- A Nepal Rastra Bank study warns that economic policy uncertainty weakens investor and consumer confidence, threatening Nepal’s recovery and long-term growth prospects.
- Frequent policy changes can reduce real GDP by 2% and cause the stock market to decline by up to 10% within months.
- Uncertainty significantly slows private sector credit and industrial production as businesses and consumers postpone major spending and investment decisions.
- The central bank recommends transparent, predictable, and stable policies to foster market trust and encourage sustainable economic activity and investment.
Kathmandu, Nepal: Nepal Rastra Bank has warned that growing uncertainty over economic policies is gradually weakening confidence among investors, businesses, consumers, and financial institutions, creating risks for Nepal’s economic recovery and long-term growth prospects.
A recent study conducted by the central bank has revealed that an economy does not move forward only through government plans, industrial production, banking activities, or investment flows. The foundation that keeps these activities active is confidence—the confidence of entrepreneurs that their investments will remain secure, the confidence of consumers that their income and economic conditions will remain stable, and the confidence of investors that sudden policy changes will not put their capital at risk.
The study titled “Macroeconomic Effects of Economic Policy Uncertainty: Evidence from Nepal”, prepared by the Economic Research Department of Nepal Rastra Bank, concludes that frequent changes in economic policies, unclear regulations, and uncertainty surrounding government decisions have a direct impact on Nepal’s economic performance. According to the study, policy uncertainty affects major economic indicators, including economic growth, private sector investment, bank lending, imports, and the stock market.
Analyzing economic data from 2011 to 2026, the study has attempted to measure the impact of policy uncertainty on Nepal’s economy by developing a Google Trends-based Economic Policy Uncertainty Index. The research represents one of the first detailed efforts to understand how uncertainty in economic decision-making influences overall economic activities in Nepal.
The study highlights that uncertainty does not damage the economy overnight. Instead, its impact spreads gradually through different economic channels. When businesses are unsure about future government policies, taxation systems, import regulations, or regulatory changes, they often postpone investment decisions. Entrepreneurs become reluctant to establish new industries, expand existing businesses, or increase production capacity because they cannot accurately predict future operating conditions.
Similarly, consumers also become cautious during periods of uncertainty. They delay major spending decisions, such as purchasing houses, vehicles, or other expensive goods. As businesses reduce investment and consumers limit spending, demand in the market weakens, production slows, and economic growth begins to lose momentum.
According to Nepal Rastra Bank’s findings, a significant increase in economic policy uncertainty can reduce Nepal’s real Gross Domestic Product (GDP) by nearly two percent. Although the impact is not immediate, the slowdown becomes visible after approximately six months, showing that uncertainty affects economic activities through delayed reactions from businesses, financial institutions, and consumers.
The capital market is identified as the sector that reacts most quickly to policy uncertainty. The study states that Nepal’s stock market often reflects investor concerns immediately after uncertainty emerges regarding political developments, government decisions, or economic policies. Increased uncertainty can lead to a decline of around 5 to 10 percent in the Nepal Stock Exchange (NEPSE) index, according to the report.
The reason behind this reaction is largely linked to investor psychology. Stock markets are driven not only by current corporate performance but also by expectations about the future. When investors feel uncertain about future economic conditions, they tend to reduce risks by selling shares, postponing new investments, or adopting a “wait and watch” approach. This results in lower trading activity, increased market volatility, and reduced confidence among investors.
The impact of policy uncertainty is not limited to financial markets. The study shows that the banking sector and private investment activities are also affected. Increased uncertainty can reduce private-sector credit flow by around five percent, creating challenges for businesses that depend on bank financing for expansion and production.
In Nepal, where many industries rely heavily on bank loans for working capital, machinery purchases, and business expansion, a slowdown in credit growth can have a wider impact on economic activities. When businesses hesitate to borrow because of uncertain future conditions, banks also become more cautious in lending due to concerns about repayment risks. This creates a cycle where reduced lending leads to lower investment, slower production, and fewer employment opportunities.
The central bank study also points out that declining imports during periods of uncertainty should not always be interpreted as a positive development. According to the report, policy uncertainty can reduce Nepal’s imports by nearly 15 percent. While lower imports may appear beneficial because they reduce pressure on foreign exchange reserves, the situation can indicate weakening economic activities.
Nepal’s industries depend significantly on imported raw materials, machinery, fuel, and production equipment. Therefore, a fall in imports may mean that businesses are purchasing fewer production inputs, industries are reducing operations, and economic activities are slowing down. It can also affect government revenue because customs duties and import-related taxes are important sources of public income.
The study identifies several factors responsible for increasing economic policy uncertainty in Nepal. These include annual budget announcements, monetary policy decisions, changes in government, elections, pressure on foreign exchange reserves, import control measures, and major political developments.
The report also notes that major national crises, including the 2015 earthquake and the COVID-19 pandemic, significantly increased uncertainty by disrupting economic activities and affecting public confidence. During such periods, businesses struggled to make investment decisions, while consumers and investors became more cautious about future economic conditions.
To address these challenges, Nepal Rastra Bank has emphasized the importance of maintaining policy stability and credibility. The study recommends that the government and monetary authorities focus on transparent, predictable, and long-term policies rather than frequent and sudden changes.
According to the report, policy decisions alone are not enough; the way those decisions are communicated is equally important. Clear information about the objectives, expected impacts, and implementation process of economic policies can reduce confusion, prevent unnecessary speculation, and improve confidence among market participants.
The central bank has also stressed the need to create a stable environment for the private sector by ensuring investment security, improving access to credit, and maintaining consistent regulatory frameworks. Such measures, according to the study, can encourage businesses to invest, expand production, and contribute more effectively to economic growth.
The study further recommends developing a formal system to measure economic policy uncertainty in Nepal. Until such a mechanism is established, real-time data sources such as Google Trends can help policymakers identify emerging risks and respond before uncertainty creates wider economic damage.
The broader message from the Nepal Rastra Bank study is that economic growth depends not only on financial resources and development projects but also on trust. A lack of confidence can discourage investment, reduce consumption, weaken financial markets, and slow economic progress.
For Nepal, achieving sustainable economic growth will require more than announcing ambitious plans. It will require a policy environment that businesses, investors, and citizens can trust—a system where economic decisions are stable, transparent, and predictable.
The study concludes that policy stability is not merely a governance issue; it is one of the most important foundations for economic prosperity.
