

Despite these challenges, there are early signs of economic recovery. In fiscal year 2024/25, total domestic demand reached 121.5 percent of GDP, although it still remains below the 131.5 percent level recorded in 2021/22. Productive sectors such as construction, manufacturing, and wholesale and retail trade have begun to recover after experiencing negative growth in the previous two years. These sectors are gradually returning to positive growth, suggesting that the broader economy is moving toward stabilization.

Overall, while Nepal’s economy appears to be on a path toward gradual recovery, it has yet to fully regain the momentum seen before the COVID-19 pandemic. The report suggests that strengthening productive sectors, encouraging private investment, and promoting industrial development will be crucial for achieving sustainable and higher economic growth in the coming years.