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The United States of America has requested Nepal to become a member of the Open Government Partnership (OGP), a multilateral initiative that aims to secure concrete commitments from governments to promote transparency, fight corruption, and harness new technologies to strengthen governance.

Till now, more than 55 countries have joined the OGP. At a meeting with Minister for Foreign Affairs Narayan Prakash Saud at Washington, DC, USAID Administrator Samantha Power discussed the matter.

It is not clear how Nepal reacted to the US offer. USAID Spokesperson Jessica Jennings said: Administrator Power reinforced the US government’s partnership to further strengthen the relationship with Nepal and recognized Nepal’s democratic progress, including potential membership in the Open Government Partnership.

During the conversation, the duo discussed the impact of USAID’s long-standing investment in Nepal and discussed the new development priorities.  According to the spokesperson, Administrator Power expressed commitment to advancing Nepal’s inclusive economic development and highlighted USAID’s work with the Nepal government and private sector to unlock the country’s investment potential. After the bilateral talks with his American counterpart, Foreign Minister NP Saud is holding talks with heads of USAID, MCC and other development agencies.

Saud also held a meeting with US International Development Finance Corporation's CEO Scott Nathan where he highlighted the measures taken by Nepal to enhance private investment in various sectors of the economy and urged DFC to encourage the American private sector to invest in Nepal.  

CEO Nathan said DFC wants more projects in Nepal, including in infrastructure development, energy, and agro-business, apart from its current involvement with SMEs. He noted that DFC is not only involved in financing, but also helps to create the ecosystem for private-sector development.

Minister Saud also participated in a talk program titled Nepal’s Foreign Policy Outlook hosted by the United States Institute of Peace. Speaking about Nepal’s foreign policy orientation, Minister Saud stressed Nepal’s pursuit of an independent foreign policy which is based on the Charter of the United Nations, non-alignment, and principles of Panchasheel. “Our conduct of external relations is based on a balanced and independent outlook, which is rooted in the historical fact that we were among the few countries that always remained independent, free from any colonial rule,” he said.

Highlighting Nepal’s political transformation of historic proportions, the Minister said, “We ended armed conflict in the country by establishing a home-grown peace process tailored to our requirements. We were able to settle differences by making a democratic constitution. That happened in Nepal. In the country of the Buddha, peace prevailed; democracy prevailed. In this journey, the support from our partners like the USA was important.”

Foreign Minister Narayan Prakash Saud held talks with US Secretary of State Antony J Blinken in Washington, DC on Monday, focusing mainly on matters of bilateral, regional and international concerns, including the Millennium Challenge Corporation (MCC) compact, bilateral cooperation in multilateral forums and the unfolding situation in the Mideast. 

The high-level talks in the American capital, which come in the wake of a series of visits by senior US officials to Nepal, bear special significance, also because opportunities for Nepal’s foreign ministers to engage in bilateral talks with the US are relatively rare.

Before Saud, his predecessor, Pradeep Kumar Gyawali, had held official meetings with the then American Secretary of State Mike Pompeo in 2018. However, Foreign Minister Gyawali’s visit courted criticism as some leaders within his own party accused him of aligning with America’s Indo-Pacific Strategy (IPS). Importantly, there has been no reciprocal visit by a US Secretary of State to Nepal since Colin Powell’s visit in 2002.

Matthew Miller, spokesperson at the Department of State, said Saud and Blinken highlighted the ‘recently launched $500m Millennium Challenge Corporation Compact that will build infrastructure, increase access to electricity and support cross-border power trade.’ The Nepali Embassy in Washington stated in a press release that Secretary of State Blinken expressed the US wish to “see Nepal as a strong and prosperous democracy”.

The two sides also exchanged views on Nepal-US cooperation in multilateral forums, and other matters of regional and global concerns, including the situation in the Mideast, per the statement. The United States and Nepal established diplomatic relations in 1948, and the US has consistently been Nepal’s largest donor country. US policy objectives in Nepal have revolved around the promotion of a peaceful, prosperous, resilient and democratic nation, observers say. 

Over the past decade, American engagement with Nepal has substantially increased, notably seen in increased financial support through USAID and MCC, technical assistance in trade, deepened cooperation in security and defense, humanitarian assistance and disaster response.  This expansion in cooperation is reflected in the growing number of US visits to Nepal, according to the experts. 

A growing rivalry between the US and China, the Russia-Ukraine conflict, the US withdrawal from Afghanistan, climate change and other global concerns have prompted the US to intensify its engagement with Nepal. To counter the growing influence of China in the Indo-Pacific region, the US introduced the IPS, first unveiled by the Trump Administration in 2018 and further developed by the Joe Biden administration in 2022.

