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For the first time since the formation of the new government led by the Rastriya Swatantra Party (RSP), Nepal and China have held bilateral talks at the foreign minister level.

The talks come at a time when Beijing remains skeptical about its security and strategic interests in Nepal, particularly following last year’s GenZ movement. Nepal’s Foreign Minister, Shisir Khanal, held bilateral talks with his Chinese counterpart, Wang Yi, in Beijing, focusing heavily on China’s core concerns alongside a wide range of other issues.

Khanal’s dialogue with the Chinese foreign minister follows his recent visit to India and a series of high-level visits from the United States to Nepal. A primary reason behind Beijing's invitation to Khanal was to secure firm assurances from the new government regarding China's core security and strategic anxieties.

According to The China Daily, Khanal reiterated Nepal's long-standing diplomatic positions during the meetings:

"Issues related to the Taiwan question and Xizang (Tibet) are China's internal affairs," Khanal stated, adding that Nepal firmly adheres to the One-China policy, supports China's complete reunification, and will never allow any force to use Nepali territory to undermine China's interests.

Meanwhile, The Kathmandu Post reported that the Chinese side expressed explicit concerns to Khanal regarding certain US initiatives, including the Millennium Challenge Corporation (MCC) and the State Partnership Program (SPP). 

With the formation of the new RSP-led government, Beijing is closely monitoring the evolving relationship between Nepal and Western countries. Chinese foreign policy observers note that Beijing remains highly sensitive to Western strategic projects and potential security cooperation in the region—agendas that consistently dominate the table whenever Kathmandu and Beijing sit down for bilateral talks.

During the meetings, the Chinese side sought a more conducive and fair business environment for Chinese investors in Nepal. For a long time, Beijing has complained that Chinese companies face persistent regulatory roadblocks and bureaucratic hurdles in the country.

The implementation of past pacts was another dominant theme. In Chinese diplomacy, whenever President Xi Jinping visits a country and signs an agreement, its execution stands as a top priority. Just as in previous engagements, Beijing placed heavy emphasis on executing the wide-ranging agreements signed during President Xi’s historic 2019 visit to Nepal, which originally elevated bilateral ties into a comprehensive strategic partnership.

Regarding the Belt and Road Initiative (BRI), while the two sides discussed the matter, no tangible breakthroughs or specific outcomes were highlighted in their official press releases.

 Last year, the two countries signed a framework agreement on the BRI, identifying 10 priority projects, but detailed discussions on these projects appeared limited during this visit. 

The Rastriya Swatantra Party and its government have largely maintained a quiet stance on their official position regarding the initiative. Previously, Nepal's traditional political parties had communicated to Beijing that the country strongly prefers grants over loans when finalizing investment modalities.

Beyond these strategic hurdles, the two sides engaged in an expansive dialogue aimed at practical, long-term economic cooperation. Currently, Nepal and China are actively cooperating in several core sectors:

·       Infrastructure and connectivity

·       Border management and energy

·       Trade and investment

·       Agriculture and technology transfer

·       Digitalization and tourism

Furthermore, China has proposed expanding this cooperation into new frontiers, including chemical fertilizer supply, petroleum and natural gas exploration, and artificial intelligence—areas in which both sides have now intensively engaged.

While in Beijing, Khanal also met with Liu Haixing, Minister of the International Department of the Central Committee of the Communist Party of China (CPC), to discuss party-to-party cooperation.

According to the Chinese readout, the CPC expressed a strong willingness to consolidate ties with the RSP, deepen strategic communication, enhance political mutual trust, and share governance experiences. The readout noted that China aims to utilize its "Party+" channel to promote cross-field cooperation and contribute political party strength to the broader China-Nepal relationship. In response, Khanal stated that the RSP is eager to learn from China's extensive experience in the party-building and governance processes.

The official visit of Rabi Lamichhane, Chairman of Nepal’s ruling Rastriya Swatantra Party (RSP), to India—undertaken at the invitation of the Bharatiya Janata Party (BJP)—marks a shift in contemporary Nepal-India relations. 

While fundamentally a party-to-party engagement, New Delhi strategically leveraged this opportunity to gauge the strategic outlook of the ruling dispensation in Kathmandu and channel critical diplomatic overtures to Prime Minister Balendra Shah. The diplomatic protocol accorded to Lamichhane by New Delhi reflects respect for the people’s mandate in the March 5 election, from which the RSP emerged as the largest party. India had planned to invite both Lamichhane and Shah, but the latter declined to visit New Delhi so soon. Top Indian leaders congratulated Lamichhane on the RSP’s victory in the elections and conveyed India’s best wishes for the success of the new government.

The engagement between Indian Prime Minister Narendra Modi and Lamichhane transcended a mere courtesy call, transitioning into formal, delegation-level talks—a rare occurrence for such meetings. Historically, meetings between Prime Minister Modi and visiting Nepali leaders who were not sitting prime ministers were limited to brief courtesy calls. Following his meeting with Lamichhane, Modi stated that Nepal remains a priority partner under India’s Neighborhood First policy. He added that India looks forward to collaborating with the new government to elevate the special and multifaceted relationship between the two countries to greater heights.

During his interaction with the Indian political leadership, Lamichhane sought to frame the RSP as a forward-looking, pragmatic entity. He explicitly communicated to Prime Minister Modi that the RSP carries "no political baggage" from the past, expressing a desire to look beyond historical constraints and embrace a new era of development diplomacy. This vision focuses heavily on digital corridors, trade normalization, and seamless physical connectivity.

The presence of India's core foreign policy and security apparatus—including External Affairs Minister S. Jaishankar, Foreign Secretary Vikram Misri, and National Security Advisor Ajit Doval—underscored the high strategic stakes. 

In these discussions, Prime Minister Modi reportedly proposed a structured, prioritized framework to address outstanding bilateral issues incrementally. Furthermore, a separate meeting with Union Home Minister Amit Shah, who rarely receives foreign political dignitaries, indicates that New Delhi used this channel to directly communicate its core national security imperatives regarding regional stability.

 External Affairs Minister S. Jaishankar also met with Lamichhane, noting afterward that their discussions focused on the India-Nepal development partnership and people-to-people ties, which play a crucial role in promoting growth and prosperity.

Since assuming office, Prime Minister Shah has instituted a policy of strict institutional adherence, mandating that foreign envoys operate exclusively through the Ministry of Foreign Affairs rather than seeking direct political audiences. This stance subsequently led to the deferral of Indian Foreign Secretary Vikram Misri's planned visit to Kathmandu, creating a distinct communication asymmetry and strategic vacuum between the two capitals. 

Consequently, in the absence of traditional government-to-government (G2G) engagement, New Delhi opted to utilize Lamichhane’s visit to conduct substantive deliberations on bilateral portfolios that typically require state-level channels. While Lamichhane holds no formal portfolio within the executive branch, his position as the leader of the ruling party provided India with a viable conduit to resume high-level political dialogue.

