Uncertainty in government’s economic policies has a significant negative impact on the country’s economy, with the stock market and imports among the worst affected.

According to a new study, titled Macroeconomic Effects of Economic Policy Uncertainty: Evidence from Nepal, by the Nepal Rastra Bank, growing uncertainty over fiscal and monetary policies weakens economic activity, discourages investment and affects financial markets. It estimates that prolonged policy uncertainty can reduce the Nepal Stock Exchange (Nepse) index by as much as 10 percent, real imports by 15 percent, private sector credit by 5 percent and gross domestic product (GDP) by around 2 percent.

The working paper was prepared by central bank officials Birendra Bahadur Budha and Rohan Byanjankar, along with researcher Swastik Nepal. It is the first study to develop an Economic Policy Uncertainty Index specifically for Nepal.

The researchers constructed the index using real-time Google trends data covering the period from January 2011 to April 2026. The index measures the frequency of internet searches related to economic policy uncertainty. A rise in searches for uncertainty-related terms is interpreted as growing concern among households, businesses and investors about the country's economic policy direction.

The findings come at a time when economists and the private sector have increasingly questioned frequent policy changes by successive governments and regulators, arguing that abrupt revisions undermine business confidence. In recent years, both fiscal and monetary policies have been amended repeatedly after implementation, often in response to criticism from businesses and other stakeholders.

According to the report, the stock market reacts almost immediately to policy uncertainty. Investors tend to sell shares as uncertainty increases because it becomes more difficult to predict future returns and assess investment risks.

"The impact of policy uncertainty is observed most rapidly in the Nepse index," the report says. "Immediately after an uncertainty shock, the index falls by around 5 percent, while the maximum decline reaches about 10 percent if uncertainty persists."

The study also found that uncertainty is typically highest during the period when the government prepares and announces the annual budget and when the central bank unveils its monetary policy.

Until 2015, Nepal generally presented its annual budget in mid-June. Since then, the budget has been announced on 15 of Nepali month of Jestha (which was May 29 this year), while the Nepal Rastra Bank usually releases its monetary policy towards the end of mid-July. The report identifies these periods as the most sensitive for policy-related uncertainty.

The index also recorded notable spikes during the 2014 South Asian Association for Regional Cooperation (SAARC) Summit in Kathmandu and the 2018 Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) Summit. Another sharp increase was observed in 2022, when Nepal's foreign exchange reserves came under severe pressure, prompting concerns over external sector stability.

Beyond financial markets, the study suggests that policy uncertainty has broader macroeconomic consequences. It says the impact on GDP begins to appear from the second quarter after uncertainty rises and continues through the fourth quarter.

“As policy uncertainty increases, GDP declines. The analysis suggests that higher uncertainty reduces GDP by around 2 percent,” says the report.

Real imports also fall significantly, declining by about 15 percent, while private sector credit contracts by around 5 percent. Unlike the stock market, however, the effect on lending appears with a delay.

The report found little evidence that policy uncertainty has a significant impact on the consumer price index, suggesting inflation is less sensitive to uncertainty than other macroeconomic indicators.

The findings reinforce a message that economists have repeatedly highlighted in recent years: stable and predictable policies are essential for sustaining investment, strengthening private sector confidence and supporting economic growth.

The central bank study recommends that policymakers adopt clearer, more transparent and more predictable fiscal and monetary policies. It particularly stresses the need for consistency in sensitive areas such as the capital market, arguing that avoiding abrupt policy shifts would help improve investor confidence, reduce market volatility and support broader economic stability.