A vital role in the Indo-Pacific

Although Nepal is not explicitly mentioned in the IPS, the Trump administration recognized Nepal's potential central role in the Indo-Pacific in 2018. As a result, Nepal is considered a high-priority country in the region for US policymakers. Nevertheless, Nepal has consistently maintained that it does not intend to become a part of the IPS, despite all bilateral cooperation and assistance between Nepal and the US operating within its broader framework.

A key US priority in Nepal is the successful completion of projects under MCC, which entered its entry into force phase in August, accompanied by a five-year deadline. Two months have already passed since the deadline began, but there is much work still to be done. US officials view the MCC compact as a significant milestone in the 75-year partnership between the two countries. Given China’s strong opposition to the compact, the US anticipates potential roadblocks and is making additional efforts to ensure its smooth implementation.

In the meeting with Foreign Minister Saud, Secretary of State Blinken underlined the importance of timely implementations of projects under MCC. After the meeting, Blinken said, “I met with Nepali Foreign Minister Narayan Prakash Saud to highlight US investment in Nepal, including a $500m compact from MCC to support economic growth.”

As China advances its debt-lending mega-project, the Belt and Road Initiative (BRI), in an attempt to attract developing countries, the US aims to showcase the benefits of MCC projects, funded by US grants and substantial financial contributions from the government of Nepal. Simultaneously, the US perceives strong anti-MCC sentiments in Nepal as reflective of growing Chinese influence in the country. For their part, Chinese analysts say they are not opposed to American projects but seek a level-playing field for all players in development cooperation.

Combating corruption is another top US priority in Nepal. The US is closely monitoring developments like investigations into corruption cases, including the Bhutanese refugee scam. US Anti-Corruption Coordinator Richara Nephew visited Nepal in August of this year, engaging with representatives of anti-corruption institutions, law enforcement and civil society.

President Joe Biden has framed current global tensions as a struggle between democracy and autocracy. Since 2021, the Biden administration has been hosting the Summit for Democracy, highlighting the ability of democracies to address the world’s most pressing challenges and deliver for their citizens. Nepal is one of the few South Asian countries invited to participate in the summit.

Under the Democracy Delivers Initiative launched in 2022, the US provides support to mobilize resources for countries undergoing democratic renewal, maximizing the likelihood that their democratic gains endure. The US recently pledged over $145m, with more than $35m in new funding through USAID for the Democracy Delivers cohort, which includes Nepal. Additionally, the US’ International Development Finance Corporation announced $110m to support new private sector-led projects.

In 2022, the government of Nepali and USAID signed a new development cooperation grant amounting to $659m spread over a five-year period. This February, USAID Chief Samantha Power announced that USAID would provide up to $58.5m to advance democratic progress in Nepal. Following transparent and peaceful elections in 2022, Nepal has an opportunity to strengthen federalism, advance the inclusion of women and marginalized communities, empower its young people and demonstrate that democracy can deliver for its citizens.#

In addition to these initiatives, the US has intensified its defense cooperation with the Nepali Army and other security agencies. 

Saud’s visit to the US should be analyzed in the context of a growing engagement between the two countries and rising geopolitical tensions. Nepal’s two close neighbors India and China will be closely watching Saud’s visit to America. There is a convergence between the US and India on the issue of countering Chinese influence in Nepal, while China is more concerned over growing American influence in Nepal.  

An important partner

Antony Blinken, US Secretary of State

We have 76 years of diplomatic relations between Nepal and the United States, and Nepal is today a very valued partner in the Indo-Pacific. We’re working together to ensure that we have a free, open, secure, prosperous region. And in so many ways, Nepal is leading, not just in the region but globally, as a very constructive actor in international organizations—of course, with so many peacekeepers, who are trying to help people move from conflict to peace around the world. And in our own bilateral relationship, we’re working to deepen it and strengthen it even more, particularly with more people-to-people as well as economic ties.

Ahead of COP28, which is taking place in the UAE from Nov 30 to Dec 12, UN Secretary-General Antonio Guterres has pledged to draw the attention of the international community about the unfolding climate crisis in the Himalayas.

Nepal’s political leaders and environmentalists say COP28 is the best platform to highlight the issues of climate change in the Himalayas. Gutterres is likely to flag this issue at COP28, which will immensely help to internationalize the mountain agenda.

After a visit to the Everest region, he urged the international community to stop the madness of climate change. “The rooftops of the world are caving in,” he said, noting that Nepal had lost nearly a third of its ice in just over three decades. Nepal’s glaciers melted 65 faster in the last decade than in the previous one, said Guterres.

The UN chief further said, “Today from the base of Mt Everest, I saw for myself the terrible impacts of the climate crisis on the Himalayas. As temperatures rise, glacier melt increases—threatening the lives and livelihoods of entire communities.”

In the Everest region, the UN head held interactions with local communities and learned about the multifaceted impact of climate change in their daily lives and livelihoods.