This diplomatic re-engagement occurs against the backdrop of India's historical role in stabilizing Nepal's volatile political transitions. Following the destabilizing protests of September 8 and 9, New Delhi actively supported the interim mechanisms led by Sushila Karki to ensure electoral democratic continuity. 

The subsequent electoral outcome, which saw the traditional political establishment displaced by an RSP two-thirds majority, was initially welcomed by India as an opportunity for a reset, prompting immediate high-level congratulatory outreach from Prime Minister Modi. However, the bilateral trajectory soon plateaued. The Shah administration’s subsequent policy decisions inadvertently strained cross-border, people-to-people ties, fostering a climate of mutual mistrust. Lamichhane’s visit, augmented by a strategic op-ed in The Hindustan Times, sought to clarify the RSP's vision for bilateral engagement and mitigate these anxieties.

Reportedly, New Delhi has sought explicit clarity from the RSP leadership on key disputed issues such as the boundary dispute, the 1950 Peace and Friendship Treaty, and Nepal's broader alignment with China and Western powers. Historically averse to Kathmandu utilizing a "China card" to balance regional power, New Delhi remains equally cautious of a potential foreign policy tilt toward Western spheres of influence by the current administration. New Delhi has reportedly expressed displeasure over the foreign policy document unveiled by the RSP during electioneering.

The future trajectory of Nepal-India relations now hinges on how Prime Minister Balendra Shah internalizes the outcomes of Lamichhane's visit. Two distinct diplomatic scenarios emerge. In the first scenario, PM Shah could view the visit pragmatically as a useful backchannel diplomatic mechanism, adopting the understandings reached in New Delhi to normalize relations without compromising his domestic posture. 

Conversely, the Shah administration could perceive the elevated, state-like reception accorded to Lamichhane as a calculated maneuver by New Delhi to exploit internal divisions within Nepal's ruling coalition or alter domestic political alignments. This could trigger a defensive reaction, pushing the Prime Minister toward a more rigid, nationalist foreign policy stance. 

 As formal diplomatic tracks resume with Foreign Minister Shisir Khanal’s official visit to India. During the visit, two foreign ministers will review the entire gamut of bilateral relations. 

Sarah B. Rogers, the United States Under Secretary of State for Public Diplomacy, concluded her official visit to Nepal after a series of high-level talks aimed at expanding digital infrastructure, boosting private investment, and strengthening bilateral ties.

During her visit, Under Secretary Rogers met with top government officials, delivered a keynote address at an international tourism summit, and outlined a roadmap for the future of US-Nepal relations ahead of a major diplomatic milestone.

Rogers held separate bilateral meetings with Minister for Foreign Affairs Shishir Khanal and Minister for Information and Communications Dr Bikram Timilsina to discuss enhancing decades-long diplomatic ties.

Her talks with Foreign Minister Khanal focused on expanding cooperation in trade, investment, culture, and tourism.

Meanwhile, her courtesy call on Communications Minister Timilsina focused heavily on technological cooperation.

Rogers expressed a strong interest in expanding partnerships to build digital infrastructure and develop Nepal’s IT and telecommunications sectors.

Emphasizing the necessity of a predictable regulatory framework, Rogers noted that improving the investment climate would successfully attract American private firms to Nepal's tech sector.

A key highlight of her itinerary was a keynote address at the Ascent Summit 2026 in Kathmandu, an event that brought together more than 1,400 climbers, expedition leaders, outdoor brands, and tourism executives.

Rogers underscored how American innovation—ranging from high-quality outdoor gear to specialized communication tools designed for extreme mountain conditions—can make Himalayan expeditions safer while simultaneously boosting Nepal’s tourism economy.

 "The United States continues to cooperate with Nepal to advance innovation and economic growth for both nations, strengthening Nepal’s rise as a premier global destination for adventure tourism," Rogers stated.

Speaking to a select group of journalists before her departure, Rogers reiterated that the US expects Nepal’s new government to establish a favorable regulatory environment, noting that American private companies are highly enthusiastic about investing in the country.

She also emphasized Washington's firm stance on digital rights and infrastructure, stating that the US stands behind the expansion of reliable, high-quality internet connectivity in Nepal alongside robust protections for internet freedom.

Looking ahead, Rogers noted that next year marks the 80th anniversary of US-Nepal diplomatic relations. She announced that a series of special events will be organized to celebrate the historic milestone and elevate bilateral ties to new heights.

Yagya Bahadur Hamal’s ‘Nepal’s Foreign Policy and Foreign Relations’ is a timely contribution to the study of Nepal’s diplomacy, international engagement, and strategic evolution. The book comes at a time when geopolitical tensions are high and Nepal is grappling to maintain a balanced relationship among the major powers. The book provides some guidelines for the political parties, practitioners and policymakers on navigating the complex geopolitical environment.

A former ambassador who spent more than three decades in Nepal’s Ministry of Foreign Affairs, Hamal reflects both scholarly commitment and practical experience in his book. At a time when Nepal’s geopolitical position has become increasingly sensitive amid changing regional and global dynamics, Hamal’s work offers readers an extensive historical and analytical overview of Nepal’s foreign policy from ancient times to the contemporary republican era.

One of the most commendable aspects of the book is the author’s effort to produce an objective and balanced account of Nepal’s external relations. In Nepal, very few retired diplomats devote themselves to rigorous academic writing after leaving public office. Hamal therefore deserves appreciation not only for documenting Nepal’s diplomatic history but also for contributing to the intellectual discourse on foreign policy. His inclination toward research and writing was visible during his public service career, and this volume demonstrates his long-standing engagement with diplomacy and international affairs. Over the past few years, Nepal’s foreign policy debate has swayed those who depend on the foreign fund who have published reports and books. To overcome such tendencies, we need more books written by Nepali diplomats who put Nepali perspective at the center.

The book is divided into six parts and nineteen chapters, covering a broad range of themes including the evolution of Nepal’s foreign policy, bilateral relations, non-alignment, neutrality, national security, economic diplomacy, multilateral engagement, and Nepal’s responses to international issues. The scope is remarkably wide, making the book valuable for students, scholars, diplomats, journalists, and general readers interested in understanding Nepal’s place in the world.

Hamal begins by tracing Nepal’s foreign relations from ancient times to 879 CE. He argues that Nepal’s early foreign policy was naturally limited because of the small number of neighboring political entities and the low degree of international interaction. Nevertheless, these early exchanges laid the foundation for Nepal’s later diplomatic traditions. By discussing the formative period of foreign relations, the author successfully situates Nepal’s diplomacy within a long historical continuum rather than treating it as merely a modern phenomenon.

The discussion becomes particularly engaging when the book moves into the modern era and the unification campaign led by King Prithvi Narayan Shah. Hamal correctly identifies national unification as a watershed moment in Nepal’s foreign policy history. According to the author, it was during this period that Nepal began to formulate a more robust and strategic approach toward external relations. The emphasis on protecting sovereignty, preventing external interference, and maintaining balance between powerful neighbors remains highly relevant even today. Hamal effectively demonstrates how many of Nepal’s contemporary diplomatic principles have historical roots in this period.

