Nepal faces ongoing political and economic uncertainty. The country’s political divide between two main party coalitions—the communist parties and the Nepali Congress—continues to create instability. This internal conflict, combined with a fragile economy and disruptions in foreign aid, complicates Nepal’s growth. Despite some signs of recovery, challenges remain for the nation as it navigates these complex issues. Political infighting and slow economic progress are likely to continue shaping Nepal’s future.
Political Landscape: Ongoing Struggles Amid Divisions
Nepal’s political environment remains highly unstable, with frequent shifts in government leadership. Since the monarchy was abolished in 2008, Nepal has had 13 different governments. The political divide is mainly between the communist parties and the Nepali Congress, which hold differing views on governance, foreign relations, and economic policies.
In December 2024, a new coalition between the Nepali Congress and the major communist factions was formed. However, political analysts are uncertain about how long this coalition will last, given Nepal’s history of frequent government changes. Prime Minister K.P. Sharma Oli, a key figure in the current government, is set to share leadership duties with Nepali Congress leader Sher Bahadur Deuba until the next election in 2027.
Nepal’s Political History: A Legacy of Instability
Nepal’s political instability dates back to its time as a monarchy. In 2001, a royal family tragedy triggered a constitutional crisis, which ultimately led to the abolition of the monarchy in 2008. Despite the end of the civil war in 2006, the country’s political system has struggled with divisions, human rights issues, and a lack of accountability.
The country’s two primary political forces—the communists and the Nepali Congress—continue to engage in power struggles, often forming unstable coalitions. These struggles hinder Nepal’s ability to develop effective governance, leaving the nation in a cycle of political gridlock.
Economic Recovery: Growth Amid Challenges
Nepal’s economy faces numerous challenges, particularly due to its reliance on tourism and remittances. Years of conflict and the COVID-19 pandemic weakened Nepal’s economic foundations, and the services sector, including tourism, was heavily impacted. Agriculture exports also took a hit, contributing to the overall economic decline.
However, there are signs of recovery. In 2024, Nepal’s economy grew by 4%, driven by increased agricultural exports and a 32% rise in tourism income. Remittances, which reached a nine-year high in 2023, have boosted private consumption, supporting economic growth. Additionally, hydropower production has increased, adding more than 450 megawatts to the grid, further supporting recovery.
Despite these positive signs, Nepal’s economy still faces significant hurdles. The World Bank has warned of declining private and public investment, which could stifle future growth. While the fiscal deficit has narrowed, the country continues to struggle with low revenue collection and inadequate capital expenditure, which could delay vital infrastructure projects.
External Pressures: Dependence on Foreign Relations
Nepal’s economy is heavily influenced by its relationships with India, China, and the United States. These countries play a vital role in Nepal’s trade, energy sector, and foreign aid. Nepal has historically maintained a balance between India and China, but geopolitical pressures are increasing.
India is Nepal’s largest trading partner, with bilateral trade reaching $8.85 billion in 2023. Nepal exports around $850 million to India, while importing petroleum and consumer goods. The two countries have also collaborated on energy projects, such as hydroelectric power trade agreements. These agreements are expected to help reduce Nepal’s trade deficit with India, a critical step for economic stability.
Nepal has also deepened its economic ties with China, particularly through the Belt and Road Initiative (BRI). While China has invested in infrastructure projects, Nepal faces challenges related to the execution of these projects. The 2022 Sri Lankan debt crisis raised concerns about the risks of borrowing from China, leading to a more cautious approach toward BRI investments.
The U.S. is Nepal’s second-largest export market, and American aid plays a significant role in the country’s development. The U.S. signed a $500 million agreement with Nepal in 2017 under the Millennium Challenge Corporation to improve infrastructure and energy systems. However, the future of American aid is uncertain, especially given shifting U.S. political priorities.
Nepal’s Balancing Act: Relations with India, China, and the U.S.
As a small, landlocked nation, Nepal faces the challenge of balancing its relations with India and China. India has long held cultural and historical ties with Nepal, and the two countries share strong trade links. However, Nepal’s communist parties lean toward strengthening ties with China, creating tension in the region.
China’s growing influence is evident through several large-scale infrastructure projects, including roads, hydropower, and railways, under the BRI. However, some projects have faced delays, and Nepal has expressed concerns about taking on too much debt. The risk of overreliance on China has led to a more cautious approach to Chinese investments.
The U.S. has been a significant aid donor to Nepal, particularly after natural disasters like the 2015 earthquake. However, the future of U.S. aid depends on political developments in both Nepal and the United States. Nepal’s challenge lies in maintaining favorable relations with all three countries, each of which has distinct economic and strategic interests.
Nepal’s future remains uncertain as the country grapples with deep political divisions and ongoing economic challenges. While there are signs of recovery, the country’s political instability and slow pace of reform pose significant obstacles. Nepal’s ability to manage its foreign relations and internal political issues will be crucial to its future development.
