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WHEN THE Chitwan Chamber of Commerce and Industry calls the government’s new policies “encouraging”, the word carries the same warmth as a handshake from a banker who has just declined your loan. The business association was careful, in mid-May, to add a qualification that swallowed the compliment whole: success, it said, depends “entirely on budget allocation and implementation”. The Nepal Poultry Federation, no less diplomatic, requested that the forthcoming budget address the investment-friendly measures that were, conspicuously, missing from the policies announced so far.
“Wait and watch” is the phrase Nepali business groups have settled on to describe their posture towards their reclusive prime minister Balendra Shah’s eight-week-old government. It sounds like patience. It is, in fact, a clinical assessment of risk.
The macroeconomic backdrop makes the caution understandable. Nepal’s real GDP growth is projected to moderate to 2.3% in the current fiscal year, according to the World Bank—down from already modest figures, weighed by the lingering costs of last September’s youth-led protests and rising fuel prices driven by conflict in the Middle East. The protests, which toppled the previous government and brought Shah’s Rastriya Swatantra Party to power in a landslide in March, caused economic losses estimated at some 1.3% of GDP. Physical damage ran to some Rs84bn ($582m). That wound has not closed.
Private sector credit expanded by only 3.6% in the six months following the unrest, against deposit growth of 14.8% over the same period year on year. By mid-May deposits in the banking system had reached Rs7.9trn while outstanding credit sat at Rs5.87trn, a gap wide enough to drive a freight convoy through. The non-performing loan ratio was 5.42% as of mid-January. Nepal’s banks are full of money; they are just unwilling to lend it, and firms are equally unwilling to borrow.
The Federation of Nepalese Chambers of Commerce and Industry (FNCCI) put it more starkly when its representatives visited finance minister Swarnim Wagle on May 19th, a week before the budget deadline. Industrial production capacity, the federation noted, has been crimped to 40%. The private sector’s contribution to GDP has eroded from 86.67% to 81.55%% over the past several years, a haemorrhage that no single budget can reverse. Foreign direct investment has not yet crossed 1% of GDP. “The upcoming budget,” the FNCCI told Wagle, “is not just an annual document but is coming at a special juncture in the economic history of Nepal.” This, from an organisation that tends towards understatement, is something close to an alarm.
The paradox that Shah’s government must confront is that it came to power on a wave of genuine business enthusiasm. The Rastriya Swatantra Party’s near-supermajority was read by investors as the end of the revolving-coalition era that had produced 14 governments in 17 years.
Within weeks of the swearing-in, investment announcements worth more than Rs30bn landed in Kathmandu. Chaudhary Group, the conglomerate owned by billionaire Binod Chaudhary, began constructing a Rs15bn hotel in Thamel, with plans to bring in the Ritz-Carlton brand. Carlsberg, the Danish brewer, signalled an intention to invest some Rs10bn.
Wagle—a development economist who took his doctorate at the Australian National University and his master’s at Harvard before spending years as chief economic adviser to the UNDP’s Asia-Pacific bureau—pledged at the FNCCI’s 60th annual general meeting to repeal roughly two dozen restrictive laws; reform tax administration; and reorient the state towards what he called a “social market economy”. The private sector, he noted, drives between 70% and 75% of the national economy, and a proposal to protect it was already before Cabinet. For a few weeks in April, the investment climate felt, for the first time in years, like it was thawing. Then the government began governing the way it said it would not.
Facing a parliament it had not yet formally convened for a budget session, and with political opponents from the Nepali Congress, CPN-UML and other parties obstructing proceedings over Shah’s absences, the cabinet accelerated its use of executive ordinances. It removed more than 1,500 political appointees through a single decree. It moved ordinances on cooperatives, the Constitutional Council, universities, healthcare and civil service reform to the president for signature while the legislature sat idle.
On April 26th FNCCI, the Confederation of Nepalese Industries and the Nepal Chamber of Commerce issued a joint statement expressing “serious concern” about the government’s actions—a tripartite rebuke that, in Nepal’s carefully calibrated business-political culture, is roughly equivalent to a street protest. When the country’s three apex business bodies speak simultaneously against a government with a near-supermajority, the phrase “cautiously optimistic” acquires a certain ironic lustre.
Governance by ordinance is not new to Nepal; former prime minister K.P. Sharma Oli, arrested in March on charges related to the crackdown on last year’s protests, deployed the same instrument so aggressively that the Supreme Court eventually voided some of his decrees.
But the frequency matters less than the signal it sends to investors who price their decisions on predictability. What a firm in Chitwan considering an expansion needs is confidence that the rules governing its contracts, its taxes and its regulatory environment will be set through a transparent legislative process and held steady long enough to amortise an investment. Ordinances, by their nature, expire or get challenged. They are the opposite of a stable foundation. The FNCCI’s demand that Wagle guarantee no retrospective application of tax law is a confession that the private sector regards the rule book as liable to change without warning.
The budget, due in parliament on May 29th (a constitutional deadline that cannot slide) will be the first real test of whether Shah’s government can convert its political capital into economic architecture. The odds are not pleasing.
Nepal has collected on average only 81.7% of its annual revenue targets over the past five fiscal years, touching a nadir of 69.3% in 2022-23. In the current year, spending has reached some 60% of the total Rs1.69trn budget by the end of the first ten months, suggesting that the fiscal space for transformative new programmes is tighter than the rhetoric implies. Nepal’s graduation from the Least Developed Countries group is scheduled for November, after which trade concessions that have partly cushioned its export competitiveness will begin to erode: adding an external deadline to an already crowded domestic agenda.
As the East Asia Forum observed earlier this year, “stability without confidence is brittle.” Lower interest rates alone cannot unlock investment when firms are uncertain about contract enforcement; property rights; and whether the regulatory ground beneath them will shift with the next cabinet meeting. Nepal has macroeconomic stability and microeconomic paralysis simultaneously: a combination that feels like having excellent weather while the roof leaks.
Chitwan’s business leaders are not nihilists. The Chitwan Industry Association noted, alongside its caution, that the government’s proposed “one-door system” for business approvals and plans for electricity reserve pricing were encouraging signals. The declaration of 2028-29 as a “Visit Year” for tourism gave hoteliers something to plan around. Tourism activity in Sauraha, Chitwan’s elephant-and-river market town, has already ticked up: hotel occupancy averaged 50% this year against 40% last year, boosted partly by the new two-day weekend. These are not nothing.
But they are not a verdict. Every reform that Balen Shah’s government has announced—from the one-door system to the repeal of restrictive laws to the private-sector protection strategy—still awaits the budget and the implementation machinery to give it life. Until May 29th, and for some time after it, the private sector’s assessment will be delivered in credit applications not submitted, factories not expanded and hiring decisions deferred.
The “wait and watch” mood is, at its core, a wager on whether a government that won its mandate by promising to break with the past will find the discipline to build something in its place. That is a bet Nepal’s entrepreneurs have made, and lost, before. ■
