In 2024, Nepal saw continued political instability but gained tentative ground within the economic and geopolitical domains. More stability is expected in the days ahead as a result of two major parties forming the government and bringing an end to a tumultuous coalition dominated by smaller and new parties jostling for influence. The recent conclusion of the Framework for Belt and Road Cooperation, achieved after seven years, indicates a maturation of diplomacy and foreign policy, attributable to the stable coalition among political actors during this period. If the coalition preserves its unity, it possesses the capacity to enhance the achievement of the nation’s domestic and global goals more effectively.
Politics of Coalition
Nepal’s political landscape is defined by a multi-party system and is marked by the frequent formation and dissolution of coalitions, resulting in regular changes in government even within a single electoral cycle. An eventful year in coalition politics began when the Nepali Congress (NC) and Communist Party of Nepal – Maoist Centre (CPN-MC) coalition established in December 2022 was dissolved in March 2024. Prime Minister Pushpa Kamal Dahal of the CPN-MC then reestablished the leftist alliance with the Communist Party of Nepal (Unified Marxist–Leninist) (CPN-UML). Despite the new coalition, Dahal’s problems persisted, especially after the Janta Samajwadi Party withdrew its support for the government in May. This led to a vote of confidence in Parliament – the fourth such vote presented in Parliament in just 24 months. Dahal successfully obtained a vote of confidence, but the event highlights the country’s fragmented political landscape, in which the public mandate is frequently ignored in favor of the self-serving interests of political actors seeking to gain or maintain power.
Dahal successfully obtained a vote of confidence, but the event highlights the country’s fragmented political landscape, in which the public mandate is frequently ignored in favor of the self-serving interests of political actors seeking to gain or maintain power.
For their support of the government, smaller and newer parties were given ministerial posts to preserve the fragile CPN-UML and CPN-MC coalition. Despite allegations against him of cooperative fund misappropriation, Rabi Lamichhane, from the new Rastriya Swatantra Party (RSP), was appointed home minister — a move that was criticized by the opposition Nepali Congress (NC). Soon after his appointment, the home ministry was accused of orchestrating the arrest of Kantipur Media Group (KMG) chairman Kailash Sirohiya. This was widely perceived as retaliation for two reasons. First, the media house revealed in 2023 that Lamichhane had violated the law by holding U.S. citizenship, thereby forcing his resignation as home minister. Second, after his reinstatement as home minister, KMG and other media outlets focused on his role in the cooperative scandal.
As the two largest parties in Nepali politics, the UML and NC were frustrated by the rise of smaller new parties. As home minister, Lamichhane announced in Parliament that he would create a powerful commission to investigate 25 major corruption cases, including those involving individuals connected to the NC and UML. The controversies surrounding Lamichhane, combined with the smaller parties’ persistent demands for ministerial positions, caused significant governance obstacles by delaying the formation of the government. The public and other parties were becoming more disillusioned with a political system in which smaller and newer parties exerted significant influence by controlling key ministerial positions, despite having minimal parliamentary representation. For example, the Maoists and the RSP were responsible for the Prime Minister’s Office and the Home Ministry despite holding only 32 and 21 seats, respectively, out of a total of 275 in Parliament. The RSP, in particular, had capitalized on anti-incumbent sentiment during the last election, but the public began to become disenchanted when their opportunistic theatrics stood in the way of coalition formation.
This growing discontent within the new coalition led UML and NC to form a new government in July, which was easy since both parties had a parliamentary majority. UML President K.P. Oli became prime minister of the newly established government. Since the two parties lacked a unifying ideological agenda, they wanted to guarantee their influence by securing key ministries.
Economic Update
The country’s economic situation has improved marginally since last year. According to a report by the World Bank, Nepal’s gross domestic product (GDP) grew at 3.9 percent in 2024 — up from 2 percent in 2023. This growth was driven by the services sector, tourism, and hydropower generation. Decreased imports and increased remittance inflows also positively impacted the country’s account balance, which hit a nine-year high due to record-breaking migration in 2023. Inflation, which hit a new high of 7.7 percent in 2023, has since dropped to 5.4 percent, well below the 6.5 percent goal set by the central bank. The decrease in housing and utility prices, along with falling transportation costs due to cheaper fuel, played a significant role in this easing. The international agency, Fitch Ratings, granted Nepal a sovereign credit rating of “BB Minus,” positioning Nepal just below India and above other South Asian countries.
This credit rating is demonstrative of Nepal’s low risk of debt distress. In 2024, Nepal’s public debt is recorded at 42.7 percent of its GDP, well below the 55 percent median observed in other comparable countries as rated by Fitch. Despite this positive aspect, the country’s primary economic challenge is its high debt servicing costs. Loan repayments are projected to account for 3.9 percent of total economic output due to high interest rates and low revenue collection. Consequently, the government has been required to allocate a substantial portion of its budget for debt servicing in recent years. The high cost of debt servicing hinders investment in infrastructure and the expansion of the financial sector.
