PAKISTAN READER

Mahesh Bhatta Mahesh Raj Bhatta is a Research Fellow and Project Manager at the Centre for South Asian Studies (CSAS) in Kathmandu, Nepal.

The second quarter of 2026 has been important for Nepal; the new government began implementing its political, economic and good governance agenda. This quarter witnessed governance reforms, anti-corruption initiatives, the national budget, and renewed diplomatic engagement, especially with India and China.

1. New government, political stability and governance reforms
The new government led by the RSP has nearly two-thirds in parliament. Unlike past coalitions, the new government has a parliamentary majority, enabling it to pass legislation and make policy decisions. This has led to faster government decisions and a stronger focus on administrative reforms, digital governance, anti-corruption efforts and economic recovery.

During the second quarter, Nepal witnessed important political developments. The newly elected 7th House of Representatives held its first session in early April. During this session, members elected a new Speaker and Deputy Speaker, formed parliamentary committees and the President addressed the joint session of Parliament, presenting the government's policies and priorities for the coming year.

After assuming office on 27 March 2026, Prime Minister Balendra Shah focused on strengthening the new government by forming an efficient cabinet and introducing governance reforms. The government emphasized transparency, accountability, efficient public service delivery and reducing unnecessary public expenditure to improve the overall functioning of the state.

The government introduced several important bills and ordinances in this quarter. One of the major legislative initiatives was the House of Representatives Member Election (First Amendment) Bill, 2083, which aims to reform Nepal's electoral system and improve the process of electing members of the House of Representatives. Along with this, the government passed the Voter List (First Amendment) Bill, 2083 to make the voter registration system more accurate, transparent and reliable. To strengthen the financial sector, the government introduced the Nepal Rastra Bank (Third Amendment) Bill, which seeks to modernize the legal framework of the central bank and improve its efficiency and independence. To make government spending more efficient, the Public Procurement (Second Amendment) Ordinance was introduced to simplify procurement procedures and speed up the implementation of development projects. Similarly, the Cooperative (First Amendment) Ordinance was carried forward to improve the regulation of cooperative institutions, protect depositors and increase transparency and accountability in the cooperative sector.

The government also took significant steps to combat corruption. The traditional political parties – NC, CPN(UML) and the Maoists have been saying that this political vendetta but one of the major causes of last year’s Gen Z movement was pervasive corruption in the country.   

2. Efforts towards economic stability and its challenges
Nepal’s economic growth remains modest after several setbacks - the earthquake of 2015, the COVID-19 pandemic, and the political agitation in 2025. Recovery is expected during fiscal year 2026/27. Inflation has remained relatively contained despite global uncertainty. Remittances continue to be a major source of the economy, supporting consumption and foreign exchange reserves, but the crisis in the Gulf has caused anxiety. Private investment is still relatively weak due to regulatory uncertainty, financing constraints, and business confidence issues. International institutions have stressed that long-term growth depends on simplifying regulations, reducing corruption, improving infrastructure, and strengthening the investment climate.

In this quarter, the government published 'Nepal's Current Economic Situation Report‑2083,' which assesses the country's overall socio‑economic situation and sets out policy priorities to boost growth, investment and employment. The Ministry of Finance said the report aims to present a neutral picture of the economy and to guide the formulation of future policies, plans, and the budget. The report acknowledges that Nepal's economy is currently affected by many challenges but concludes that there are ample, multifaceted opportunities for transformation.

The report also states that if a stable government, good governance, and an investment‑friendly policy environment can be created, private sector confidence will be restored and domestic and foreign investment will increase. The hydropower sector is identified as a major opportunity to generate stable foreign income through cheap and reliable energy production, industrialization and electricity exports.

According to the report, average economic growth of 7 per cent can be achieved from the coming fiscal year 2026/27. It is set to raise per‑capita income to more than USD 3,000 within five to seven years and to expand the size of the economy to close to USD 100 billion. To meet these targets, the report sets out immediate priorities: achieve 15,000 megawatts of electricity generation capacity within five years; complete designated national pride projects within two years; strengthen linkages between agriculture, industry and tourism; build quality tourism infrastructure; and expand the digital economy.

Asian Development Bank (ADB) President Masato Kanda recently visited Nepal on July 6-7 to strengthen the six decade partnership between Nepal and the ADB and to discuss the country's economic priorities with the new government. A major outcome of the visit was ADB's announcement that it would provide an additional USD 2.4 billion in financial support to Nepal by 2029. This assistance will focus on infrastructure development, private sector growth, employment generation, clean energy and economic reforms. The ADB also signed two loan agreements worth USD 165 million: USD 115 million for improving water supply and sanitation services and USD 50 million for modernizing Nepal's cross-border trade and customs systems through digitalization. The visit demonstrated ADB's confidence in Nepal's economic potential and reinforced its role as Nepal's one of the largest multilateral development partners.

3. Foreign Minister's visits to India and China
Nepal's Minister for Foreign Affairs, Shishir Khanal, made official visits to India on June 5-7 and China on June 14-17 respectively. These were the first high-level diplomatic visits by the new foreign minister and reflected Nepal's commitment to maintaining balanced and friendly relations with its two immediate neighbours. The visits were aimed at strengthening bilateral relations, economic cooperation, improving connectivity, and expanding trade and investment.

During his visit to India, Foreign Minister Khanal held talks with Indian External Affairs Minister S. Jaishankar and other senior leaders. The discussions focused on strengthening bilateral relations and expanding cooperation in hydropower, energy trade, cross-border connectivity, digital technology, tourism, and investment. Both countries also agreed to continue dialogue on border issues through peaceful and diplomatic means.

Shortly after his India visit, Minister Khanal traveled to China at the invitation of Chinese Foreign Minister Wang Yi. During the visit, the two sides discussed cooperation in infrastructure development, agriculture, tourism, health, technology, trade and investment. China reaffirmed its support for Nepal's development priorities, including cooperation under the Belt and Road Initiative. Nepal also emphasized that its foreign policy would remain independent and balanced.

These visits reaffirmed Nepal's long-standing foreign policy of maintaining balanced, friendly, and hassle-free relations with both India and China. The new government emphasized an "economy-first" approach to diplomacy, seeking greater foreign investment, infrastructure development, energy cooperation, and employment opportunities. Overall, the visits strengthened Nepal's diplomatic engagement with its two neighbours and reaffirmed the country's commitment to safeguarding its national interests.

To conclude: Nepal during the second quarter
The second quarter has been marked more by planning and institutional reform and major policy changes. The government has focused on strengthening anti-corruption measures, improving governance, creating a better environment for business and investment, maintaining balanced relations with both India and China, and working with international organizations such as the IMF and the World Bank on long-term reforms. The speed with which the government has been trying to work has not been matched by the bureaucracy and also hindrances from the traditional political parties.

The public has generally received these efforts well. However, the real measure of success will be whether the government can turn these plans into visible improvements in investment, job creation, public service delivery, and the fight against corruption in the coming days.

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