Glaciers in the wider Himalayan and Hindu Kush ranges are a crucial water source for around 240 million people in the mountainous regions, as well as for another 1.65bn people in the South Asian and Southeast Asian river valleys below, according to AFP.

The glaciers feed 10 of the world’s most important river systems, including the Ganges, Indus, Yellow, Mekong and Irrawaddy, and directly or indirectly supply billions of people with food, energy, clean air and income, AFP reports.  “I am here today to cry out from the rooftop of the world: stop the madness,” Guterres further said.

“The glaciers are retreating, but we cannot. We must end the fossil fuel age,” he said. Hardest hit are the most vulnerable people and the world’s poorest countries, which have done little to contribute to the fossil fuel emissions that drive up temperatures.

“We must act now to protect people on the frontline, and to limit global temperature rise to 1.5 degrees, to avert the worst of climate chaos,” Guterres said. “The world can’t wait.”

“Melting glaciers means swollen lakes and rivers flooding, sweeping away entire communities,” he added. But all too soon, glaciers will dry up if change is not made, he warned. “In the future, major Himalayan rivers like the Indus, the Ganges and Brahmaputra could have massively reduced flows,” he said. “That spells a catastrophe.”

Though the impact of climate change on mountains is devastating, it does not figure prominently in the global summits like COP. For a long time, Nepal has been raising this issue in the international platforms asking all stakeholders to take this matter seriously.

While addressing the 78th UNGA, Prime Minister Pushpa Kamal Dahal said climate vulnerable mountainous countries like Nepal have been bearing the severe brunt of climate change. 

The Himalayas are the source of freshwater for over two billion people, PM said: Global warming has induced rapid receding of ice in our Himalayas. It has not only eroded the health of our mountains but also endangered the lives and livelihoods of millions of people living downstream. 

Nepal’s economy is grappling with the bitter reality of a recession, even if it hasn’t been officially acknowledged by the government. Despite rosy forecasts from global financial heavyweights like the World Bank, International Monetary Fund and Asian Development Bank, the nation’s economy is reeling under a multitude of challenges.

A relentless surge in inflation is delivering a harsh blow to the commoner. Experts say that Nepal’s economy seems trapped in a downward spiral of high inflation and sluggish growth. Pushpa Kamal Dahal’s government is facing intense pressure from opposition parties and various stakeholders to take immediate action to revive the faltering economy.

A report published by Nepal Rastra Bank reveals that consumer price inflation reached a worrisome 8.19 percent in mid-Sept 2023, up from 7.52 percent in the previous month. According to the World Bank, consumer prices are scaling new heights in the current fiscal year.

The numbers are unsettling. Food and beverage inflation has skyrocketed to 9.74 percent, while non-food and service inflation is at 6.99 percent. Economists are sounding the alarm, warning that inflation is poised to rise in the coming months, further increasing the cost of living.

Economist Dilli Raj Khanal says the rising inflation is a glaring example of failed monetary policy. He warns that inflation is likely to grow after the festivals if the government fails to see the problems through new and innovative ways, adding that fresh crises are on the horizon. 

The price index for spices has surged by an astonishing 45.46 percent, sugar and sugar products by 17.86 percent, and vegetables by 14.51 percent. Cereal grains and their products are up by 13.38 percent, milk products and eggs by 12.60 percent, and restaurant and hotel prices have climbed by 10.97 percent. The brunt of this rising inflation is felt most acutely by the people. 

In its recent report, the World Bank underscores the challenges of taming high inflation and the need for a careful balancing of policies to stimulate growth.

The decline in edible oil prices from Feb 2023 onwards, reflecting global price reductions, had an offsetting effect on prices. But the persistence of high inflation impedes policies to stimulate growth. Nepal’s vulnerability to external shocks implies a difficult trade-off between policies that boost growth and those that contain inflation.

The World Bank report also identifies key drivers of food price hikes, including supply side shocks such as India’s export restrictions on wheat and rice, along with domestic policy changes like the removal of VAT exemptions on basic food items. The report further highlights the importance of price support to producers of rice, milk and wheat.

To compound matters, factors like the lumpy skin disease and unpredictable monsoons are impacting agricultural output, while services and industry are being affected by higher-than-expected import prices and export bans from India.

In this tumultuous economic landscape, Nepal’s private sector has voiced its concern, claiming that international financial institutions are exerting undue pressure on Nepal Rastra Bank and the Ministry of Finance. Despite the various challenges the nation faces, Nepal’s external position has strengthened, thanks to prudent fiscal and monetary policies, thriving remittances, and a boost in tourism.

However, the number of Nepali workers taking approval for foreign employment decreased 28.3 percent to 74,466 in September.   