The sections dealing with the Rana era provide another important contribution. Hamal argues that Nepal’s foreign policy assumed a largely unidimensional character after the Rana rulers consolidated power and aligned themselves closely with British India. The author critically analyzes the isolationist tendencies of the Rana regime while also acknowledging certain diplomatic achievements such as territorial gains and the international recognition of Nepal’s sovereign status. Particularly interesting is his discussion of how foreign influence contributed to domestic political change. By connecting internal political developments with external relations, the book highlights the inseparable relationship between domestic politics and foreign policy.

The chapters on the democratic era and the Panchayat system are equally insightful. Hamal explains how Nepal gradually expanded its outreach to the wider world after the fall of the Rana regime. During this period, Nepal sought to assert an independent identity in international affairs while balancing relations with India, China, and other global powers. The Panchayat era receives detailed treatment, especially regarding Nepal’s non-aligned stance and the proposal of Nepal as a “Zone of Peace.” The author presents these initiatives as attempts to preserve Nepal’s sovereignty and distinct international identity in a challenging geopolitical environment.

One of the strongest features of the book is its treatment of non-alignment and neutrality. Nepal’s foreign policy has long been guided by the principle of non-alignment, and Hamal provides a detailed explanation of its historical evolution and practical implications. The discussion extends beyond theoretical interpretation and examines Nepal’s actual participation in the Non-Aligned Movement (NAM). The author also explores the contradictions and challenges involved in maintaining neutrality while dealing with regional and global pressures. This section is particularly useful for readers seeking a deeper understanding of Nepal’s diplomatic balancing strategy.

The book also devotes significant attention to economic diplomacy and national security. Hamal discusses issues such as foreign trade, tourism, foreign aid, transit rights, foreign investment, and Nepal’s engagement with the World Trade Organization (WTO). These chapters are important because they demonstrate that foreign policy is not confined to political and strategic issues alone; economic interests increasingly shape Nepal’s international relations. The analysis of transit infrastructure and trade challenges is especially relevant for a landlocked country like Nepal.

Similarly, the author’s discussion of multilateral relations broadens the scope of the book. Nepal’s involvement in the United Nations, SAARC, BIMSTEC, the Group of 77, and South-South cooperation is presented in a systematic manner. Hamal highlights Nepal’s active role in international forums and explains how multilateral diplomacy has provided smaller states like Nepal with opportunities to amplify their voices in global affairs. His examination of SAARC and BIMSTEC is particularly relevant in the context of shifting regional cooperation in South Asia and the Bay of Bengal region.

Another strength of the book is its accessibility. Despite dealing with complex diplomatic and historical issues, the writing remains clear and understandable. Hamal avoids excessive theoretical jargon and instead focuses on practical explanations supported by historical examples. This makes the book approachable for a wider readership beyond academia. Readers unfamiliar with foreign policy studies can still follow the arguments and gain substantial knowledge about Nepal’s diplomatic evolution.

However, the book is not without limitations. At times, the narrative becomes repetitive, particularly when discussing recurring themes such as sovereignty, non-alignment, and external interference. Some arguments presented in earlier chapters reappear later without significant new interpretation. Additionally, there are occasional date inaccuracies and minor factual inconsistencies that could have been corrected through more careful editing. While these errors do not seriously undermine the book’s overall contribution, they somewhat affect its scholarly precision.

Another limitation is that some contemporary issues could have been explored in greater depth. Nepal’s growing engagement with China under the Belt and Road Initiative, evolving Indo-Pacific debates, and the impact of emerging global power competition on Nepal’s diplomacy deserve more detailed treatment. Given the rapidly changing international environment, readers may expect a deeper analysis of how Nepal can navigate future geopolitical challenges.

Despite these shortcomings, Nepal’s Foreign Policy and Foreign Relations remains an important and valuable work. It successfully combines historical narrative, diplomatic analysis, and policy discussion into a single comprehensive volume. Hamal’s long experience in the foreign service lends credibility and depth to his observations, while his academic approach ensures that the book goes beyond mere memoir or personal reflection.

Ultimately, this book serves as a significant reference for anyone interested in Nepal’s foreign policy, diplomatic history, and international relations. It provides readers with a broad understanding of how Nepal has interacted with the outside world across different political periods and changing global contexts. More importantly, it encourages reflection on the future direction of Nepal’s diplomacy in an increasingly interconnected and competitive world. Though there are some repetitions and minor factual errors, the overall contribution of the book is substantial. Yagya Bahadur Hamal deserves recognition for producing a comprehensive and insightful account of Nepal’s foreign relations that will likely remain a useful resource for years to come.

Nepal presented its annual budget on May 29, 2026, under the leadership of Prime Minister Balendra Shah. It has drawn a significant degree of national and international attention, as it comes from a newly formed stable government with a strong parliamentary majority and high public expectations following the Gen Z movement, which demanded reform, transparency, good governance, and expanded economic opportunities. Presenting budget at Parliament, Finance Minister Swarnim Wagle said the country is at a very important economic turning point. He noted that there is immense potential in clean energy production and new technologies, while the youth demographic represents a major source of national capital and strength. The budget has identified agriculture, tourism, industry, information technology, and human capital as drivers of economic
prosperity for the coming decade, and has initiated a new phase of structural reforms.

Through this budget, a foundation has been laid to establish good governance in public administration, restore private sector confidence, make public service delivery more technology-friendly and accountable, and launch a new economic framework based on production, innovation, and entrepreneurship, the budget speech states. Finance Minister Wagle has announced that the tax system has been made simpler, fairer, and more result-oriented.

Public expenditure has been made more economical and results-oriented. As a result of these reform and transformation programs, the budget speech has set a target of achieving 7 percent economic growth, which economists have described as ambitious. While macroeconomic stability has improved—supported by strong foreign exchange reserves, easing inflation, and robust remittance inflows—economic growth remains modest at around 3.85 percent. Private investment is low, and the economy continues to rely heavily on consumption and external income rather than domestic production.

Minister Swarnim Wagle said the budget aims to address these structural weaknesses through reform agendas. Its key priorities include improving the investment climate, expanding digital infrastructure, promoting artificial intelligence and innovation, reforming the energy sector, and strengthening governance and public institutions.

The budget places strong emphasis on making the state more facilitative rather than acting like a control mechanism, promoting accountability, restoring private sector confidence, and modernizing public service delivery through the use of robust technology. It also seeks to build a more production-driven economy by prioritizing energy, agriculture, forestry, industry, tourism, information technology, and human capital development.

Fiscal reforms focus on simplifying and making the tax system more equitable and growth-oriented, while ensuring public expenditure is efficient and results-oriented. Overall, the budget outlines a transition from economic stability management to structural transformation, aiming to create a more competitive, inclusive, and innovation-driven economy. The government has said it will create 1.5 million jobs in five years, meaning 300,000 jobs annually.

