Nepal is gearing up for its upcoming polls, scheduled for March 5th, a crucial moment for the nation as it seeks to solidify its democratic foundations, foster transparency, and achieve economic stability. While the populace is keenly focused on the political outcomes, significant concerns are emerging regarding the substantial costs associated with the elections. These expenditures are set to coincide with a deteriorating investment climate and a concerning rise in public borrowing, presenting a complex economic challenge for the nation.
The Steep Price of Democracy: Election Expenditure
Elections, a cornerstone of democratic societies worldwide, are inherently costly. In Nepal, the Election Commission (EC) has projected an initial budget of approximately NPR 7.5 billion. When factoring in security provisions, estimated at NPR 20 billion, the government’s direct financial outlay for the electoral process escalates to roughly NPR 27 billion. Despite the EC’s assurances of a focus on essential purchases and the reuse of existing materials, the sheer logistical undertaking of establishing polling stations for the country’s 18.9 million eligible voters inevitably incurs significant expenses.
Beyond the official budget, official election spending represents only a fraction of the total expenditure. A far larger volume of private and informal campaign financing is channeled by political parties and individual candidates. These funds are allocated towards securing party tickets, mobilizing party cadres, orchestrating promotional events, facilitating transportation, and staging victory rallies. The surge in election-related spending, while often touted as a short-term fiscal stimulus, injects temporary capital into the economy. This increased aggregate demand benefits sectors such as food, transportation, and event services, leading to a transient uplift in consumption, service sector activity, and consequently, a short-term rise in the Gross Domestic Product (GDP).
However, this temporary economic boost comes at a considerable cost. Despite official caps on campaign spending, ranging from NPR 2.5 million to NPR 3.3 million per candidate, the reality on the ground paints a different picture. Past election cycles have revealed instances where winning candidates have demonstrably spent upwards of NPR 20 million, often fueled by undeclared and unaccounted funds. This creates a detrimental cycle of corruption, where businesses and contractors provide campaign financing with the implicit expectation of future policy concessions. Such practices entrench cronyism and severely distort the nation’s investment climate, fostering a symbiotic relationship between business interests and political power. Elected officials often feel indebted to their financiers, leading to decisions that favour specific groups over broader public interest.
A Paradox of Reserves and Weak Investment
As the nation stands on the cusp of elections, Nepal boasts robust foreign exchange reserves, totalling approximately NPR 3.2 trillion. Paradoxically, this apparent economic strength is juxtaposed with sluggish foreign direct investment (FDI) inflows and a mounting debt burden. While a substantial accumulation of reserves, largely driven by remittances, might suggest sound economic health, it also signals underlying issues. Despite increasing deposit mobilization, credit expansion remains subdued, indicating that excess liquidity is not being effectively channeled into productive investments. This phenomenon, known as reduced monetary transmission, is a characteristic of a liquidity trap, where low interest rates fail to stimulate borrowing and bolster aggregate demand.
Further exacerbating the investment climate are concerns regarding weakening asset quality and a rise in non-performing loans, which constrain credit availability. Adding another layer of complexity is Nepal’s continued presence on the Financial Action Task Force (FATF) ‘grey list.’ The nation faces a significant risk of being downgraded to the more damaging ‘black list’ if it fails to demonstrate substantial progress in combating money laundering within the remaining one-year deadline. Reports suggest that the current administration may be taking actions that run counter to these efforts, with the Attorney General’s Office reportedly moving to amend or withdraw charges related to money laundering and organized crime in cases involving approximately 50 defendants. Such actions could severely damage Nepal’s credibility in upcoming FATF meetings and undermine its capacity to sustain economic recovery. Nevertheless, Nepal’s ‘BB’ rating from Fitch, a reputable international credit rating agency, offers a positive signal to potential international investors.
Globally, FDI flows to developing nations have experienced a sharp contraction, reaching their lowest point since 2005. Within Nepal, while FDI commitments saw an increase to NPR 39.25 billion in the first half of the current fiscal year, actual net FDI inflows remained considerably lower at just NPR 7.47 billion. This significant disparity between pledged investments and realized capital formation presents a formidable challenge that the incoming government will need to address. The private sector, a vital engine of the economy, exhibits low confidence in the post-protest environment and amidst ongoing political uncertainty. Investors often perceive elections as high-risk events, anticipating potential shifts in government, policy reversals, or social unrest. Studies have indicated that FDI inflows tend to stagnate or decline in the quarters preceding an election, as investors adopt a cautious “wait-and-see” approach.
Navigating the Debt Landscape and Charting the Path Forward
Against this backdrop of subdued investment, Nepal’s public debt is also on an upward trajectory. By mid-December 2025, the nation’s total public debt had reached NPR 2.81 trillion, representing approximately 46 percent of its GDP. The depreciation of the Nepali Rupee against the US Dollar further inflates the burden of foreign debt liabilities. A particularly concerning trend is the escalating cost of debt servicing, with both principal and interest payments increasing. This limits the fiscal space available for crucial capital expenditure, which currently stands at a low 3.6 percent of GDP. Moreover, research suggests that fiscal deficits in low-income countries tend to widen by about 1 percent of GDP during election years, typically financed through borrowing rather than tax increases, thereby directly contributing to the rise in public debt.
The forthcoming election in Nepal must serve as a catalyst for economic course correction. The nation cannot sustain frequent and costly electoral cycles. The incoming government must demonstrate the political will to unlock its substantial reserves for critical infrastructure projects and to cultivate a secure and stable environment conducive to investment. A paramount priority must be placed on the welfare of the people and the development of productive sectors. Failure to do so risks squandering the potential of Nepal’s demographic dividend – the economic growth that can be spurred by a large, working-age population – and missing a vital opportunity for sustainable development.
