As Nepal prepares for the upcoming polls, scheduled for March 5, the people will be voting to institutionalise democracy, transparency and economic stability. People are concerned about political outcomes, but there are also concerns about election costs, which will now collide with a weakening investment climate and growing public borrowing.

Elections are a democratic exercise and, in general, are expensive, not only in Nepal but in most democracies. The Election Commission (EC) has estimated a preliminary budget of around Rs7.5 billion. If we add security costs, allocated at Rs20 billion, the government’s direct burden increases to approximately Rs27 billion. While the EC claimed it is trying to limit purchases to ‘essentials’ and reuse old materials, the sheer logistical scale of establishing polling centres for 18.9 million voters will be costly.

Election cost

Estimates show that official election spending is small relative to the much larger volume of private and informal campaign spending by political parties and candidates. Candidates spend money for securing tickets, cadre mobilisation, promotional events and activities, transportation and victory rallies, etc. The increase in election-related spending functions as a temporary fiscal stimulus (short-term boost to spending in the economy), raising aggregate demand, particularly in sectors such as food, transportation and event services. This will increase consumption and service activity, leading to a short-term rise in gross domestic product (GDP), especially during elections.

However, the temporary fiscal stimulus comes with a heavy price tag. Although the commission has capped election campaigning ranging from Rs2.5 million to Rs3.3 million per candidate, the reality is different. The past election has shown that winning candidates often spend over Rs20 million, fuelled by unaccounted money. This has created a vicious cycle of corruption in which businesses and contractors finance campaigns in exchange for future policy favours, thereby entrenching cronyism and distorting the country’s investment climate. There is a business-political nexus, where election financiers expect returns when leaders are once elected, and elected leaders feel obligated to repay favours.

Strong reserve, weak investment

With the election around the corner, the country has strong foreign exchange reserves of Rs3.2 trillion but suffers from sluggish foreign direct investment (FDI) inflow and rising debt. The stable macroeconomic situation with massive accumulation of reserves—thanks to remittances—may be a sign of good economic health, but it is also a symptom of illness. Although deposit mobilisation is rising, credit expansion remains weak, where excess liquidity is not being transmitted into productive investment. This shows reduced monetary transmission, a key feature of a liquidity trap, where low interest rates fail to stimulate borrowing and aggregate demand.

Moreover, weakening asset quality and rising non-performing loans constrain credit, while Nepal’s continued presence on the Financial Action Task Force (FATF) Grey List adds another layer of pressure. Nepal faces a serious risk of being moved from the FATF ‘grey list’ to the more damaging ‘black list’ for money laundering if it fails to show strong progress within the remaining one-year deadline. The current government is being accused of doing the opposite by deciding, through the Attorney General’s Office, to amend/withdraw charges related to money laundering and organised crime in cases involving around 50 defendants. These risks could harm Nepal’s credibility at upcoming FATF meetings and also undermine Nepal’s ability to sustain economic recovery. However, Nepal’s recognition with ‘BB’ in the Fitch rating, an international credit rating agency, sends a positive signal to international investors.

Globally, FDI flows to developing countries have contracted sharply, falling to their lowest level since 2005. Meanwhile, in Nepal, FDI commitments expanded to Rs39.25 billion in the first half of the current fiscal year, but actual net FDI inflows remained low at only Rs7.47 billion. This gap between investment pledges and realised capital formation is the main challenge to overcome once a country elects a new government. In the private sector, which accounts for a major share of the economy, confidence is low in the post-protest environment and political uncertainty. Election results are unpredictable, and investors view elections as high-risk events due to changes in government, policy U-turns, or unrest. The study published in International Studies Quarterly shows that FDI inflows often pause or decline in the quarters leading up to an election. Investors adopt a wait-and-see approach before investing in the country.

Managing debt and the way forward

Amid this sluggish investment inflow, the public debt burden is also growing. By mid-December 2025, Nepal’s total public debt reached Rs2.81 trillion (about 46 percent of GDP). The depreciation of the Nepali currency against the US dollar has further exacerbated foreign debt liabilities. What’s more concerning is the rising cost of debt servicing. Similarly, principal and interest payments to repay debt are also increasing, limiting the fiscal space for capital spending, which remains low at 3.6 percent of GDP. Moreover, a study has shown that fiscal deficits in low-income countries tend to widen by approximately 1 percent of GDP in election years. This is typically financed by borrowing, not by tax increases, leading to a direct increase in the public debt.

Lastly, the upcoming election in Nepal must be a mandate for economic course correction. The country cannot afford expensive elections in quick succession. The incoming government must find the political will to unlock its reserves for big infrastructure projects and to create a safe and secure environment for the investors. We must prioritise people and productive sectors. Otherwise, we risk missing the opportunity to capitalise on the demographic dividend (economic growth led by a large share of the working-age population).