The Nepali remittance sector, according to the NRB report, saw a remarkable 22.1 percent increase to Rs 228.37bn compared to an increase of 19.8 percent in the same period of the previous year. However, the number of Nepali workers seeking approval for foreign employment has seen a significant 28.3 percent decline to 74,466 in September. The economic landscape is complex, with some positive signs like a 3.8 percent increase in gross foreign exchange reserves to Rs 1,598.9bn in mid-September compared to Rs 1,539.36bn in mid-July 2023.

While Finance Minister Prakash Sharan Mahat acknowledges some gradual improvements in the nation’s economic situation, it's evident that not all internal indicators suggest a smooth ride.

Reflecting the current state of affairs, the government’s total expenditure reached Rs 131.14bn in the first two months of the fiscal year 2023/24. Recurrent expenditure, capital expenditure and financial expenditure stood at Rs 87.66bn, Rs 8.16bn, and Rs 35.31bn, respectively, during the review period. Up till mid-Sept, the government’s total revenue collection, including funds transferred to provincial and local governments, reached Rs 141.08bn, with tax revenue accounting for Rs 127.96bn and non-tax revenue at Rs 13.12bn.

The total expenditure stood at Rs. 4.77bn and resource mobilization of provincial governments stood at Rs 21.16bn, respectively. The total resource mobilization of provincial governments include the grants and revenue transferred from government totaling Rs 15.15bn, and revenue and other receipts of provincial governments totaling Rs 6.01bn.

The provincial governments have also been active on the financial front, with total resource mobilization reaching Rs. 21.16bn. This figure includes grants and revenue transferred from the central government, amounting to Rs 15.15bn, as well as provincial governments’ own revenue and receipts, totaling Rs 6.01bn.

Economy at a glance

• Inflation at 8.19 percent
• Exports decrease by 7.8 percent
• Trade deficit decreases by 4.7 percent
• Remittances increase by 22.1 percent
• Balance of payment remains at a surplus of Rs 53.61bn
• Forex stood at Rs 159.90bn
• Government expenditure amounts to Rs 131.14bn
• Revenue collection Rs 141.08bn

Prime Minister Pushpa Kamal Dahal may not have any imminent threats to his government, but things are not smooth either. There are strong voices inside the Nepali Congress, key coalition ally in the Dahal-led government, that the party should reconsider its alliance with the CPN (Maoist Center). 

Recently, a faction within the NC urged the party president, Sher Bahadur Deuba, to reevaluate the alliance with the Maoists. Leaders warned Deuba that Dahal may not hand over the government reins without the guarantee of another electoral alliance. 

Dahal’s only consolation is that Deuba is still in favor of maintaining the current coalition. 

Voices within the NC are also suggesting that the party should consider joining forces with the main opposition, CPN-UML, instead. Proponents of this alliance argue that the coming together of the two largest parties would diminish the bargaining power of smaller political parties and provide a stronger government capable of amending laws and implementing necessary reforms.

People are growing increasingly frustrated with major political parties due to the government's perceived inability to deliver on its promises. Many believe that the country's overall situation, including its economic prospects, could improve if the two major parties united.

Political analyst Puranjan Acharya, who has close ties with NC leader Shekhar Koirala, says that there are strong internal calls within the party to detach from the current coalition. However, Deuba remains optimistic that Dahal will eventually transfer power to him, and this optimism has hindered substantial discussions with the UML regarding a potential new government.

UML leaders believe that Deuba is being influenced by Prime Minister Dahal and are hesitant to engage in discussions about national politics. As for Deuba and UML Chairman KP Sharma Oli, they rarely sit for bilateral talks.

The relationship between Deuba and Shekhar Koirala is also deteriorating, with Koirala becoming a vocal critic of the Dahal-led government. A few days back, Koirala accused Prime Minister Dahal of fueling communal violence by supporting identity-based politics. He said that Dahal had a couple of months to mend ways to end anarchy.  And on Monday, Koirala warned Prime Minister Dahal and Defense Minister Purna Bahadur Khadka against politicizing the Nepal Army. 

Koirala's faction has even defied Deuba and forged an alliance with the UML in Koshi province, which has remained unstable since the previous election. Koirala has the support of nine provincial assembly members in Koshi, which is too little to form a government. But he worked with the UML to make Kedar Karki the chief minister of the province. 

Karki was appointed the new chief minister of Koshi province with backing from 47 lawmakers—39 from UML and eight from the NC.  To achieve this, Koirala, Minendra Rijal and other Congress leaders had worked very hard. 

Deuba had supported the Maoist candidate. With the backing of leaders like Krishna Prasad Sitaula and Purna Bahadur Khadka, Deuba had even threatened to hand over the chief minister’s post to the Maoist party if his choice of candidate is not allowed to become the chief minister.

The developments in Koshi have reverberated within the federal government, leading to a joint meeting between Dahal, Deuba and Koirala, which resulted in an agreement to accept Karki as the chief minister of the coalition.

