By / August 1, 2012

Nepal and its transition: what lies ahead?

A little history The Federal Democratic Republic of Nepal is a landlocked country with a population of approximately 30 million…

Image copyright Vadim Petrakov. Used under licence from
Nepal and its transition
Image copyright Vadim Petrakov. Used under licence from

A little history

The Federal Democratic Republic of Nepal is a landlocked country with a population of approximately 30 million people that has been a monarchy throughout most of its history. Nepal had been ruled by the Shah Dynasty from 1768 until a decade-long Maoist uprising, which ended in 2006, led to the abolition of the monarchy in 2007. Elections to establish a Constituent Assembly (CA), a transitional legislature responsible for drafting a constitution, followed in April 2008. The current prime minister Baburam Bhattarai represents the Unified Communist Party of Nepal (the Maoist UCPN), the largest party that emerged from the 2008 elections.

A crumbling democracy

Since then, the political crisis has worsened in Nepal. The CA, which has cost Nepal $1.13 billion over four years, has been unable to complete a draft constitution, despite four extensions of its term. Political factionalism reflects Nepalese society: highly fragmented as it has always been multi-ethnic, multi-lingual and multi-religious. Three major issues blocked the constitution-drafting process: the number of provinces in the federal state, the question of whether to opt for a presidential or a prime ministerial model of government, and the electoral system to adopt. Since the Supreme Court agreed in late 2011 that there would be no further extensions to the CA’s mandate, which ended on 27 May 2012, the court asked the government to seek alternatives. As a result, Prime Minister Baburam Bhattarai has called for fresh CA elections on 22 November 2012. Critics argue that the CA has long lost its legitimacy as no serious discussion on the future political framework has taken place and it has not been able to tackle the issue of federalism. The failure of political leadership, worsened by the split of the Maoist party (UCPN), is considered to be the key factor for national instability and poverty.

The economy

With almost one-quarter of the population living below the poverty line, Nepal is among the poorest and least developed countries in the world. Growth prospects rely on the political situation. Poor security and political instability impair the state’s capacity to spend money, for example aid with irrigation infrastructure in poor rural areas.. The Economist Intelligence Unit explains that one-third of Nepal’s $18.2 billion GDP for 2011 came from the agricultural sector, which employs the majority of the population, therefore crop growing conditions are the key element of the country’s economic growth rate. Nepal’s GDP is estimated to grow at an average of 3.8% per annum between 2010 and 2013. The Nepali rupee (NRs) is pegged to the Indian rupee (IRs) at the rate of 1.6 : 1. This monetary policy is aimed at promoting economic growth through financial stability and stable prices. Maintaining the peg can however conflict with keeping inflation under control, especially since the Indian rupee is forecast to depreciate 8% in 2012. It is however hoped that strong agricultural output for 2011/2012 will mitigate inflationary pressures coming from India, Nepal’s largest trading partner accounting for 65.5% of its exports and 57% of its imports.

Nepal has a huge hydropower potential estimated at around 42 000 MW of feasible capacity. In April 2012, the Ministry of Energy completed a draft power development agreement, which if approved would allow seven hydropower projects to move forward. These projects could bring up to $6 billion in foreign direct investment (FDI). Nepal’s failure to enact three laws against money laundering could jeopardise FDI especially if the country is blacklisted by the Financial Action Task Force, a global anti-money-laundering body. As a consequence, FDI between mid-July 2011 and mid-April 2012 dropped 31% to $57 million. The economic prospects are likely to remain grim unless Nepal’s ruling elite can deliver the necessary reforms and achieve the stability needed to attract FDI.

Further reading

Oxford Analytica, Constitutional chaos looms over Nepal’s polity

Economist Intelligence Unit, Country Report

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