Policy uncertainty dents Nepal's economy, hitting stock market and imports hardest

Economic policy uncertainty is significantly damaging Nepal's economy, with the stock market and imports bearing the brunt of the instability, according to a new study by the Nepal Rastra Bank. The "Macroeconomic Effects of Economic Policy Uncertainty: Evidence from Nepal" working paper estimates that prolonged uncertainty over fiscal and monetary policies can lead to a 10 percent drop in the Nepal Stock Exchange (Nepse) index, a 15 percent decrease in real imports, a 5 percent reduction in private sector credit, and a 2 percent hit to GDP. Researchers Birendra Bahadur Budha, Roshan Byanjankar, and Swastik Nepal developed the first Economic Policy Uncertainty Index specifically for Nepal. They constructed this index using real-time Google Trends data from January 2011 to April 2026, measuring the frequency of internet searches related to economic policy uncertainty. An increase in these searches indicates growing concern among the public, businesses, and investors about the nation's economic policy direction. The findings emerge as economists and the private sector increasingly criticize frequent policy shifts by successive governments. These abrupt revisions, often made in response to stakeholder feedback, are seen as undermining business confidence. The study notes that the stock market reacts almost instantaneously to policy uncertainty, with investors selling shares due to difficulties in predicting future returns and assessing risks. The report states, "The impact of policy uncertainty is observed most rapidly in the Nepse index." It also identifies periods surrounding the annual budget announcement and the central bank's monetary policy release as particularly sensitive times for uncertainty.

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The impact of policy uncertainty is observed most rapidly in the Nepse index. Immediately after an uncertainty shock, the index falls by around 5 percent, while the maximum decline reaches about 10 percent if uncertainty persists.