Nepal country brief

Political overview

System of government

Prime Minister Baburam Bhattarai of the Maoist party took office on 31 August 2011.

The Head of State of the Federal Democratic Republic of Nepal is President Ram Baran Yadav who assumed office in July 2008.

Recent political developments

Nepal is slowly emerging through political transition following its 10 year civil conflict which resulted in thousands of people being killed and disappeared. The conflict raised awareness that the Nepali state had been associated with exclusionary political, social and economic institutions that did not reflect the country's diversity. This led to the rise of identity politics with an increasing demand for regional autonomy and greater accommodation of diverse social, cultural, and ethnic identities.

One of the major milestones of the peace process was the dissolution of the former Maoist army, with the majority of cadres receiving "retirement" payments and a small number awaiting integration into the Nepal Army. A Constituent Assembly elected in 2008 to write a new, federal constitution was dissolved in May 2012 after failing to fulfil its mandate. The issue of federal restructuring proved the most difficult one on which to forge agreement. The Prime Minister has called for fresh elections and announced he will remain in office until then. The period ahead presents challenges in managing ethnic aspirations and maintaining political stability.

Poor law and order is a growing concern in some parts of the country. Strikes or bandhs are frequently called by political parties which close down the country for extended periods. Strikes are often violently enforced and cause disruption to law and order and the economy, and hardship to ordinary people, as well as tourists.

Economic overview

Nepal's economic growth has been adversely affected by the political uncertainty. The focus on political transition and attainment of peace has meant that inadequate attention has been given to economic and other reforms that could improve the investment climate, stimulate growth and create more private sector jobs. Economic growth and increased private investment is dependent upon a political settlement that promotes greater law and order. The failure of the Constituent Assembly and the resulting constitutional crisis is a blow to the economy and to investor confidence.

Real GDP growth was 4.6% in FY2009-2010, following 4.4% the previous year. Sources of growth include agriculture, construction, financial and other services, and consumption fuelled by remittances. Remittances, including informal flows from India, are estimated to be 25-30% of GDP. Remittance growth slowed to 11% from above 40% during the two previous years. The trade deficit rose to 27% of GDP with surging imports and sluggish exports, and the overall BOP balance turned to deficit in FY2009-2010 as official remittances could not offset the high trade deficit. Capital flight added to the BOP deficit.

Despite political uncertainties, Nepal maintained a policy of prudent fiscal management during FY2009-2010 and FY2010-2011. The rapid expansion of expenditure (20% of GDP in FY2009-2010) has been supported by a strong revenue performance (15% of GDP), the availability of foreign aid (2.5%) and domestic borrowing (2.5%). But expenditure quality remains an issue because of implementation capacity and emerging public financial management problems. The four-month delay in passage of the FY2010-2011 budget adversely affected the implementation speed of government projects.

Food prices in Nepal have risen rapidly, affecting the poor, especially in food insecure areas. An estimated 3.5 million people are currently food insecure.

Nepal remains at moderate risk of debt distress. Nepal has successfully lowered its debt level from 43 to 35.4% of GDP from 2007 to 2011, and many indicators are well below the sustainability thresholds. Since July 2010, the Nepal Rastra Bank has adopted strong measures to reduce risks to the financial system.

GDP growth in FY2010-2011 is estimated to be 3.5%.

Inflation was around 9.5% in FY2010-11.

Bilateral relationship

Australia and Nepal celebrated 50 years of diplomatic relations in 2010. Australia's relationship with Nepal predates the establishment in 1960 of diplomatic links. Over the years, the Australian Government and private sector have contributed to the economic and social development of Nepal through activities and assistance in the fields of health, education, hydroelectricity, forestry regeneration and sustainable management, civil aviation, and livestock and grain management.

The on-going collaboration between the Tilganga Institute of Ophthalmology in Kathmandu and the Fred Hollows Foundation, which has been at the forefront of developing safe and cheap procedures for cataract surgery in the region, is an enduring partnership. The Fred Hollows Foundation will celebrate its 20th anniversary in 2012 which will be marked in Kathmandu with a photography exhibition and other events.

Our key interests in Nepal currently are fourfold: tourism, development assistance, commerce, and education. Approximately 18 000 Australian tourists visited Nepal in 2011. The number of private Nepalese students studying in Australia has been increasing. AusAID has a scholarship program for Nepal and has promoted an alumni association. There are also active Nepal-Australia Friendship societies in both countries.

Bilateral economic and trade relationship

Two-way merchandise trade in 2010-11 totalled $16 million with exports to Nepal valued at $12 million. Principal exports to Nepal are refined petroleum and vegetables. Enrolment fees in Australian universities and colleges are an important source of revenue for Australia. Main imports are floor coverings and clothing.

There is some potential for the development of commercial links through the involvement of Australian companies in development project work, funded through international financial institutions like the World Bank and the Asian Development Bank. Other areas where there are increasing private commercial opportunities following deregulation include civil aviation, telecommunications and power generation.

Development assistance

Australia's development cooperation program with Nepal began in the 1960s. Australia provided an estimated $26.6 million in total official development assistance to Nepal in FY2011-2012 focusing on health, education and strengthening governance and peace-building. The budget figure for FY2012-2013 is $34.8 million.

Updated June 2012