Job creation is one of the major expectations of the youth population. The budget has faced criticism that it addresses the concerns of the middle class while failing to provide sufficient incentives for the poor. For the past few months, Wagle had been saying that, to boost the economy, the issues of the middle class should be addressed.

Investment climate

A central pillar of the budget is the effort to reshape Nepal’s investment climate. Major countries such as India, China, and the United States, along with the international community, have urged the government to create a favorable investment environment. Government has proposed wide-ranging legal and institutional reforms designed to reduce bureaucratic barriers and improve investor confidence. It plans to amend or repeal outdated laws, including provisions in company law, to clarify governance standards, conflict-of-interest rules, and disclosure requirements.

Government aims to simplify and accelerate business processes. In parallel, it plans to conclude agreements on foreign investment protection and double taxation avoidance with partner countries, a move aimed at reducing risks for international investors. Many countries interested in investing in Nepal have raised concerns about double taxation.

One of the most ambitious administrative reforms is the proposed “Investment Express” system, which seeks to integrate company registration, tax compliance, visa processing, and financial services into a unified digital platform. The objective is to reduce fragmented approvals and create a more predictable investment environment. The government also plans to eliminate redundant approvals for already sanctioned investment projects and simplify processes related to share transfers, taxation, liquidation, and profit repatriation. Collectively, these reforms signal a strong push toward deregulation and digital governance in investment administration.

Digital economy and AI

Budget introduces a significant shift toward positioning Nepal within the global digital economy, particularly through artificial intelligence. A key proposal is the establishment of the country’s first Sovereign AI Computing Center in Kathmandu, designed to provide high-performance computing resources for startups, researchers, and entrepreneurs. Countries like China and USA have shown interests to collaborate with Nepal in the areas of AI. The strategy is based on converting Nepal’s hydropower surplus into digital value by powering energy-intensive computing infrastructure. Government also plans to offer fellowships to internationally recognized Nepali AI researchers to encourage them to return and contribute to domestic capacity building. In addition, there is a renewed focus on strengthening foundational academic disciplines such as mathematics, which are essential for advanced technological development. This digital agenda aims to diversify Nepal’s economic base beyond traditional sectors and position the country as a potential niche player in AI-enabled services and computing infrastructure.

 
Energy sector

Energy remains one of the most strategically important sectors in the budget speech. Government plans to expand electricity generation capacity and improve regional energy trade. A significant portion of new hydropower and solar projects is expected to be integrated into the national grid, increasing total installed capacity substantially. Beyond domestic supply, the policy direction is increasingly outward-looking, focusing on electricity export potential. The budget proposes allowing private sector participation in international electricity trading, including enabling private entities to build transmission infrastructure and participate in cross-border energy markets through wheeling charge mechanisms—long- standing demands of Nepal’s private sector. The aim is to open Nepal’s hydropower sector to broader commercial participation beyond generation alone. The government also plans to encourage reservoir-based hydropower projects by allowing developers to sell a portion of shares early, provided investment commitments are directed toward such projects. During the upcoming fiscal year, 670 megawatts of hydropower and 370 megawatts of solar energy, totaling 1,040 megawatts, will be added to the national transmission system. As a result, total installed capacity will reach 5,535 megawatts.

Governance and institutional reform

​​​​​​​The budget emphasizes governance reform and institutional modernization. A key priority is addressing corruption and improving administrative transparency through legal and procedural changes. The government plans to introduce conflict-of-interest laws to promote accountability in public decision-making. It also plans to integrate systems related to asset recovery and proceeds of crime into a unified platform to improve enforcement efficiency. In addition, the budget proposes exploring state funding for political parties based on electoral performance, accompanied by mandatory auditing by the Auditor General. This aims to reduce reliance on opaque funding sources and strengthen democratic accountability.

Political parties and transparency

​​​​​​​Budget proposes a framework for providing government funding to nationally recognized political parties based on votes received in the most recent general election. This issue has long been debated but has seen little progress. However, this proposal has also faced criticism, with some describing it as problematic or undesirable.

Foreign policy

​​​​​​​The budget aims to strengthen balanced foreign relations based on mutual benefit, national self-respect, and sovereign interests, while mobilizing Nepal’s soft power to support economic prosperity. It seeks to enhance Nepal’s international presence through economic diplomacy, cultural identity, technology, and tourism. The budget also emphasizes strengthening Nepal’s role in the United Nations and other multilateral forums. It promotes regional connectivity and cooperation and highlights Nepal’s soft power assets, including Lumbini, Mount Everest, the Himalayas, yoga, meditation, cultural diversity, and peacekeeping contributions. The government also plans to strengthen diplomatic missions abroad and expand economic diplomacy to boost exports, trade, investment, and tourism.

Tax incentives

​​​​​​​The budget outlines total expenditure of Rs. 2,124.34 billion, with nearly 60 percent allocated to recurrent spending, about 20 percent to capital investment, and the remainder to financial management. The information technology sector receives significant support, including a 50 percent tax exemption on export earnings and full tax relief on sweat equity. These measures aim to encourage startup growth and digital entrepreneurship. Additional incentives include tax exemptions for cinema halls outside major urban areas and support measures for foreign development banks operating in Nepal under specific conditions. The government identifies agriculture, tourism, industry, information technology, and human capital as key drivers of long-term transformation. However, the effectiveness of these priorities will depend on translating incentives into real investment and production growth.

Tax on health, education and electricity bills

​​​​​​​The government’s decision to impose taxes on health and education has drawn criticism. It has introduced an education equity fee on all fees collected by private boarding schools. Similarly, a 3 percent tax has been imposed on private hospitals. Taxes have also been introduced on consumers using more than 50 units of electricity.

Debate over budget size

The size of the budget exceeds the ceiling suggested by National Planning Commission, which was Rs. 1.89 trillion. The current budget stands at Rs. 2.12 trillion for the fiscal year 2026–27. The budget is 8.15 percent larger than the current fiscal year’s allocation. Former finance ministers and economists have stated that implementation may be difficult due to its size. Of the total allocation, Rs. 1.27 trillion (59.8 percent) has been earmarked for recurrent expenditure, Rs. 431.1 billion (20.3 percent) for capital expenditure, and Rs. 422.64 billion (19.9 percent) for financial management. Former finance ministers have raised questions about the government’s capacity to secure the necessary resources for implementing the budget.

Cautious optimism of the private sector

​​​​​​​The private sector has expressed optimism about the budget but says resource management remains a key challenge. Business leaders welcome  revisions in customs duties, an increase in the income tax threshold for the middle class, the operation of closed industries under a public–private partnership (PPP) model, and innovation-focused youth programs. They note that past coalition governments often failed to implement policies effectively. However, with a strong government holding a near two-thirds majority, they expect better execution and economic recovery. Anjan Kumar Shrestha, President of the Federation of Nepalese Chambers of Commerce and Industry, said the increase in excise duties and  customs adjustments are positive steps. He added that high tax rates have long increased costs and hindered business operations. Previously, there had been a demand to raise the income tax threshold to NPR 1.2 million, but the budget has set it at NPR 1 million. Overall, the budget addresses key  private sector concerns, including tax reforms, legal improvements, and easier foreign currency repatriation. It also emphasizes digital  infrastructure and industrial solutions. In its initial assessment, the budget appears positive and is expected to boost investor confidence. 

