Nepal

Riots of 8 September 2025 reflect chronic political instability

On 8 September 2025, massive protests citizens broke out involving mainly Generation Z students and young citizens after nationwide ban on numerous social media platforms. Rioting broke out as an angry response to nepotism, corruption and wealth inequality. Clashes with law enforcement officials were violent, leaving dozens dead and thousands injured. The protests led to the dissolution of the Assembly (its headquarters, like other public buildings, was set on fire) and the resignation of Prime Minister K. P. Sharma Oli (Unified Communist Party), who was temporarily replaced after army intervention by Sushila Karki, a former President of the Supreme Court known for her involvement in the fight against corruption until legislative elections are held on 5 March 2026, the outcome of which is uncertain.

The traditional parties—the Unified Communist Party and the Congress Party (Social Democratic)— – are likely to suffer heavy losses among young voters, whose numbers and turnout will be much higher than in previous elections due to the lowering of the legal voting age from 18 to 16, the digitisation of voter registration procedures and a surge in online political mobilisation. However, the lack of organisation among emerging movements and their high degree of fragmentation (125 registered lists) are likely to prevent the emergence of a dominant party and could lead to unstable coalitions.

Internationally, Nepal has maintained close relations with India since the 1950 Treaty of Peace and Friendship, establishing the free movement of goods and people between the two nations and collaboration on defence and diplomacy. Disagreements over the territories of Limpiyadhura, Lipulekh, and Kalapani, located on Nepal's northwestern border near Tibet and used for trade routes, as well as friction over restrictions on imports from Nepal, are unlikely to spoil bilateral relations. However, the withdrawal of US aid for infrastructure and social programmes has significantly cooled relations with the US and strengthened the influence of China, which already plays the role of major financial partner through grants, loans (on relatively favourable terms), and infrastructure financing via the Belt and Road Initiative,.

Economy weighed down by political uncertainty

Growth will slow significantly in the 2025-2026 fiscal year due to political uncertainty and the risk perceived by foreign investors and tourists following the September 2025 riots. The climate of mistrust will tarnish private investment despite tax incentives for investment in industrial parks, while the widespread destruction caused by the riots (public buildings, police stations, and cars set on fire, looting of hotels and shops) will force insurance companies to liquidate financial assets to cover claims, which will keep their share prices down. The drop in tourist arrivals will weigh on consumption and service exports, while agricultural exports could be affected by extreme weather conditions, such as the September 2024 floods caused by a late but heavy monsoon, due to a lack of investment in resilient infrastructure.

Nevertheless, domestic consumption is expected to grow thanks to inflation remaining below the 5% target and strong growth in remittances from the diaspora on back of concerns about the crisis among the diaspora, the continued emigration of young people, the appreciation of the US dollar against the Nepalese rupee, and the creation of a secure remittance system, all of which will support household income. Growth will be driven mainly by public spending, particularly on rebuilding infrastructure destroyed during the riots and organising the parliamentary elections scheduled for March 2026. Some infrastructure projects, deemed by the government to be non-urgent, will be frozen or postponed. However, major investments will be maintained, particularly in road infrastructure, with the expressway between Kathmandu and Nijgadh (the north-south axis in the east of the country), the NH05 and NH03 highways, which cross the country from east to west in the centre and along the border with India, bridge and tunnel projects, most of which should be completed in 2026, hydroelectricity infrastructure, with the repair of the Tamakoshi dam and the commissioning of Upper Trishuli 1 (in the north of the country) and the large Arun 3 dam (in the east), which are expected to take place in 2026.

These projects, the rollout of which is often delayed by administrative red tape and corruption, are financed by the Nepalese government, with support from the IMF's Extended Credit Facility due to end in January 2026, as well as bilateral partners (India, China and the US via the MCC) and multilateral partners (World Bank, Asian Development Bank). The cutting of USAID programmes threatens hospital and school construction projects and risks increasing poverty and malnutrition, especially in the event of poor harvests.

Inefficient public spending, low risk of excessive debt

The public deficit is expected to widen in the 2025-2026 fiscal year. Despite the introduction of an alcohol and tobacco tax, the extension of VAT to digital services and the increase in customs duties on luxury goods, revenues will recede on back of a narrower corporate tax base and declining tourism Conversely, expenditures are expected to increase due to reconstruction work, the organisation of legislative elections and investment projects. That said, structural problems generally prevent Nepal from spending its entire budget, particularly with regard to investment projects. These include setbacks in project preparation, communication difficulties between the various levels of government, poorly managed decentralisation and corruption. Resolution of these issues and prioritising social spending are the central focus of demands being made by younger people. Their expectations are likely to influence future public policy.

Nepal’s debt-to-GDP ratio is expected to increase slightly by the end of the 2025-2026 fiscal year, but without jeopardising the low risk of over-indebtedness. Some 53% of public debt is domestic, and 85% of foreign currency-denominated debt is held on concessional terms by multilateral creditors (IMF, World Bank, Asian Development Bank). The remainder is held by Indian, Korean and Chinese export credit agencies. The size of expatriate remittances provides solid support. The only vulnerability concerns the repayment of the Chinese loan (0.6% of GDP) initially intended to be covered by revenues from the Kathmandu International Airport, which was financed by the loan and whose profitability is uncertain. Negotiations are under way to convert it into a grant.

The current account surplus is expected to deteriorate during this fiscal year: growth in remittances from the diaspora will fail to offset the deepening trade deficit, which is being penalised by imports related to investment projects and reconstruction, as well as by declining tourism. The financial account surplus is also likely to be eroded by softer FDI, which is already very low. Foreign exchange reserves are nevertheless expected to remain comfortable, representing around 10 months of imports.

Last updated: November 2025