A written agreement among three leaders says: “We are firm and clear toward the current power alliance and we will not allow this alliance to weaken under any circumstances.”  The agreement, at least for now, has saved the alliance at the center. 

The UML also  appears positive on welcoming NC in the provincial government, but the party will not entertain other parties including CPN (Maoist Center). It has warned of withdrawing the support to Karki if any other party joins the provincial government.

While it has become clear that Koirala seeks to oust the Dahal-led government, he currently lacks the support within the party to make a decisive move. However, he is gaining ground within the party to challenge Deuba's dominance.

Koirala needs the support of Congress General Secretary Gagan Thapa to challenge Deuba, who controls the Parliamentary Party and Central Working Committee. Despite internal divisions, both Koirala and Thapa are united in their stance against forming an electoral alliance with the Maoist party in upcoming local and national elections.

Although the situation in Koshi province may not have an immediate impact on the central coalition, Acharya says, the growing dissatisfaction within the Congress could potentially lead to the emergence of a new coalition in the coming months.

On Oct 7, Nepal’s Ministry of Foreign Affairs issued a resolute condemnation of the attack orchestrated by Hamas in Israel. 

“The Government of Nepal vehemently denounces the recent act of terrorism in Israel, which tragically resulted in the loss of precious human lives and left many others injured,” the statement read.

The attack claimed the lives of hundreds of people, including ten Nepali students, and left thousands wounded. Notably, subsequent statements from the ministry omitted the term ‘terrorist’, a move that has captured the attention of foreign policy experts and observers. This marks the first instance of Nepali nationals being casualties of a Hamas assault.

However, the ministry officials emphasize that there has been no shift in Nepal’s established policy regarding the Israel-Palestine conflict, which dates back to the 1960s. A senior foreign ministry official clarified, “Nepal’s stated policy remains one of condemning terrorist activities, and it does not support Hamas and its actions.” Experts concur, asserting that Nepal's stance on the Israel-Palestine conflict remains unaltered.

Formed in 1987 during the uprising against Israel’s presence in Gaza and the West Bank, Hamas has long been associated with the Muslim Brotherhood. Numerous countries, including the US, the UK, Canada, the European Union, and others, designate Hamas as a terrorist organization due to its history of activities such as suicide bombings, kidnappings, and civilian killings. China, however, does not recognize Hamas as a terrorist group.

Nepal regularly engages in discussions concerning Israel and Palestine at the United Nations, and frequently faces multiple proposals related to the issue. On humanitarian grounds, Nepal extends support to Palestine on certain matters, although it does not formally recognize Hamas, which has governed the Gaza Strip since 2007. The extreme position taken by Hamas is spoiling all the peace deal attempts. 

Nepal’s voting positions in the UN have, at times, displeased Israel. Notably, in 2021, the UN General Assembly passed a resolution disavowing Jewish ties to the Temple Mount, designating it solely by its Muslim name, al-Haram al-Sharif. While 64 countries, including India, did not support this resolution, Nepal backed it. This was a departure from Nepal’s previous neutral positions on similar votes in 2018, 2019, and 2020. 

Nepal supports the two-state solution, calling for the creation of a Palestinian state in the West Bank and Gaza Strip alongside Israel. However, Hamas rejects this proposal, complicating the matter, while major powers, including the US, China, Russia, and India, stand in favor of a two-state solution. 

During the 78th General Assembly of the United Nations, Prime Minister Pushpa Kamal Dahal expressed Nepal's unwavering commitment to peace for the Palestinian people, urging an end to the prolonged conflict. Nepal reiterated its support for a two-state solution, envisioning Israel and Palestine coexisting peacefully within internationally recognized borders, aligned with relevant UN resolutions.

Nepal and Israel established diplomatic relations in 1960, with Israel opening its embassy in Kathmandu in March 1961, while Nepal established its embassy in Israel in 1993. Notably, Nepal’s recognition of Israel’s existence and continuous diplomatic relations with the nation set it apart in South Asia until recently.

The Foreign Ministry’s official documents affirm Nepal’s ongoing support for Israel’s right to exist within secure and internationally recognized boundaries. Nepal’s historical involvement in recognizing Israel as an independent state, including visits by prominent leaders, underscores the enduring nature of their diplomatic relations.

 The first democratically elected Prime Minister BP Koirala acknowledged Israel as an independent state at a time when the entire world was yet to do so. Koirala paid an official visit to Israel in 1960, and three years later, the then king, Mahendra Shah, had also paid an official visit to Israel.  

In contrast, Nepal does not maintain diplomatic relations with Palestine, although both nations are members of the Non-Aligned Movement.

Box

What Nepal said on Israel-Palestine situation

2023: The Palestinian people deserve peace ending the prolonged conflict. Nepal reiterates its support for a two-state solution with Israel and Palestine, living peacefully side by side, within recognized international borders based on the relevant UN resolutions.