How is Nepal’s economy faring?

The Economic Survey accompanying the budget presents a restrained outlook. Growth is projected at 3.85 percent, reflecting weak agricultural output, slow credit expansion, and subdued private investment. Despite high liquidity in the banking system, lending to the private sector remains limited. However, the external sector is strong, supported by record remittance inflows, which have strengthened foreign exchange reserves and stabilized the balance of payments. Inflation remains low, and social indicators continue to improve. Poverty has declined, life expectancy has increased, literacy has risen, and electricity access is nearly universal. However, structural weaknesses persist. The economy remains heavily dependent on imports, with exports forming a small share of total trade. Public debt is rising, and fiscal deficits remain a concern. Job creation remains weak due to insufficient investment. Nepal’s GDP is estimated at Rs. 6,609 billion. The economy is consumption-driven, with over 90 percent of GDP linked to consumption.

The service sector contributes 61.81 percent of GDP, agriculture 24 percent, and non-agriculture 76 percent. Agricultural growth is expected to slow to 1.58 percent, while non-agricultural growth is projected at 4.54 percent. Per capita GDP is estimated at $1,513, and per capita national income at $1,535. Significant regional disparities remain, with Bagmati Province at $2,644 and Madhesh Province at $934. Remittances rose 37.7 percent to Rs. 1,449 billion, helping maintain a current account surplus. Foreign exchange reserves reached Rs. 3,413 billion, sufficient for 18.5 months of imports. The trade deficit widened by 11.2 percent to Rs. 1,098 billion, while exports accounted for only 12.9 percent of total trade.

Inflation averaged 2.13 percent. Bank deposits increased by 6.64 percent, but private sector credit grew only 4.4 percent. Non-performing loans rose to 5.42 percent. Federal expenditure increased by 10.4 percent, while revenue rose only 3.2 percent, resulting in a fiscal deficit of Rs. 58.01 billion. Social indicators show progress: absolute poverty fell to 20.27 percent, multidimensional poverty to 17.4 percent, life expectancy reached 71.3 years, and youth literacy reached 94.2 percent. Electricity access reached 99.1 percent, and installed capacity reached 4,105 MW, with 3,798 MW from hydropower. Nepal exported 2,918 gigawatt-hours of electricity.

Conclusion

​​​​​​​The budget is best understood as a reform-heavy economic roadmap set against slow and uneven growth. It is ambitious in scope, particularly in investment liberalization, digital transformation, artificial intelligence infrastructure, and energy reform. At the same time, it reflects the realities of a consumption-driven, remittance-supported economy with deep structural constraints. While macroeconomic stability provides space for reform, the main challenge lies in execution, institutional efficiency, and attracting sustained private investment. Ultimately, the budget represents a transition in intent rather than a guaranteed transformation in outcomes. It sets out a long-term vision for a more productive, technology-driven,
and investment-friendly Nepal, but its success will depend on how effectively these policies move from paper to practice in the coming years.

After their humiliating defeat in the March 5 elections, many expected the Nepali Congress (NC) and the CPN-UML to engage in serious self-reflection and work toward unifying their respective parties. Instead, internal divisions within both parties have intensified, further weakening their position in national politics.

Within the UML, calls are growing for party chairman KP Sharma Oli to step down. Meanwhile, the Nepali Congress appears to be on the verge of a split, as the rival faction led by Purna Bahadur Khadka has yet to fully accept Gagan Kumar Thapa’s leadership.

The UML is now attempting to revive itself, potentially by handing over leadership to former president Bidya Devi Bhandari. Bhandari enjoys a relatively clean public image, but questions remain about whether she possesses the political strength and charisma needed to lead the party. Her renewed party membership appears to be part of a broader effort to rescue a shrinking and increasingly divided UML.

Earlier, Bhandari’s party membership had been revoked after she challenged Oli’s leadership. At the time, some of Oli’s supporters defended the decision by arguing that it was necessary to preserve the dignity and neutrality of the office of the president. Now, however, her membership has been reinstated without any convincing explanation.

It is possible that Bhandari has agreed to eventually take over the party leadership from Oli. Although Oli initially appeared determined to continue leading the UML even after the electoral defeat, he now faces unprecedented pressure to step aside. His deteriorating health has also limited his political activity. In recent weeks, apart from occasional social media posts, he has largely remained silent in public, signaling growing problems within the party.

Yet any leadership transition will not be straightforward. Oli was elected through the party’s general convention, giving him organizational legitimacy. Under such circumstances, he may continue formally as party leader while gradually creating more space for Bhandari to assume greater responsibility.

Following Oli’s arrest over last September’s killings of GenZ demonstrators, Ram Bahadur Thapa has been acting as the leader of both the party and its parliamentary wing. However, many within the UML are uneasy about Thapa’s confrontational approach toward key state institutions. Thapa, popularly known as Badal, has increasingly used rhetoric reminiscent of the hardline Maoist politics he represented between 2008 and 2013.

Traditionally, the UML maintained relatively strong relations with state institutions, including the Nepal Army and the bureaucracy. But Thapa’s recent accusations against these institutions have damaged those ties. Senior UML leaders have since attempted to contain the political fallout.

For now, Bhandari appears more capable of unifying the party than fully reviving it. Most senior leaders after Oli seem willing to accept her leadership. Moreover, several smaller communist parties struggling for political relevance could potentially rally behind her. As a result, the old slogan of left unity may once again return to Nepali politics in the coming weeks.

The March elections signaled a broader generational shift in Nepali politics. At over 60 years of age, Bhandari may struggle to attract younger voters, many of whom have become deeply disillusioned with communist parties. Yet Nepali politics remains unpredictable. After all, communist parties also appeared weakened before making a dramatic comeback in the 2017 elections.

For this reason, it would be premature to write off the UML and other communist forces altogether, even though the party is currently facing a historic crisis. The UML still retains a strong grassroots organizational network across the country. In the coming years, the party may attempt to rebrand itself by moving away from a rigid communist identity and instead projecting itself as a broader socialist force.

The situation inside the Nepali Congress is equally fragile. The rival faction led by Purna Bahadur Khadka is reportedly preparing to register a new political party. Leaders close to the faction say that if party president Gagan Kumar Thapa fails to address their concerns, a formal split may become inevitable.

Several senior leaders aligned with Khadka are unwilling to accept Thapa’s leadership and increasingly favor a separation. At the same time, many leaders close to Thapa have also adopted a hardline position on party unity. They argue that even if the party formally remains united, the chronic factionalism that has long plagued the NC will continue to weaken it from within. 

