LAXMI SHARMA

KATHMANDU: A day after the Nepali Congress and the CPN (UML) agreed to form a new government under UML Chairman KP Sharma Oli, the stock market surged on Tuesday. The Nepal Stock Exchange (NEPSE) index increased by 47.04 points, causing trading to be halted twice by a circuit breaker.

According to the rules, trading is stopped for 20 minutes if NEPSE increases by 4 percent or more within the first hour of trading (12:00 noon). If the index rises by 5 percent or more before 1 p.m., trading is halted for 40 minutes. If the index increases by 6 percent or more, trading is stopped for the entire day. The first halt occurred when NEPSE rose by 32.44 points in the pre-open session. The market, which opened at 11 a.m. in the regular session, increased by 4 percent in less than 2 minutes, leading to a 20-minute halt. At 11:21 a.m., NEPSE rose again by 5 percent to 2,156.07 points, causing a 40-minute halt. By the end of the day, NEPSE had increased by 2.29 percent, closing at 2,100.43 points. Amid rumors of a government change, NEPSE had increased by 16.29 points on Monday.

Investor Radha Pokharel attributes the market surge to the expectation of political stability and economic reform, along with policy reforms in the capital market, following the formation of the new government. Investors hope for political stability as the two largest parties will form a joint government.

Since the parliamentary elections in November 2022, three governments have been formed under the leadership of Prime Minister Pushpa Kamal Dahal. With Oli's leadership, the country will now have its fourth government within a year and a half.

Investor Navraj Dahal also notes the impact of the Congress-UML coalition on the stock market. "Investors are very anxious because the stock market has not risen for a long time," he said. The private sector in Nepal has also expressed concerns that frequent government changes and the resulting political instability have deteriorated the investment environment, hindering economic development.

A 2014 study by the Millennium Challenge Corporation (MCC), an American international aid organization, highlighted policy implementation uncertainty due to political instability as a major obstacle to Nepal's economic development. Other obstacles identified include lack of electricity, high transportation costs, and strict labor laws. While there have been improvements in electricity and labor laws, political instability and high transportation costs remain significant challenges. Industrialists and businessmen hope that the new government, formed by two major parties, will bring political stability and improve the investment environment.

"We have been saying that political stability is necessary for economic progress," said Rajesh Agarwal, president of the Confederation of Nepalese Industries. However, no government has lasted five years. The KP Oli-led government formed after the 2017 election had almost a two-thirds majority but collapsed due to internal strife between Oli and the current Prime Minister Pushpa Kamal Dahal.

"One finance minister brings the budget for the current fiscal year, another for the next fiscal year," Agarwal said. "One finance minister prepared the investment summit held in April, and another took over during the summit. How can the country attract investment in such a situation?" Agarwal argues that frequent government changes lead to policy instability, preventing any single minister from fully understanding the economy's problems and creating a stable investment environment.

Currently, banks and financial institutions have sufficient investable financial resources, but the demand for loans from the private sector is very low. According to Nepal Rastra Bank, credit expansion of banks was limited to 4.6 percent last year, and even until April of this year, credit has expanded by only 5.2 percent. Private sector businessmen attribute this to the lack of market demand. In the past, remittances created market demand, but now even large-scale remittances do not seem to create sufficient demand, affecting production. The National Statistics Office estimates the economy will grow by 3.87 percent this year, with the manufacturing and construction sectors shrinking and the wholesale and retail trade sectors growing moderately. Economists believe the construction sector has been particularly affected by the government's inability to spend the capital budget.

Despite different coalitions, Dahal has led the government for one and a half years, but stakeholders note that the economy has not gained momentum during this period. Economist Gobinda Nepal suggests that while the Congress-UML government might bring hope for political and policy stability, investors may adopt a wait-and-watch strategy for at least a year due to past experiences of majority government collapses.

Nepal recommends that the new government urgently address economic improvements and investor attraction. "The new government should establish the economic reform suggestion commission mentioned in the budget and proceed with the country's credit rating work immediately," he said.