The newly installed government led by Prime Minister Sher Bahadur Deuba changed the budget that had been issued by the previous KP Sharma Oli administration through a replacement bill in September.

Though the new government had sought to change the budget as per its priorities, it affected the budget cycle as government agencies delayed the implementation process of the development budget included in the financial plan presented by the previous government.

Now, government spending is at a low at a time when the government needs to accelerate spending to address the liquidity crunch in the banking sector which has forced most banks and financial institutions to halt lending.

As of December 28, the government’s total spending stood at just 25 percent of the budget while capital spending reached just 7 percent of the capital budget, according to the Financial Comptroller General's Office. An increase in government spending will help ease the liquidity crunch in the banking sector.

“The government's poor capital spending shows how political instability affects the government’s performance,” said Chiranjeevi Nepal, former governor of Nepal Rastra Bank. “When a government is changed, its administrative leadership is also changed; and this affects the government's spending plans.”

The year 2021 was a year of political turmoil in the country. Ever since the erstwhile KP Sharma Oli-led government dissolved the House of Representatives for the first time on December 22 last year, the country has been in political turmoil.

Oli’s move to dissolve the House late last year invited resistance from his own party, opposition parties and civil society members. The Supreme Court overturned his decision on February 23, reinstating the lower house.

On March 7, another surprise verdict of the Supreme Court revived the CPN-UML and the CPN (Maoist Centre), invalidating the Nepal Communist Party (NCP), which the two parties had formed in May 2018.

On May 21, Oli again moved to dissolve the lower house. But the Supreme Court on July 12, not only restored the house but also ordered the appointment of Nepali Congress President Sher Bahadur Deuba as new the prime minister.

Even though the Oli-led government had presented a budget through ordinance on May 28, the new government on September 11, changed the budget through a replacement bill.

Experts said that political instability would not make a big difference if policy stability was maintained even when governments change frequently. But along with changes in government, parties run it in line with their ideologies and policies are changed, they said.

“The private sector finds it risky to invest when there is policy instability,” said Posh Raj Pandey, former member of the National Planning Commission.

A study report titled “Nepal Growth Diagnostic”, jointly prepared by the government and Millennium Challenge Corporation (MCC), a bilateral United States foreign aid agency in 2014, pointed out that policy instability was one of the key constraints to Nepal’s economic growth.

Policy instability caused by political instability; electricity shortage; high cost of transportation and poor labour relations and rigid labour laws were four binding constraints identified by the report.

In recent years, the country appeared to have achieved political and policy stability, load-shedding had gone and relations between employers and employees in factories had improved. But the country has yet to improve the situation of high transport costs caused by poor infrastructure and the syndicate system among truckers.

“Now, with the return of political instability, there is a question about policy stability,” said Pashupati Murarka, former president of the Federation of Nepalese Chambers of Commerce and Industry. “Such a situation affects the psychology of private sector investors. They see greater risks for investment in turbulent times.”

According to the report, frequent changes in government leadership has resulted in policy implementation that has been unpredictable for firms in Nepal.

“While much of Nepal’s bureaucratic structure and policy documents have remained the same, changes in leadership of a ministry often leads to significant shifts in the implementation of government policy,” the report states. “This lack of continuity and predictability of policy implementation is consistently cited by firms as a major constraint to making investments in Nepal.”

After the parliamentary elections in 2017, the then ruling Nepal Communist Party (NCP) formed the government with a two-thirds of majority, and it was expected that the days of frequent changes in government were over. The Oli-led government could survive only three and a half years without fulfilling its full five-year term.

Even though labour relations have improved along with the introduction of relatively flexible labour laws and social security laws, fears have grown if political divisions would hinder labour relations as well. “We cannot rule out the return of labour militancy for political advantage,” said former governor Nepal.

But the private sector is still confident that the country will not see labour militancy again like in the late 2000s and early 2010s. “The trade unions have shown greater maturity in recent years. We have not seen any indication of labour militancy lately,” said Murarka.

Along with the intra and internal political divisions which led to dissolution of the House, a number of bills related to business and economy have not been passed.

The Bill on Amendment to Competition Promotion and Market Protection Act, Bill on Amendment to Export and Import Act, Bill on Amendment to Customs Act, Bill on Amendment to Nepal Rastra Bank Act, Bill on Amendment to Bank and Financial Institution Act, Bill on Amendment to Securities Act and Bill on Amendment to Insurance Act are among the business and economy related bills which have remained pending at the lower house for over two years.

Likewise, the Electricity Bill, Civil Aviation Authority of Nepal Bill and Nepal Air Service Authority Bill are other crucial pieces of legislation pending at the National Assembly.

“In fact, the country went through a policy paralysis with Parliament failing to endorse a number of laws demanded by the private sector amid infighting in the erstwhile Nepal Communist Party (NCP) and subsequent House dissolution,” said Pandey. Now, the opposition CPN-UML has been obstructing the House proceedings affecting smooth endorsement of the relevant laws.

After the formation of the new coalition government under Deuba, there is no one voice about important issues within the ruling coalition. With the new coalition government in power, there is division among the parties regarding the endorsement of MCC and the share market.

With a $500 million grant from the US government under the programme, a 300-metre-long transmission line and road improvement works were supposed to be done. The Nepali Congress has been in favour of endorsing MCC which was made clear by Prime Minister Deuba during his speech at the general convention of the CPN (Maoist Centre).

But coalition partners the CPN (Maoist Centre) and the CPN (Unified Socialist) are not in favour of passing MCC in its current form.

“MCC is an example of how political instability affects policy stability,” said Murarka. “The share market has also gone down amid unfavourable remarks by some leaders.” In early December, Maoist Centre Chairperson Pushpa Kamal Dahal had remarked that the capital market was a developed form of imperialism.

Differences over policy among the coalition partners does not help to increase confidence among investors to invest in Nepal. “If the government asks potential investors what they want in Nepal and takes measures to win their hearts and minds, there is still room for attracting foreign investors,” said Radhesh Pant, former chief executive officer of Investment Board Nepal.

Pant, who worked with several governments during the height of political instability in the early 2010s, said that institutions like the board could also communicate with all the parties for policy stability despite political differences to help attract investments.

Experts said that the return of political instability has also slowed the recovery of the economy severely affected by the Covid-19 pandemic as the government’s priority went elsewhere with the country facing a political crisis early in the year and the parties engaging in holding general conventions lately.

But the government has been struggling to spend the development budget. The country is also facing other economic problems such as liquidity crunch in the banking sector, balance of payments deficit, depletion of foreign exchange reserves and reduced inflows of remittance threatening economic stability.

“The political situation is affecting economic recovery now,” said Nepal. “Amid the potential of frequent political instability in the future if no party secures a majority after the new elections, the country heading towards a high growth trajectory is likely to be a daydream only.”