Policy uncertainty hits Nepal's economy, stocks and imports suffer most

Uncertainty surrounding Nepal's economic policies is significantly impacting the nation's economy, with the stock market and imports bearing the brunt of the instability. A new study by the Nepal Rastra Bank highlights that fluctuating fiscal and monetary policies weaken economic activity, deter investment, and destabilize financial markets.

The research, titled "Macroeconomic Effects of Economic Policy Uncertainty: Evidence from Nepal," estimates that persistent policy uncertainty can lead to a 10% drop in the Nepal Stock Exchange (Nepse) index, a 15% decrease in real imports, a 5% reduction in private sector credit, and a 2% decline in gross domestic product (GDP).

This study is the first to create a specific Economic Policy Uncertainty Index for Nepal. Researchers constructed the index by analyzing real-time Google Trends data from January 2011 to April 2026. The index reflects the frequency of internet searches for terms related to economic policy uncertainty, indicating growing concerns among the public, businesses, and investors about the country's economic policy direction.

The findings emerge as economists and the private sector increasingly voice concerns over frequent policy shifts by successive governments. These abrupt revisions are seen as undermining business confidence. The report notes that the stock market reacts swiftly to policy uncertainty, with investors often selling shares due to the difficulty in predicting future returns and assessing risks. The Nepse index can fall by approximately 5% immediately after an uncertainty shock, potentially reaching a 10% decline if the uncertainty persists.

The study also identified periods of heightened uncertainty, typically coinciding with the government's budget announcements and the central bank's monetary policy releases. Historically, budget announcements shifted from mid-June to mid-May (Jestha), while monetary policy is usually unveiled in mid-July. The index also showed spikes during major regional summits like the 2014 SAARC Summit and the 2018 BIMSTEC Summit.