Since 2024, Nepal has begun exporting electricity to Bangladesh via an Indian grid. Over the years, Nepal has become a net electricity exporter due to increased production. This represents a significant advancement, considering the country’s considerable hydro capacity. The expected increase in hydro capacity will boost hydropower exports to India and Bangladesh in the coming year, benefiting the economy. However, the government must develop more thorough plans to effectively utilize electricity for its own economic advancement. So far, the government has yet to leverage its hydropower capacity to bolster domestic consumption and stimulate growth.
Foreign Policy Developments
Nepal’s geopolitical situation has become more difficult in recent years due to increased competition between its neighbors and other powers. For example, India’s zero-sum approach to Nepal-China relations has made economic relations with Beijing difficult for Nepal. India has refused to purchase electricity produced by projects with Chinese affiliation. In addition, India’s refusal to allow access to Nepal’s new international airport in Pokhara, built with Chinese financing, has cost the government money. However, geopolitics alone are not responsible for making Nepal’s foreign policy difficult. Political instability and politicization of foreign policy by Nepali politicians have led to shifting foreign policy positions, hurting Nepal’s international negotiations on all fronts. The existing coalition between the two major parties presents a notable opportunity to realign Nepal’s diplomacy and foreign policy, promoting transparency and professionalism in the management of the country’s foreign relations.
After the new coalition assumed power, challenges promptly emerged, notably following India’s decision to not extend an invitation to Prime Minister Oli for a visit. Upon the selection of a new prime minister in Nepal, India generally issues an invitation, anticipating that the inaugural visit will be to India. This time, Oli did not receive an invitation, likely due to his historically strained relations with India. Nepal’s Foreign Minister Dr. Arzu Rana Deuba tried to arrange Oli’s visit to India when she visited Delhi earlier this year. Yet, when Oli and Prime Minister Narendra Modi met in New York during the UN General Assembly, they failed to mediate. Consequently, Oli accepted an invitation from Beijing to visit China. This action faced renewed criticism from the opposition Maoist Centre party that Oli would alienate New Delhi by trying to forge a closer relationship with China.
The assertion was not entirely accurate. The current government intended to prioritize a visit to India; however, no substantive outcomes could arise from such a visit. On the other hand, progress on the implementation plan for China’s Belt and Road Initiative (BRI), to which Nepal acceded in 2017, was at a standstill. Thus, a visit to China was much needed. Prior to the visit, concerns emerged regarding the financing of BRI projects. There were calls for Nepal to accept only grants, not loans, primarily due to apprehensions about debt sustainability. These concerns were exemplified by the Pokhara airport, which was constructed with a Chinese loan, which the Nepal government wanted China to waive.
The current government addressed the issue with a serious demeanor, showcasing a revitalized commitment to engaging in negotiations with professionalism and promoting political consensus among coalition partners. The government established a task force comprising members from both parties to develop the BRI negotiating document before the visit. Oli visited China from December 2 to 5, 2024, during which Nepal and China signed the Framework for BRI Cooperation. This document is intended to establish negotiating principles for BRI-supported projects, indicating that specific projects and their details will be negotiated on a case-by-case basis going forward. The final document speaks of “aid financing modalities” rather than a solely grant-based approach, as the Nepali side insisted. However, the new arrangement opens the door to a mix of grants and loans, giving BRI projects more financing options. How much Nepal benefits from this development depends on the projects implemented in the coming days and how well the Nepal government negotiates them to maximize benefits and minimize loss.
Nepal in 2025: A New Coalition for Stability and Progress
Nepal’s new NC-UML coalition may bring the country much-needed stability until the next election. This is an opportunity to implement strong domestic, economic, and foreign policies without having to accommodate smaller parties. The recent BRI agreement shows that a unified government position can lead to favorable foreign policy outcomes without politicization, even in a coalition government. Regrettably, the political elite have been excessively preoccupied with the formation or dissolution of governments and the debate over which foreign power is most advantageous to their interests rather than discussing specific economic and foreign policy goals of the government.
Nepal’s new NC-UML coalition may bring the country much-needed stability until the next election.
At the same time, 2025 will show whether Nepal can put its national interest first in economics and geopolitics. While the economy progressed in 2024, the government must analyze the implications of this progress and determine how to advance its economic interests to make a significant profit. The lack of a focused approach may slow progress. Although a liberalized regional market for electricity exports is beneficial, greater emphasis should be placed on utilizing electricity for domestic growth; perhaps electricity generated through Chinese investment could be considered for this purpose. Separately, while BRI projects should progress according to Nepal’s interests and needs, its economic relations and priorities with India should not be neglected. Taking New Delhi into consideration is crucial because India is Nepal’s most important economic partner.
Nepal will also need to assess its longstanding commitment to non-alignment in light of current geopolitical conditions. The country should focus more on strategic interaction, which allows states to conduct pragmatic assessments of their interests on a case-by-case basis. To that end, Nepal must prioritize clarifying its foreign policy objectives through in-depth analysis and constructive dialogue with all powers. A comprehensive national document on foreign policy with broad consensus would be a great initiation. Furthermore, it is crucial for Nepal to adopt a strategic approach to fostering bilateral relations through diplomacy and negotiations to safeguard its interests with all allies. The emphasis must be placed on preventing third-party countries from impacting bilateral relations. Since geopolitical considerations will be taken into account by every major power in their engagement with Nepal, the country must also understand its own priorities and strategic advantages over each power.
source : southasianvoices