2022: Protracted violence and conflicts continue to inflict pain and suffering on Palestinian and Israeli civilians. Nepal reiterates its long-standing view for a two-state solution, whereby Palestine and Israel live side by side in peace and security within the recognized international borders.

2021: In the Middle East, we reiterate our long-standing position and want to see peace and security with a two-state solution for Israel and Palestine living side by side within secure and recognized international borders. 

2020: We would like to see peace and stability in the Middle East with a two-state solution for Israel and Palestine, living side by side in peace and security with secure and recognized international borders based on relevant United Nations resolutions.

2019: We want to see meaningful steps being taken to resolve the protracted Middle East issue. We support a two-state solution for Israel and Palestine, living side by side in peace and security with secure and recognized international borders based on relevant United Nations resolutions.

2018: With this commitment we must ensure that the voice of the people struggling for their rights, liberty, freedom and justice in various parts of the world, including Syria, Yemen, Palestine, and many other places must be heard and addressed.

In recent months, some malicious actors have been plotting to unravel the very fabric of our society, sowing discord and unsettling the social harmony we hold dear.

This dastardly act first reared its head in Dharan in eastern Nepal, only to be thwarted by the efforts of local administration and security forces. The vigilant watch of political parties and civil society also played a pivotal role in quelling the potential flames of communal tension that threatened to spread to other parts of the country. 

Next, a similar dark event emerged in Malangwa, the district headquarters of Siraha, in Madhes province. A protracted curfew was imposed to suppress the brewing unrest. But the situation remains precarious in both Dharan and Siraha.

Now, a fresh wave of unrest has surged in Nepalgunj, a mid-western city, and there are fears that this discord may spread to other corners of the country. The catalyst for this upheaval was a social media post by a young Hindu man, which ignited protests by the Muslim community. They gathered at the District Administration Office and burned tires in the streets. In response to the protest, a local Hindu group took out a rally on Tuesday, which spiraled into a violent clash between the two groups. At least 22 individuals, including five security personnel, were injured. Nepalgunj is still under a curfew.

In the digital realm, the situation mirrors the turmoil in the streets. Social media has become a breeding ground for hate speech and incendiary rhetoric, posing a grave threat to social harmony. Individuals from one community are posting contents intended to vilify another, with even responsible local leaders guilty of propagating such harmful materials. Unfortunately, Nepal lacks a legal and institutional framework to monitor, regulate, and remove such toxic content.

The Press Council Nepal, the regulatory body for the media sector, has asked social media users to refrain from posting materials that could disrupt peace and harmony in our society.

In Nepal, social media platforms like YouTube, Facebook, Twitter, and TikTok serve as the battlegrounds for this digital discord. The Nepal Army was deployed in Nepalgunj to restore order, but some individuals continue to disseminate fake videos and photos, further stoking the fires of hatred. The government must take swift measures to address this issue without infringing upon the freedom of speech and expression.

For the first time in recent memory, signs of distress are surfacing in multiple locations simultaneously. If political parties, government agencies, and civil society fail to respond judiciously, the embers of communal violence may burst into a raging inferno at any moment. The government, which has pledged to uphold peace and harmony, cannot afford to remain indifferent to these developments. Yet, the government has been conspicuously absent. Prime Minister Pushpa Kamal Dahal was on a foreign trip for more than two weeks as the nation was grappling with communal tensions.

While minor cases of communal violence were once sporadic and localized, recent events suggest a more sinister motive at play. It seems that systematic efforts are underway to stoke religious tensions, potentially leading to the dismantling of the 2015 constitution, with shadowy forces lurking behind the scenes. The gravity of the situation cannot be overstated, and it is disconcerting that both the government and political parties seem to underestimate it.

Parliamentarians on Tuesday raised their voices in protest, compelling the government to finally acknowledge the systematic attempts to foment ethnic, religious, and regional tensions. At present, no prominent political party seeks to amend the constitution in any significant way, making it even more challenging to pinpoint the forces behind this campaign to ignite social and religious turmoil.

A senior security official suspects that some religious groups are behind these incidents, and that they are using some influential community and political leaders to push their agenda.

These unsettling developments are unfolding against the backdrop of a deepening economic crisis and a rising cost of living, which could further jeopardize our fragile economy. As the Dashain festival approaches, extended curfews in major cities threaten to cripple local businesses and, in turn, the local economy.

Frustration with the government and major political parties is reaching a boiling point, and opportunistic elements may exploit this discontent. 

Lawmakers, dissatisfied with the government’s response, have demanded more decisive action. Ishwari Devi Neupane, a Nepali Congress lawmaker, has warned against undermining Nepal’s “unity in diversity” and called for serious government intervention. Dhawal SJB Rana, a lawmaker from the Rastriya Prajatantra Party, has underscored the role of social media in sowing discord and urged the government to combat crimes committed through these platforms.