Over the past decade, the Nepali economy has faced multiple major shocks, including the devastating 2015 earthquakes, the COVID-19 pandemic, and political unrests such as last September’s Gen Z movement, all of which disrupted growth momentum and exposed structural vulnerabilities.

Despite notable strides in poverty alleviation and the achievement of relative macroeconomic stability, the structural foundations of Nepal’s economy remain precarious. The current landscape is characterized by a high degree of vulnerability, driven by an over-reliance on remittance inflows, a low-productivity subsistence agricultural sector, and a stagnant export base. These systemic imbalances have acted as a persistent bottleneck to achieving broad-based, inclusive, and sustainable development.

At the same time, Nepal is preparing for graduation from Least Developed Country (LDC) status in November. While this transition represents a landmark achievement in the country’s development trajectory, it introduces a complex set of challenges. The impending loss of preferential trade treatments and international support measures necessitates a radical shift toward enhancing domestic competitiveness and building post-graduation resilience.

Below is a detailed analysis of the White Paper issued by the Ministry of Finance earlier this week, highlighting the strategic imperatives for this transition. 

External Sector Pressures and Global Risks

Nepal’s external stability is becoming increasingly entangled with global geopolitical shifts, most notably the escalating tensions within the Middle East. This region serves as the primary pillar of Nepal’s foreign exchange reserves, hosting approximately 1.75 million Nepali workers who contribute nearly 37.4% of total remittance inflows. Recent disruptions, including a two-month suspension of labor migration and the return of thousands of workers, have exposed the fragility of this dependency. Such instability poses a triple threat to the national economy by endangering steady remittance flows, straining foreign exchange reserves, and depressing household consumption. These pressures are already manifesting through inflated import costs, shortages of essential agricultural inputs like fertilizer, and heightened transportation costs that stifle both trade and the tourism sector.

Beyond regional conflicts, Nepal’s inclusion on the Financial Action Task Force (FATF) grey list has emerged as a significant hurdle for international financial governance and national credibility. The perception of weak enforcement in anti-money laundering and countering the financing of terrorism (AML/CFT) frameworks directly threatens foreign investment, cross-border banking relationships, and trade financing. While the government has initiated reforms across 16 strategic areas identified by the FATF, the progress remains uneven due to institutional fragmentation and limited enforcement capacity. Under the new government led by Prime Minister Balendra Shah, there has been a visible intensification of money laundering investigations and high-profile arrests. While these actions signal a firm commitment to international compliance, they have also sparked concerns that an overly aggressive or unpredictable regulatory environment might inadvertently dampen the domestic investment climate.

Structural Transformation of the Economy

Nepal is undergoing a structural shift characterized by premature de-industrialization and a growing dominance of the service sector. Agriculture employs about 62% of the population, its contribution to GDP stands at a disproportionately low 25.2%, growing at around 3% annually. Low mechanization, fragmented landholdings, and weak commercialization continue to limit productivity.

Manufacturing remains underdeveloped, contributing only 5.4% of GDP with sluggish growth of 2.9%. Dependence on imported raw materials, low technological adoption, and weak investment have prevented industrial expansion. The service sector has expanded rapidly, but largely driven by remittance-fueled consumption rather than productivity-led transformation. This has led to an unbalanced and consumption-oriented economic structure.

Over the past decade, the manufacturing sector’s contribution to total GDP has averaged only 5.4%. During this period, while the overall economy expanded at an average rate of 4.2%, the manufacturing sector grew by just 2.9% on average.

A combination of factors, including insufficient investment, heavy dependence on imported raw materials, limited adoption of innovation and advanced technology, and high production costs, has weakened the country’s competitiveness, resulting in a stagnant industrial base.

Although the service sector has expanded, it has not generated sufficient decent employment opportunities. Its growth has been concentrated mainly in trade, real estate, public administration, and traditional financial services. The development of high value-added IT-based services, knowledge-based industries, and other innovative sectors remains limited. To build a competitive economy with skilled employment, Nepal needs to expand modern service industries such as artificial intelligence, robotics, data centers, and digital technologies.

Total investment has declined significantly in recent years. It stood at 39.5% of GDP in fiscal year 2017/18 but fell to 28.1% by fiscal year 2024/25. Weak government capital expenditure and declining private sector investment have further dampened the overall investment climate.

Over the past decade, private sector investment averaged 19.6% of GDP. However, since the COVID-19 pandemic, this share has gradually declined, reaching 14.7% in fiscal year 2024/25. This slowdown in investment is constraining sustainable, inclusive, and high economic growth, as well as job creation. Addressing this will require improvements in the business environment, stronger government capacity to execute capital spending, and measures to boost aggregate demand.

Revenue Mobilization

In recent years, revenue mobilization has shown signs of slowing. In the five fiscal years preceding the most COVID-19-affected year (2019/20), revenue grew at an average annual rate of 14.9%. In the subsequent five years, this growth rate has declined to 8.7%.

Similarly, the ratio of federal revenue to GDP fell from 21.5% in fiscal year 2020/21 to 19.3% in 2024/25. Over the past decade, revenue mobilization has grown at an average annual rate of 12.3%. Revenue collection reached Rs 780 billion so far in the current fiscal year, marking a 4.4% increase compared to the same period last year. 

Revenue collection has consistently fallen short of targets. Over the past decade, actual collections have averaged only 87.6% of budgeted estimates. By mid-February, revenue collection stood at 82.6% of the target for that period and just 50.5% of the annual target.

Improving revenue performance will require stronger efforts to curb tax evasion, broaden the tax base, simplify tax administration, and accelerate digitalization. A significant share of revenue remains tied to imports and consumption. About 45% of tax revenue is derived from goods imports, while the domestic production and service sectors contribute relatively little. This leaves revenue vulnerable to external shocks.

In 2024/25, income tax accounted for 25.2% of total revenue, value-added tax (VAT) 29%, customs duties 19.6%%, and excise duties 14.8%. Non-tax revenue has contributed only around 11%, partly due to outdated rates and inefficiencies in collection.

Key Indicators

Nepal’s growth averaged 4.2% over the past decade, ranging from -2.4% to 9%. For fiscal year 2025/26, growth is projected at around 3.5%, although the Asian Development Bank has estimated a lower 2.7%, citing political uncertainty and external shocks. Inflation is expected to remain moderate at 3.7% in 2025/26 but may rise to 4.5% in 2026/27 due to demand pressures and global price volatility. Growth is expected to recover to around 5% in 2026/2027, supported by hydropower expansion, tourism revival, and improved domestic demand.

Labor migration has grown at an average annual rate of 28.6%, with over 839,000 labor approvals issued in 2024/25 alone. While remittances have stabilized the economy and reduced poverty, they have also created structural risks such as labor shortages, low domestic productivity, and dependency on external labor markets. Youth unemployment stands at 22.7%, while overall unemployment is 12.6%. Many workers remain in low-paid, informal, and insecure employment, highlighting the urgent need for domestic job creation.

