Introduction

Nepal is currently experiencing a significant wave of protests, highlighting deep-seated public discontent with corruption and governance under its republican system. Recent violent street demonstrations reflect growing frustration, with an increasing number of people rallying behind former King Gyanendra Shah. This movement has gained traction amidst allegations of corruption against political leaders and the perceived failure of the republic to address socio-economic crises.

• The country’s political transformation since the abolition of the monarchy in 2008 has been marked by instability, fragile coalitions, and governance challenges. Alongside political uncertainty, Nepal’s economy faces structural difficulties, relying heavily on tourism, remittances, and agricultural exports. Its foreign relations remain strategically complex, balancing engagements with India, China, and the United States.

Nepal’s Political Turbulence

Historically, Nepal functioned as an absolute monarchy, occasionally sharing power with a constitutional parliament. However, the country’s political landscape changed dramatically in the early 21st century. The royal massacre of 2001, in which the crown prince assassinated King Birendra and other royal family members, triggered severe political instability. King Gyanendra Shah’s attempt to consolidate power in 2005 further deepened the crisis, leading to mass protests that ultimately forced his abdication.

In 2008, Nepal abolished its monarchy and became a federal republic. However, rather than fostering stability, partisan politics and coalition struggles have dominated governance. Since the end of the civil war in 2006, Nepal has seen frequent government changes, with thirteen different administrations in power over the past sixteen years. The intense rivalry between the Communist factions and the Nepali Congress has resulted in fragile coalitions, hampering policy implementation and economic reforms.

The Current Political Scenario

The aftermath of the 2022 parliamentary elections saw Communist Party of Nepal-Maoist Centre (CPN-MC) leader, Pushpa Kamal Dahal (Prachanda), initially assuming the role of Prime Minister in alliance with the Communist Party of Nepal-United Marxist and Leninist (CPN-UML). However, this coalition collapsed, and in July 2024, K.P. Sharma Oli, the leader of CPN-UML, became Prime Minister for the fourth time, this time in alliance with the Nepali Congress. Under the coalition agreement, Oli and Nepali Congress leader Sher Bahadur Deuba are set to alternate as Prime Minister until the next general elections in 2027.

Despite this arrangement, Nepal’s political future remains uncertain. The frequent formation and dissolution of coalitions have left the government vulnerable to instability, hindering long-term policy execution. Additionally, unresolved issues of transitional justice, human rights violations, and political accountability continue to challenge Nepal’s democratic progress.

Economic Challenges and Progress

Nepal’s economy has historically faced numerous obstacles, exacerbated by political instability, natural disasters, and external dependencies. While the COVID-19 pandemic severely affected key sectors, recent years have shown signs of recovery.

Economic Growth and Key Sectors

• GDP Growth: Nepal recorded a 4% economic growth rate in 2024, driven primarily by a 32% increase in tourism revenue and a revival in agricultural exports.
• Hydropower Expansion: The country added 450 megawatts (MW) of hydropower capacity, strengthening its potential for electricity exports.
• Remittances: The inflow of remittances reached a nine-year high in 2023, fueling private consumption and supporting household incomes.

Despite these improvements, Nepal faces persistent economic difficulties. The World Bank has warned of declining private and public investment, indicated by reduced imports of capital goods and lower government capital expenditures. Similarly, the International Monetary Fund (IMF) has expressed concerns regarding the stability of Nepal’s banking system, particularly in the public sector.

Fiscal and Monetary Challenges

• Fiscal Deficit: Nepal’s fiscal deficit has dropped to a seven-year low, but poor revenue collection remains a concern.
• Inflation: The inflation rate fell to 5.4% in 2024, down from 7.7% in 2023, primarily due to reduced prices of non-food and service sectors.
• External Debt: Nepal has relied on IMF assistance nine times since 1976 to manage balance of payments crises. The most recent $372 million Extended Credit Facility, initiated in 2022, is set to expire this year.

A key concern for Nepal’s economy is the inefficient execution of capital projects, which limits infrastructure development and economic stimulation. The IMF has urged Nepal to accelerate capital investment to strengthen long-term growth.

India-Nepal Relations

India has historically played a dominant role in Nepal’s political, economic, and cultural landscape. The two nations share deep historical and religious ties, with Nepal being the only country that has a visa-free travel arrangement with India.

• Trade Relations: India accounts for 64% of Nepal’s total external trade, with bilateral trade reaching $8.85 billion in 2023. Nepal’s exports to India totaled $850 million, while imports from India—mainly petroleum products and manufactured goods—make up the rest.
• Hydropower Cooperation: India has assisted Nepal in harnessing its hydroelectric potential, with agreements in place for Nepal to export 10,000 MW of electricity to India over the next decade.
• Development Assistance: India is one of Nepal’s largest providers of humanitarian aid and infrastructure investments, particularly in connectivity projects like airports, pipelines, and power grids.

However, relations between the two countries have often fluctuated. Nepal’s communist factions favor stronger ties with China, whereas the Nepali Congress traditionally advocates closer relations with India and the United States. Some Nepali politicians have also expressed concerns about India’s economic dominance and cultural influence over Nepal.

Nepal’s Engagement with China

• Trade with China: Nepal’s bilateral trade with China stands at approximately $2 billion, with $1.78 billion in imports from China.
• Belt and Road Initiative (BRI): Nepal joined China’s BRI in 2017, proposing 35 infrastructure projects worth $10 billion. Of these, nine have been approved and seven have started, including road upgrades, hydroelectric plants, and an electricity transmission line.
• Infrastructure Investments: In December 2024, Prime Minister Oli signed agreements for ten new BRI projects, further deepening Nepal’s economic cooperation with China.

Despite these developments, Nepal has expressed concerns about China’s loan-heavy investment model, particularly after observing Sri Lanka’s debt crisis in 2022. This has led to hesitation in pursuing large-scale borrowing from China.

Conclusion

Nepal remains at a critical juncture, balancing political instability with economic development. While recent economic indicators suggest a slow but steady recovery, governance challenges persist, fueled by corruption allegations and public discontent. The country’s strategic position between India and China makes its foreign policy complex, requiring careful diplomacy to maintain beneficial trade relations. As Nepal approaches the 2027 elections, the durability of the current coalition and its ability to implement effective economic policies will be crucial in shaping the nation’s future.