Country Risk for Business in Nepal: Political, Regulatory, Currency and Operational

Four separate risks

Nepal is routinely written up as one undifferentiated frontier-market risk. That produces board papers which are neither defensible nor useful. The exposures below behave differently, sit with different counterparties, and move on different timescales. Political instability, the one most often cited, is currently the least acute of them.

Political and policy risk

The March 2026 elections produced a single-party majority government, the first since 1999. That is a material change to the base case: Nepal’s characteristic risk over the previous decade was coalition churn and the policy reversal that followed each change of minister.

The IMF’s stated concern is now the opposite one. Its risk assessment names a slowdown in reform momentum during the transition, weighing on confidence and delaying private investment decisions, rather than a return to instability. Nepal’s political risk has shifted from discontinuity to inertia.

The September 2025 unrest remains the reference event for civil disruption. The government assessed physical damage at NPR 84.5 billion, around 1.25% of FY 2025/26 GDP, of which NPR 44.9 billion was damage to public assets. That is the order of magnitude to use for a business-interruption scenario, and it is a national aggregate rather than a Kathmandu figure.

Legislative volatility

This is Nepal’s most under-appreciated commercial risk, and the hardest to insure against. Three examples make the point better than any general statement.

An omnibus act authenticated on 31 March 2025 amended six statutes at once: the Foreign Investment and Technology Transfer Act 2075, the Companies Act 2063, the Industrial Enterprises Act 2076, the Special Economic Zone Act 2073, the Arbitration Act 2055 and the Foreign Exchange (Regulation) Act. One instrument moved the ground under investment structuring, corporate law, industrial incentives and currency control simultaneously.

A statute catalogued as the Customs Act 2082, dated 28 Asoj 2082 (14 October 2025), sits alongside a Department of Customs website that still publishes the Customs Act 2064 as operative. Whether the later act has commenced is not determinable from the public record.

And banking regulation is consolidated and reconsolidated on a rolling basis. The Unified Directives 2082 for class A, B and C institutions were issued by Circular No. 10 on 16 January 2026 and amended by circulars up to No. 19 of FY 2082/83 by 15 July 2026, with separate consolidations for microfinance and infrastructure development banks and a further Payment Systems consolidation issued on 16 April 2026.

The control here is procedural rather than legal. Treat any Nepali legal opinion older than about six months as stale on anything touching investment, currency or banking. Long-form contracts should carry a mechanism for dealing with a change in law rather than a warranty that the law is as stated.

Financial sector and counterparty risk

Reported non-performing loans reached 5.4% by January 2026. The IMF’s loan portfolio review, which applied Basel standards to the ten largest banks, identified loans requiring reclassification into adverse categories, provisioning shortfalls, and weaknesses in credit underwriting and governance. Banks have been required to submit capital restoration plans with timelines to reach a minimum 8.5% core tier 1 ratio and an eventual 11% total capital adequacy ratio.

Nepal is not uniformly on Basel III. Class A commercial banks and national-level class B development banks operate under the Capital Adequacy Framework 2015; class C finance companies and sub-national class B institutions remain on the earlier 2007/2008 framework. A counterparty assessment that assumes a single prudential standard across the system will misprice the smaller institutions.

Three further features shape the picture. Sectoral directed lending remains in place, the IMF has recommended moving away from it, and its extension to technology firms is flagged for asset-quality monitoring. Forbearance measures for highway widening projects and working capital loans need, in the Fund’s words, to be time-bound and ring-fenced. And the system is running with far more deposits than loans. Deposits grew 16.0% year on year against private credit growth of 6.7%, leaving the interbank rate at the 2.75% floor of the corridor against a 4.25% policy rate.

For a credit committee, liquidity risk in the Nepali banking system is currently low and asset-quality risk is currently understated. The two are related. Abundant deposits allow weak loans to be carried rather than resolved.

Currency and transfer risk

The rupee is pegged to the Indian rupee at INR 100 = NPR 160. The peg has held for decades and is not the risk. The risk is on the transfer side.

Nepal maintains three exchange restrictions and one multiple currency practice that the IMF has urged it to remove, covering tax clearance requirements, limits on royalty payments, import security deposits and the Fedan US dollar remittance rate. Convertibility and outward transfer are administered under the Foreign Exchange (Regulation) Act 2019 BS by Nepal Rastra Bank, and the documentary basis of an original inflow determines what can later be sent out.

Reserve cover is comfortable on either measure: USD 24.19 billion and 19.2 months on Nepal Rastra Bank’s calculation, or USD 21.8 billion and 12.4 months on the IMF’s. The current account surplus of 6.9% of GDP in FY 2025/26 is projected to fall to 2.0% in FY 2026/27, so the buffer is at or near its peak.

For a transfer-risk assessment, the question is whether a specific payment fits the administrative categories, rather than whether Nepal can pay. That is a documentation question, resolved at entry, years before the payment is attempted.

Financial crime and correspondent banking

Nepal was added to the FATF list of jurisdictions under increased monitoring in February 2025 and remained listed at the statement of 19 June 2026, alongside 21 other jurisdictions. Algeria and Namibia were removed at that statement; Nepal was not.

The FATF recognised progress on technical compliance in the targeted financial sanctions regime for terrorist and proliferation financing. Six action plan items remain: improving comprehension of money laundering and terrorist financing risks; strengthening risk-based supervision of commercial banks, higher-risk cooperatives, casinos, money transfer dealers and real estate; identifying and sanctioning materially significant hundi operators without impeding financial inclusion; building investigative capacity and coordination; demonstrating growth in cases investigated and prosecuted; and implementing seizure and confiscation measures consistent with the risk profile.