Public debt has risen sharply from 22.5% of GDP in 2015 to 43.8% in 2024/2025, reaching Rs 2,674 billion. While still within manageable limits, there are concerns regarding debt productivity and allocation efficiency. Foreign aid dependency has declined to 14.6% of the budget, but the shift from grants to loans has increased repayment pressures. This has raised long-term fiscal risks for the country.

Nepal’s trade deficit averages 29.7% of GDP. Export accounts for less than 15% of total imports, while the country’s foreign trade is heavily dependent on India (59.5%) and China (18%).

While exports have increased significantly in nominal terms, nearly 40% of the country’s exports consists of re-exported edible oils, indicating weak domestic value addition and limited export competitiveness.

Although poverty has declined from 25.16% in 2010/11 to 20.27% in 2022/23, regional disparities are significant. Rural poverty (24.66%) remains higher than urban poverty (18.34%), and in some areas, multidimensional poverty exceeds 70%. Nepal’s Gini coefficient of 0.30 indicates moderate inequality, but regional and structural disparities persist. Human Development Index (HDI) stands at 0.622, ranking 145th globally, reflecting slow progress in health, education, and income.

Private sector credit increased from 55.2% of GDP in 2015/16 to 91.6% in 2024/25, higher than most South Asian economies. However, credit growth has slowed in recent years due to weak demand, political uncertainty, and low investment confidence. While deposits have grown steadily to Rs 7.746 trillion, supported by remittance inflows, credit growth remains weaker. This has resulted in excess liquidity in the banking system. Interest rates have also declined sharply, reducing returns for savers and reflecting weak economic demand.

Nepal received only $1.13 billion in foreign direct investment (FDI) over the past decade—just 0.2% of South Asia’s total. By 2025, total FDI stock stood at Rs 340 billion, with only Rs 10.84 billion inflow in the first eight months of the current fiscal year. This reflects weak investor confidence and highlights the need for improved governance, policy stability, and investment facilitation.

Nepal welcomed 1.158 million tourists with an average stay of 16.34 days in 2025. Hotel infrastructure has expanded significantly, with over 1,600 hotels and 222 star-rated hotels, offering more than 64,000 beds. However, weak air connectivity, inefficient airport operations, and limited transport infrastructure restrict full sector potential. Improving connectivity, digital tourism marketing, and diaspora engagement (NRNs) is essential to position Nepal as a global tourism hub.

Banking sector liquidity remains high due to weak credit demand. Excess liquidity reached Rs 904 billion by March 2025, reflecting imbalance between deposits and lending. Interest rates have declined sharply, with lending rates falling to 7.06% and deposit rates to 3.45%.

Budget size 

Resources have not been mobilized as planned, even as budget allocations have remained overly ambitious. Over the past decade, the average annual federal budget has amounted to 33.7% of GDP, while actual expenditure has averaged 26.8%\. 

The budget-to-GDP peaked at 39.4% in 2019/20, while it declined to 30.5% in fiscal year 2024/25. During this period, the budget’s average annual growth rate was 12.3%, but after the COVID-19 pandemic, this growth slowed to 4.1%.

Execution has also remained weak. Actual government spending amounted to 86% of the allocated budget in 2015/16, but fell to a low of 71.2% in 2020/21. This figure stood at 81.3% in 2024/25. 

Over the past decade, capital expenditure has accounted for only 19% of total federal spending, while utilization has averaged 64.1% of total allocation. Capital spending is low, to begin with, and even then, a large share of allocated funds goes unused. This has undermined Nepal’s long-term development goals. Therefore, it is necessary to efficiently allocate financial resources to high-return projects and address implementation bottlenecks to increase capital expenditure.

Meanwhile, recurrent expenditure continues to dominated government spending. Over the past decade, recurrent expenditure has made up an average 66.8% of total federal spending. Capital expenditure accounted for 19%, while financial management expenditure stood at 14.2%. In 2024/25, recurrent expenditure accounted for 63.2 percent, capital expenditure fell to 14.8%, and financial management spending rose to 22%. 

It is necessary to restructure government institutions, clearly define responsibilities among the three levels of government, and reduce unnecessary institutions and staff positions in the federal structure in order to contain recurrent expenditure. 

Opportunities for Transformation

Despite persistent structural challenges, Nepal has significant long-term growth opportunities driven by hydropower exports and industrialization; tourism expansion through promotion of cultural and ecotourism; digital economy, IT services and AI; and young labor force. 

The government has set an ambitious goal of achieving middle-income status within the next five to seven years, targeting GDP of $100 billion and per capita income above $3,000.

While external risks such as geopolitical instability and financial compliance challenges are immediate concerns, the country’s deeper challenges remain weak industrialization, a widening trade deficit, and heavy dependence on remittances.

That said, Nepal also possesses strong foundations for transformation—hydropower potential, tourism assets, and a young workforce. The key challenge lies in shifting from a remittance-dependent, consumption-driven economy to a productive, investment-led, and innovation-based growth model. The coming years will determine whether Nepal can successfully transition toward a more productive, investment-led, and innovation-driven economy.

Nepal’s political landscape has entered an unusual and potentially transformative phase with the rise of Balendra Shah. Popularly known as Balen, the 36-year-old leader assumed office on March 27, 2026, following a sweeping electoral victory that delivered his party, the Rastriya Swatantra Party (RSP), a near two-thirds majority in the 275-member House of Representatives (HoR), the lower house of federal parliament.

This outcome alone would have been remarkable in any context, but in Nepal—where coalition instability has been the norm since the restoration of democracy in 1990—it represents a profound political rupture. The March 5 parliamentary election was shaped by extraordinary circumstances. The protests of September 8–9, which led to the fall of the government led by KP Sharma Oli and the dissolution of Parliament, created a volatile yetdecisive moment. The deaths of 19 students during those protests became a rallying point for public anger and a symbol of state failure.

The election that followed was not merely a contest for power; it was a referendum on an entire political order. Established parties such as Nepali Congress (NC), Communist Party of Nepal (Unified Marxist–Leninist), and Maoistswere voted out, marking the first time since 1990 that they were collectively excluded from power. Their strength declined significantly, putting pressure on long-time leaders to step down. 

This shift was also generational. Out of the 275-member HoR, more than 100 members are below 40. The average age of lawmakers has dropped to 44 from the earlier 54. The cabinet is also dominated by younger faces: out of 15 ministers, 9 are below 40. The rise of Shah reflects the aspirations of a younger electorate—often described as the Gen Z movement—which demands accountability, efficiency, digital freedom, and a break from entrenched political practices.

More importantly, the election results have created a rare sense of optimism about political stability. For decades, Nepal has struggled with short-lived governments and policy inconsistency. The expectation now is that a strong majority government could complete its full five-year tenure—something no administration has achieved in over three decades.

Against this backdrop, the first month of Balen Shah’s government has been closely scrutinized. Early signs suggest a leadership that is energetic and assertive, but still grappling with the complexities of governance. In some areas, the new prime minister has broken from past traditions.