Chairman of CPN (Unified Socialist), Madhav Kumar Nepal, has also warned against attempts to disrupt social harmony, emphasizing Nepal’s history of peaceful coexistence among diverse religious and ethnic groups.

All security agencies, including the Nepal Army, are on high alert, closely monitoring the potential eruption of tensions in other parts of the country. Identity-based federalism and potential communal strife have emerged as significant security challenges. The Ministry of Home Affairs has also said that it is closely watching those actively fomenting trouble, with some arrests already made.

The Koshi province remains particularly vulnerable, with simmering tensions erupting in the name of the province, according to the observation of security agencies. Social harmony and peace have also been disrupted in the Madhes and Lumbini provinces. Reports suggest that fundamentalist elements are active in other parts of the country, adding to the complexity of the situation.

Home Minister Narayan Kaji Shrestha has been in dialogue with representatives of various religious organizations, seeking to uncover the forces behind these attempts to destabilize society.

While unrest in Nepalgunj and other regions is not entirely unprecedented, the current situation differs in its reach and intensity. Security experts say that a long-term solution is essential to address these issues. 

Tikaram Pokhrel, spokesperson for the National Human Rights Commission, has urged all stakeholders to preserve social harmony and unity.

The World Bank has projected that Nepal's economy is poised to achieve a growth rate of 3.9 percent in the fiscal year 2024. This marks a notable improvement compared to the previous fiscal year, FY 2023, when the country’s economic expansion was limited, registering only a 1.9 percent growth rate.

The World Bank’s optimistic report comes amid a deep economic crisis that the country is facing. Releasing its Nepal Development Update-October 2023 on Tuesday, the World Bank has said that Nepal’s economy is expected to rebound to 3.9 percent in FY 2024 owing to the impact of the lifting of import restrictions, a strong rebound in tourism, and the gradual loosening of monetary policy. The economic growth in FY 2025, will be five percent, according to the World Bank.

In its report, the World Bank says that the impact of lifting the final import restriction measures in January 2023 and the gradual loosening of monetary policy are expected to support growth in the industrial and services sectors. “Sub-sectors that suffered the brunt of the import restrictions and monetary policy tightening in FY 2023, including wholesale and retail trade, construction, and manufacturing, are expected to gradually recover over the forecast period,” reads the report.

While wholesale and retail trade are expected to benefit from the lifting of import restrictions and boost service sector growth, the report says, agricultural sector growth is expected to slow in 2024 due to the impact of the lumpy skin disease on livestock and a decline in rice production.

According to the report, strong energy sector growth helped to avoid an industrial contraction, since manufacturing and construction outputs shrank. Hydroelectric generation increased significantly for the second year in row and added close to 500 megawatts of hydroelectric power to the national grid, the report says, Nepal nevertheless remains a net energy importer.

The top financial body further states that slow credit growth and import restrictions contributed to a reduction in private investment on the demand side. Lower capital expenditure and revenue underperformance drove lower public investment. As a result, total investment decreased by more than 10 percent, a sharper reduction than in 2020. Private consumption remained robust, owing to strong remittance inflows.

Inflation is gradually increasing and a new report says that it is likely to go up.  Average consumer price inflation reached a seven-year peak in 2023. Average inflation amounted to 7.8 percent, above the central bank’s seven percent policy ceiling, driven by both food and non-food prices. Key drivers of food prices, which increased by 6.9 percent, included supply side shocks such as India’s wheat and rice export restrictions, and domestic policy changes including the removal of VAT exemptions on multiple basic food items and price support to producers of rice paddies, milk, and wheat, the report says.

Non-food prices rose by 8.5 percent, driven by higher housing and utility prices, and an increase in the consultation fee of medical doctors in May 2023, the report states, the decline in edible oil prices from February 2023 onwards, reflecting global price reductions, had an offsetting effect on prices. The persistence of high inflation impedes policies to stimulate growth. Particularly, Nepal’s vulnerability to external shocks implies a difficult trade-off between policies that boost growth and those that contain inflation, according to the report.

Agricultural output remained resilient and expanded by 2.7 percent. Rice paddy production supported the sectoral growth and increased by 6.9 percent, reflecting a good summer monsoon and improved seed varieties (Figures 1 and 2). However, a lumpy skin disease has affected livestock as of early April 2023, infecting more than 1m and killing close to 50,000. The resulting lower dairy product and meat production could negatively affect agricultural output growth. Updated statistics will be released by the National Statistics Office in April 2024.

Manufacturing and construction shrank by two percent and 2.6 percent, respectively. The decline was partly due to lower production of key construction materials (cement, basic iron, and steel) and vegetable oils in the first half of FY 2023. Higher frequency indicators suggest that the decline continued in the second half of FY 2023. Lower demand resulting from the elevated prices of manufactured goods and construction materials further weighed on industrial output, which increased by a meager 0.6 percent.