Grey-listing prohibits nothing. It raises the documentary burden and the review time on correspondent banking, and it gives a foreign bank’s compliance function a defensible reason to decline a marginal relationship. Budget for slower payment cycles and heavier onboarding rather than for blocked transactions.

Operational and natural hazard risk

Nepal’s recent record contains a November 2023 earthquake, severe flooding in September 2024, further flooding in October 2025, and a delayed monsoon that reduced FY 2025/26 agricultural output. The IMF’s assessment is that these successive shocks prevented the recovery from gaining traction and weighed on job creation.

Seismic exposure is structural rather than cyclical. This page puts no number on it, because no national hazard assessment was obtained. For a physical operation, hazard is a design and siting question as much as an insurance one, and supply chains routed through a single Himalayan corridor or a single Terai crossing carry correlated interruption risk.

Sovereign and programme risk

Public debt is projected to peak at 49.6% of GDP with a fiscal deficit of 2.5%, comfortably inside conventional sustainability bounds. Fiscal space is not the constraint. In the first eight months of FY 2025/26 capital spending fell 4.7% while tax revenue rose 5.9%. The Fund’s diagnosis is that unrealistic revenue projections drive cash rationing, and that the resulting mid-year cuts fall on capital lines.

The IMF Executive Board completed the seventh and final review under the Extended Credit Facility on 8 June 2026. The arrangement had been the external anchor for Nepali reform since 2022, and its conclusion removes the mechanism by which structural benchmarks were set and monitored. Whether the reform agenda survives without it is the open question in any medium-term view. It will show up in two places: whether the FATF action plan items close on schedule, and whether the bank capital restoration plans are enforced or extended.

Sources

1. Nepal — 2026 Article IV Consultation and Seventh Review under the Extended Credit Facility Arrangement, Country Report No. 26/127

   International Monetary Fund · 8 June 2026 · Tier 3 — Multilateral institution

   Supports: The risk assessment matrix, including reform slowdown during the government transition and Middle East hostilities transmitted through remittances, commodity prices and tourism with an adverse oil scenario 25 to 90 percent above baseline; NPLs of 5.4% in January 2026 and the loan portfolio review findings on the ten largest banks; capital restoration plans targeting 8.5% core tier 1 and 11% total capital; forbearance for highway widening and working capital loans; directed lending concerns; the policy rate at 4.25% against an interbank rate near the 2.75% corridor floor; three exchange restrictions and one multiple currency practice; the NPR 84.5 billion damage assessment for September 2025 including NPR 44.9 billion in public assets; the March 2026 election outcome; public debt peaking at 49.6% of GDP and a fiscal deficit of 2.5%; capital spending down 4.7% and tax revenue up 5.9% in the first eight months of FY 2025/26; the governance findings and the Governance and Corruption Diagnostic; and the natural hazard record including the November 2023 earthquake, the September 2024 floods and the delayed 2025/26 monsoon.

   Accessed 26 August 2026

2. Jurisdictions under Increased Monitoring — 19 June 2026

   Financial Action Task Force · 19 June 2026 · Tier 3 — Multilateral institution

   Supports: That Nepal was listed in February 2025 and remained under increased monitoring on 19 June 2026; the six outstanding action plan items; the recognition of progress on targeted financial sanctions for terrorist and proliferation financing; the full list of 22 listed jurisdictions; and the removal of Algeria and Namibia.

   Accessed 26 August 2026

3. Current Macroeconomic and Financial Situation of Nepal, based on ten months' data (ending mid-May) of 2025/26

   Nepal Rastra Bank, Research Department · Data to mid-May 2026 · Tier 2 — Official publication

   Supports: Gross reserves of NPR 3,704.55 billion (USD 24.19 billion) covering 19.2 months of imports, CPI inflation of 5.04% year on year, deposit growth of 16.0% against private credit growth of 6.7% year on year, and the balance of payments and current account surpluses.

   Accessed 26 August 2026

4. IMF Executive Board Concludes the 2026 Article IV Consultation with Nepal and Completes the Seventh Review under the Extended Credit Facility

   International Monetary Fund · 8 June 2026 · Tier 3 — Multilateral institution

   Supports: Completion of the seventh and final review under the Extended Credit Facility arrangement.

   Accessed 26 August 2026

5. Nepal will seek delayed LDC graduation citing economic constraints

   The Kathmandu Post · 16 May 2026 · Tier 6 — Professional or news source

   Supports: That graduation was scheduled for November 2026 and that Nepal moved in May 2026 to request a three-year deferral, with the decision resting with UN bodies.

   Accessed 26 August 2026

6. भन्सार ऐन, २०८२ (Customs Act, 2082)

   Government of Nepal / Nepal Law Commission · Dated 28 Asoj 2082 (14 October 2025); commencement status unconfirmed · Tier 1 — Primary legal instrument

   Supports: An example of legislative change whose commencement status is not clear from the public record.

   Accessed 26 August 2026

7. विदेशी विनिमय (नियमित गर्ने) ऐन, २०१९ (Foreign Exchange (Regulation) Act, 2019 BS)

   Government of Nepal / Nepal Law Commission · 2019 BS (1962) — in force, as amended by the omnibus act authenticated 31 March 2025 · Tier 1 — Primary legal instrument

   Supports: The statutory basis on which convertibility and transfers are administered by Nepal Rastra Bank.

   Accessed 26 August 2026