The Rastriya Swatantra Party (RSP), under Prime Minister Balendra Shah, has come to power with close to a two-thirds majority in Parliament. The party campaigned on promises of good governance, social justice, and economic reform.
However, the majority government now faces the hard reality of challenging times. War and rising geopolitical tensions in the Middle East are testing Nepal’s economic resilience. As a consequence of the conflict and disruptions in fuel supply, the new government has increased petroleum prices for the third time in a month. This reflects how global geopolitical shocks transmit into a fragile, import-dependent economy. As instability drives energy volatility, the economic consequences extend far beyond fuel price inflation. These disruptions and their ripple effects hit vulnerable economies like Nepal particularly hard.
Beyond fuel inflation, the prolonged conflict may have broader macroeconomic implications for Nepal and South Asia.
For decades, Gulf Cooperation Council (GCC) countries—such as Qatar, Saudi Arabia, and the United Arab Emirates—have been major destinations for Nepali migrant workers. Each day, roughly 2,300 Nepalis leave for foreign employment, mostly to these countries, where they work in healthcare, construction, hospitality, and domestic service. Data from the Ministry of Foreign Affairs shows that around 1.7 million Nepalis are employed in these Gulf states.
This migration pattern has entrenched deep economic reliance on foreign employment and remittance inflows. In fiscal year 2024–25, remittances accounted for roughly a quarter of Nepal’s GDP, placing the country among the highest remittance recipients in the world. These inflows have supported household consumption, stabilised foreign exchange reserves, and financed imports. However, the ongoing conflict risks migrant livelihoods in host countries and may disrupt supply chains and remittance flows back home.
Against this backdrop, Nepal faces risks that extend far beyond immediate fuel price shocks. The central bank, Nepal Rastra Bank (NRB), has reassured that the country maintains reserves sufficient to cover several months of imports. Even so, a combination of higher import costs and a potential decline in remittances could quickly erode this buffer, limiting the central bank’s ability to stabilise inflation and maintain the balance of payments.
Nepal ranked 33rd most fragile state in the world
The risks go beyond the immediate. Roughly 40 percent of Nepali migrant workers are employed in the Middle East, meaning that any serious disruption there could significantly impact the domestic economy. The tourism, transport, and hospitality sectors may also be affected. With the peak tourist season approaching, flight disruptions in the Middle East could lead to cancellations for travellers transiting through the region. This would reduce projected tourist arrivals and disrupt seasonal employment.
Similarly, weakening labour demand in host countries could affect both current migrant workers and those planning to leave. This may lead to large-scale layoffs, wage stagnation, and heightened security risks, potentially triggering return migration—either voluntary or forced.
At the macroeconomic level, sustained increases in oil prices would further widen Nepal’s trade deficit, which already exceeds 25 percent of GDP. Since petroleum products make up a major share of imports, higher fuel costs will increase transportation and logistics expenses across the economy.
If geopolitical instability forces even a small proportion of the 1.7 million workers to return, Nepal’s domestic labour market would face significant strain. With youth unemployment already near 20 percent, such pressures could heighten the risk of social unrest.
Way Forward
Despite these challenges, Nepal’s resilience offers an opportunity for structural reform and sustainable growth. A government with a near two-thirds majority has the political capital to implement policies that support job creation and long-term development.
In this context, Nepal’s policy response must move beyond short-term adjustments towards a more strategic and forward-looking framework.
Recent initiatives by the foreign minister to evacuate workers from parts of the Gulf represent an important humanitarian response. In the immediate term, the government should prioritise creating incentives for vulnerable households to mitigate the impact of rising fuel and food prices. Additionally, strengthening diplomatic engagement with key labour destination countries is crucial to safeguard migrant workers’ welfare. Bilateral agreements must be enforced to ensure job security, timely wage payments, and protection during crises.
In the medium term, diversification of labour destinations must become a policy priority. Nepal’s heavy reliance on a narrow set of Gulf economies increases its exposure to regional shocks. Expanding into new labour markets in East Asia, Europe, and North America could reduce this concentration risk and help mitigate remittance volatility.
Ultimately, the long-term solution lies within Nepal itself. The current crisis underscores the urgency of creating sustainable domestic employment. As outlined in the RSP’s election promises, consistent economic growth must translate into meaningful job creation. Investment in infrastructure, manufacturing, tourism, and the digital economy can generate employment and reduce dependence on foreign labour markets.
The conflict in the Middle East is a stark reminder of Nepal’s vulnerability to external shocks. Reactive measures may provide temporary relief, but only structural transformation can ensure long-term resilience.
In an increasingly uncertain global environment, Nepal faces a fundamental question: can it continue to depend on external lifelines, or will it seize this moment to build a more self-reliant and resilient economy? The government’s actions, backed by its strong parliamentary majority, will shape not only the response to this crisis but also the country’s economic trajectory for years to come.
The author is a Fellow at the Nepal Policy Institute and is currently pursuing a PhD in Economics in France.
