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Country Commercial Guides for FY 2000: Nepal Report prepared by U.S. Embassy Kathmandu, released July 1999 Note*

CHAPTER III. POLITICAL ENVIRONMENT

* NATURE OF POLITICAL RELATIONSHIP WITH THE UNITED STATES

The United States and Nepal have traditionally enjoyed warm relations. Diplomatic relations were first established in 1947 and the U.S. Agency for International Development (USAID) has been active in Nepal since 1951. The Peace Corps has been in Nepal since 1962. The United States and Nepal cooperate closely in a number of international forums, including the United Nations. The United States Government has been highly supportive of Nepal's new democracy and its economic reform efforts. American representatives enjoy excellent access to top-level officials and politicians across the political spectrum.

* MAJOR POLITICAL ISSUES AFFECTING THE BUSINESS CLIMATE

Political Stability: With the general election of 1999, Nepal may have finally brought to a close an extended period of political instability that began in 1994 with the fall of the previous majority government. In that five-year period, six separate governments under five separate Prime Ministers held power in Nepal. In May 1999, however, the Nepali Congress Party swept the polls, establishing a new majority government under Prime Minister K.P. Bhatterai that should last for the full five-year term of the current Parliament.

Rule of Law: Nepal is still adapting to its new democratic system of government which was introduced following a popular movement to restore democracy in 1990. A complete code of law has not yet been developed. Nor have the courts been effective in enforcing existing laws. This is a particular problem for foreign businesses, which have not been able to ensure that their contracts are enforced. As noted earlier, Nepal is making progress on codifying its business laws as part of its economic reform. Further progress in this area is expected under the current administration.

Relations with India: Nepal is a landlocked country whose principal access to the sea is via India. As a result, relations with India are critical to business prospects in Nepal. Over the past two years Nepal-India relations have improved considerably. In September 1996, Nepal's Parliament ratified the Mahakali Treaty between India and Nepal, which effectively defines the terms on which Nepal and India will cooperate in completing joint hydropower projects. In December 1996, the two nations also signed a new trade treaty, effectively allowing Nepal duty-free access to the Indian market for all but a very few products. In April 1997, Nepal hosted the first meeting of a new sub-regional group whose members -- India, Bhutan, Bangladesh and Nepal -- have pledged to cooperate together in the development of the Ganges-Meghna-Brahmaputra Valley. In addition, in June 1997, the Prime Ministers of India and Nepal signed a new power trade agreement, which permits, for the first time, private exports of power across the India-Nepal border. These developments are all positive economic signs for both India and Nepal.

* BRIEF SYNOPSIS OF POLITICAL SYSTEM, SCHEDULE OF ELECTIONS AND ORIENTATION OF MAJOR POLITICAL PARTIES

Nepal is a constitutional monarchy with a parliamentary form of government and an independent judiciary. In 1990, the King, formerly an absolute monarch, legalized political parties, after which an interim government promulgated a new democratic constitution. The King retains important residual powers, but has dissociated himself from direct day-to-day government activities. The democratically elected Parliament consists of the House of Representatives (Lower House) and the National Assembly (Upper House). Since 1990, Nepal has held five national elections, three for the Parliament and two for local officials. International observers have considered these elections to be generally free and fair.

Citizens, through their elected representatives, have the right to amend the Constitution with the exception of certain basic principles. Parliamentary elections are scheduled at least every five years. Mid-term elections may be called if the ruling party loses its majority, loses a vote of no confidence, or calls for elections. The Constitution grants suffrage to all citizens of age 18 and over.

The King exercises certain powers with the advice and consent of the Council of Ministers. These include exclusive authority to enact, amend, and repeal laws relating to succession to the throne. The Constitution also permits the King to exercise emergency powers in the event of war, external aggression, armed revolt, or extreme economic depression. However, the King's declaration of a state of emergency must be approved by a two-thirds majority of the Lower House of the Parliament.

The Constitution bars the registration and participation in elections of any political party that is based on "religion, community, caste, tribe, or region," or that does not operate openly and democratically.

There are now three major political parties in Nepal. The Nepali Congress Party, which holds the majority of seats in Parliament, is one of the oldest political parties in Nepal. While traditionally committed to a socialist economic philosophy, the Nepali Congress Party, after first coming to power in 1991, has adopted more pragmatic economic policies. It is now an advocate of continued economic reform, including tax reform and the privatization of state enterprises.

The Communist Party of Nepal - United Marxist-Leninist (UML), which holds slightly over one third of the seats, is the main opposition party in Parliament. The UML is a relatively moderate social democratic party. During its tenure in power in 1994/95, the UML government did not reverse the economic reform policies instituted by the Nepali Congress Party government, but did not vigorously pursue any policies either, opting instead for a prolonged period of study and review.

The National Democratic Party, which holds about five percent of the seats in Parliament, largely represents the pre-democracy ruling elite. On economic issues, the party favors a liberal, market-oriented approach, though one occasionally tinged by populist measures.