Political and Economic Background
With an average per capita Gross Domestic Product (GDP) of $280, Nepal remains the poorest country in South Asia and ranks as the twelfth poorest country in the world. A ten year conflict between the Maoist rebels and the Government of Nepal began to come to an end following the following the King’s abdication of power in April 2006.
Since then Nepal has moved to an interim democratic system under the Seven Party Alliance (SPA). Following the November 2006 peace accord between the government and the Maoists, an interim constitution was promulgated and the Maoists were allowed to enter parliament in mid-January 2007. Constituent elections are planned for June 2007 which will be crucial to solidify the peace process.
The private sector has suffered from on-going political tensions, and Maoist control over most of Nepal outside of Kathmandu has limited business opportunities outside of the capital. Moreover, the end of the MFA has impacted significantly on the garments sector, with exports of RMG falling by 41% in 2005. Faced with a difficult economic environment, local banks compete for good domestic business opportunities.
More recently the macro-economic picture has remained marginally positive despite the upheavals. Growth has been slow in the last three years (averaging 2-3%), inflation has remained below 10% though rising recently due to supply side issues (oil prices etc.). Continued remittances help build strong reserves (over 11 months of cover) and keep the Nepalese Rupee (NR) well pegged to the Indian Rupee.