One key signal is that he is not operating under the influence of anyone, including his own party. Although he is a senior leader of the RSP, he appears intent on running an apolitical government, perhaps influenced by his experience as an independent mayor of Kathmandu. Similarly, he has been avoiding public programs and focusing on administrative work in Singha Durbar. Consultations between PM Shah and Party Chairman Rabi Lamichhane on government issues remain a matter of guesswork. PM Balen has not shown interest to attend party meetings. 

PM Shah is communicating more through actions than rhetoric. However, he is under scrutiny for not speaking in Parliament or engaging with the media. Except on a few issues, opposition parties have not taken a hard position on government decisions, and as Prime Minister he has not reached out to opposition parties, except the interaction with lawmakers form all political parties. 

One of the government’s immediate priorities was to ensure accountability for the killings during the September protests. Acting on a report by former justice Gauri Bahadur Karki, the administration initiated action against key figures from the previous government, including Ramesh Lekhak. The arrests of Oli and Lekhak sent a powerful message that even the most influential leaders could be held accountable. For many citizens—especially the families of the victims—this was a long-overdue step toward justice.

However, the manner in which these arrests were carried out has sparked debate. Critics, including legal experts and opposition parties, have questioned whether due process was followed. A month later, the government attorney has yet to file formal charges, reportedly due to insufficient evidence. This delay underscores a critical challenge: while political will is essential for accountability, it cannot substitute for institutional capacity and legal rigor. If the government is to build a credible rule-of-law framework, it must ensure that its actions are not only decisive but also procedurally sound.

On the governance front, the administration has moved quickly to outline its agenda. The first cabinet meeting introduced a 100-point plan to be implemented within 100 days, with a strong emphasis on anti-corruption and administrative reform. This ambitious roadmap is designed to demonstrate urgency and commitment, and there have already been some tangible steps in this direction.

The formation of a high-level commission to investigate the assets of public officials addresses a long-standing public perception that corruption is deeply embedded within the state apparatus. Similarly, law enforcement agencies have launched investigations into businessmen and intermediaries accused of financial misconduct. Prime Minister Shah has also taken action within his own cabinet, dismissing two ministers over allegations of financial misconduct and conflicts of interest.

The resignation of Home Minister Sudan Gurung amid allegations of undisclosed business ties, and the controversy surrounding Labor Minister Deepak Kumar Sah, further highlight the government’s willingness to confront ethical lapses within its ranks. These moves have strengthened the perception that the administration is serious about integrity. 

There have also been modest improvements in public service delivery. Reports suggest that government offices are functioning more efficiently, with shorter waiting times and fewer bureaucratic obstacles. While these changes may seem incremental, they are significant in a context where inefficiency has long been normalized. The challenge will be to sustain and institutionalize these improvements rather than relying on short-term administrative pressure.

The new government has also taken measures to depoliticize state institutions such as universities and civil service, which has drawn mixed reactions. Some have said that it is a positive move, as state institutions over the past four decades were highly politicized, while others argue that the government’s decision to dismantle student unions and trade unions goes against the constitution.

The economic dimension presents a more complex picture. The private sector initially welcomed the emergence of a stable government, viewing it as an opportunity for policy consistency and economic reform. The administration’s emphasis on governance as the foundation for prosperity has resonated with business leaders, and some measures to improve the business environment have been well received.

At the same time, concerns have begun to emerge. The arrest of prominent businessmen as part of anti-corruption investigations has raised fears about the investment climate which is already worse. Business leaders have warned that such actions, if perceived as arbitrary or excessive, could discourage investment and even lead to capital flight. Finance Minister Swarnim Wagle has sought to reassure the private sector, emphasizing that enforcement actions will be limited and necessary, particularly in the context of efforts to remove Nepal from the Financial Action Task Force (FATF) grey list.

This tension reflects a broader dilemma: how to enforce accountability without undermining economic confidence. A credible reform agenda must strike a balance between strict enforcement and predictability. Investors need assurance that rules will be applied fairly and consistently—not selectively or unpredictably. Nepal’s economy is forecast to grow by 2.7 percent in the fiscal year 2026, down from 4.6 percent in the previous year, according to the Asian Development Bank.

In foreign policy, the government has adopted a cautious and pragmatic approach. It has signaled continuity rather than major changes, with a focus on economic diplomacy and balanced relations with neighboring countries. The idea of transforming Nepal into a “vibrant bridge” between regional powers has generated debate, particularly among analysts who question this conceptual framing.

Engagements with international actors have been relatively low-key. The visit of U.S. Assistant Secretary Paul Kapur and reported interactions with Chinese officials indicate ongoing diplomatic activity, but the government has not yet fully articulated a distinct foreign policy identity. Prime Minister Shah’s decision not to hold individual meetings with foreign ambassadors—at least so far—marks a departure from past practices and may reflect either a deliberate shift or a lack of diplomatic prioritization. 

Foreign Minister Shisir Khanal met his Indian Counterpart S. Jaishankar at the Indian Ocean Conference, and both sides have indicated that preparations are underway for Prime Minister Shah’s visit to India.

The international community has responded overwhelmingly, with major countries and development partners showing strong interests in supporting the priority areas outlined by the new government.  While response vary among partners, India and several Western countries have shown strong interests in working with the new government, particularly given its youth-led leadership and internationally educated team. China’s response has been more measured in comparison, reflecting broader strategic consideration. 

Domestically, the government has also initiated discussions on constitutional reform. A panel led by political advisor Ashim Shah has been tasked with exploring possible amendments. While there is broad agreement among political parties on the need for constitutional change, progress has been slow due to limited engagement from opposition groups.

The reluctance of parties like the NC and CPN-UML to participate actively suggests that political polarization remains a significant obstacle. Despite its strong parliamentary majority, the government cannot unilaterally drive constitutional reform without broader consensus. This highlights an important reality: a strong mandate simplifies governance but does not eliminate the need for negotiation and inclusion.

One of the defining characteristics of the current administration is its generational shift. With most cabinet members under 40, this is the youngest government in Nepal’s recent history. The decision to reduce the number of ministries from 24 to fewer than 17 further reflects an effort to streamline governance and enhance efficiency. While these changes are promising, they also come with risks. Younger leaders may bring fresh perspectives, but they may also lack the experience needed to navigate complex institutional and political dynamics.

After one month, it is clear that Balen Shah’s government is active, ambitious, and reform-oriented. It has taken bold steps to signal a break from the past and to address long-standing issues of corruption and inefficiency. However, it is still too early to conclude that it has become truly efficient. Efficiency in governance is not measured solely by speed or decisiveness; it requires consistency, institutional strength, and adherence to due process. The government’s early actions have generated both optimism and concern—hope for change, but also questions about execution.

The coming months will be crucial. If the administration can translate its initial momentum into sustainable reforms, it could mark the beginning of a new era in Nepali politics. If not, it risks becoming another chapter in the country’s long history of unfulfilled promises. For now, the verdict remains open: Nepal’s strong government is moving toward efficiency, but it has not yet fully arrived.