Sluggish wholesale and retail trade slowed the pace of services sector growth. Authorities estimate that the services sector expanded by 2.3 percent in this year, the slowest pace since 2020. Growth of the wholesale and retail trade sub-services sector declined 0.5 percent due to high inflation and lower goods imports.

Looser monetary policy and the lifting of import restrictions imply an increase in goods imports over the medium-term, the report states, policies to contain credit growth and lower one-off imports, including of Covid-19 vaccines, are expected to keep imports below its 2022 historic high. Near-record migration of Nepali workers should be reflected in strong medium-term remittance inflows which, however, are not expected to balance the goods and services trade deficit. Consequently, the current account deficit is expected to widen to 3.7 percent of GDP in 2025, and 4.6 percent of GDP in 2025. 

Revenues are expected to increase in line with higher goods imports, given that taxation focuses heavily on trade. The 2024 budget envisions lower federal spending on capital investment and fiscal transfers to subnational governments, yet higher debt servicing costs. Overall, the recovery of revenues is expected to reduce the fiscal deficit to 3.5 percent in 2024 and 3.3 percent in 2025. Together with the rebound in growth, tighter fiscal policy is expected to keep the overall public debt burden contained at around 41 percent of GDP in 2024 and 2025.

In the external sector, the current account deficit narrowed to a six-year low in 2023, driven by lower imports and higher remittances. The current account deficit fell from 12.6 percent of GDP in 2022 to 1.3 percent of GDP this year.  The reduction occurred through lower imports of goods and services, which fell from 42.6 percent of GDP in 2022 to 34.5 percent of GDP in 2023. Exports on the other hand remained stable, and remittances rebounded strongly. Foreign reserves ended 2023 at a comfortable level of 10 months of concurrent import cover, above the policy floor of 7 months of import cover.

Official remittance inflows surged to a five-year high in this year. Remittance inflows climbed from 20.4 percent of GDP in 2022 to 22.7 percent of GDP.  Nepal’s dependence on the export of workers and remittance inflows increased sharply over the past two decades. Goods and services exports have fallen significantly since the early 2000s as a percentage of GDP.

In FY23, total exports amounted to 6.9 percent of GDP, only one-third of what the average South Asian middle-income country exports. Not surprisingly, the 2019 World Economic Forum Global Competitiveness Index ranked Nepal 108th out of 141 countries.30 Net foreign direct investment (FDI) has also underperformed. Remittance inflows on the other hand increased to 22.7 percent of GDP in FY23, are the main source of foreign currency, and the main driver of private consumption and economic growth.

According to the bank, the near-record migration of Nepali workers should be reflected in strong medium-term remittance inflows which, however, are not expected to balance the goods and services trade deficit. “Consequently, the current account deficit is expected to widen to 3.7 percent of GDP in FY 2024, and 4.6 percent of GDP in FY 2025,” reads the report.

However, there are multiple risks to the outlook including an erratic monsoon, which could dampen agricultural growth; a renewed spike in commodity prices or continued food export bans by India which would raise prices; and higher inflation which could keep policy rates elevated, increase domestic debt servicing costs, and drag on growth. 

“Amid challenges, Nepal is leading the way towards operationalizing its green, resilient, and inclusive development vision to shape the country’s long-term economic recovery,” said Faris Hadad-Zervos, World Bank Country Director for Maldives, Nepal, and Sri Lanka. “Improved external competitiveness is key to driving this recovery and enabling Nepal to compete in export markets, in terms of both prices and quality. This requires an emphasis on reforms to help increase domestic productivity and reduce the inflation differential with Nepal’s trading partners.”

 Major points

• Nepal’s export performance has continuously declined.
• Real appreciation of exchange rate and productivity deficit negatively affected exports.
• The budgetary process needs further strengthening to better support planning.
• Increasing domestic productivity and containing domestic inflation key to improving external competitiveness.
• Credit growth to the private sector slowed owing to policy measures taken to help correct the external imbalances.
• Fiscal space diminished further with the contraction of revenues.
• Economic activity is expected to gradually gain momentum. 
• The current account deficit is expected to increase moderately.
• A rebound in revenues should reduce the fiscal deficit and contain public debt.
• Prudent policies to stimulate growth and contain downside risks are key.

Recommendations

• Changing the current tax model by shifting taxation away from the border and reducing high import tariffs
• Improving the implementation of fiscal federalism which would facilitate effective investments in infrastructure and services
• Simplifying and streamlining processes to attract more FDI which would create significant knowledge and spillover effects.
• In addition, containing domestic inflation would reduce the inflation differential with trading partners. This would help avoid further real appreciation of the exchange rate.