Nepal Forecast December 2025: Interim Government Challenges

Sushila Karki Nepal Prime Minister Interim Administration Source PM Website

There is widespread international and regional support for the change in Nepal even as the Interim administration under Prime Minister Sushila Karki faces multiple challenges leading up to elections on March 05, next year.

International Relations. There is widespread international support to the Interim Administration, but much will depend on ability to hold free and fair polls. The welfare of thousands of Nepali citizens working as migrant labour across the World will remain a core concern for all administrations in Kathmandu. Attempts are being made to provide voting rights to these along with the diaspora for the March 05 elections next year, thus how this pans out remains to be seen.

Regional Relations.  India’s support to the interim government under former chief justice Sushila Karki is expected to be sustained with the possible support for holding the polls in March next year. China was posed a challenge with deposition of Mr K P Sharma Oli widely recognised as a ‘pro-China’ figure. During his three terms as prime minister — 2015–2016, 2018–2021 and 2024–2025 — China and Nepal developed close political ties. The two governments signed many agreements and memorandums of understanding (MoUs), opening avenues for collaboration on connectivity, energy and transportation. Now, Beijing is expected to quickly recalibrate the relationship with the Interim Government as well as the forthcoming elected one. Trade with China has been lagging due to tardiness on opening the borders with winter setting in this will further come down.

Political Developments. Nepal’s interim government is expected to face challenges in conducting elections due to resistance from KP Sharma Oli’s faction. Oli has accused the interim government led by Sushila Karki of being unconstitutional and claimed it has no intention of holding elections. This could manifest in bureaucratic non-cooperation, misinformation campaigns, or attempts to delegitimize the electoral process. The interim government must also contend with public distrust, logistical hurdles, and the need to ensure safety after recent violence.  International observers and civil society groups may play a stabilizing role, but Oli’s residual influence could still disrupt timelines or provoke unrest.

With the Interim Administration heads short on governance experience there is dependency on Nepal’s bureaucracy which appears to be offering limited support to Sushila Karki’s interim administration. Mobilising these will remain important with a view to hold free and fair polls. Gen Z movement is not sustainable thus leading to concerns over divergent elements penetrating the same to usurp its legacy. The government must focus on governance and preparing for the March 5 elections. Succumbing to pressure from powerful networks risks repeating Nepal’s cycle of instability and unfulfilled promises as per the Republica.

Defence and Security. Security planning for the polls assumes importance, meanwhile disparate forces are expected to attempt to subvert stability, how security forces  are able to tackle this challenge given past experience remains to be seen.

Economy. Growth in Nepal is expected to weaken sharply in FY2026 (ending mid-July 2026) following political unrest. GDP growth in FY2025 exceeded the April forecast, supported by a favorable monsoon for agriculture and a rebound in industry. However, growth in FY2026 is projected to slow to 3.0%, well below the earlier projection in light of civil unrest in September that toppled the government.

Manufacturing is expected to decelerate under heightened political uncertainty and weakened investor confidence, while construction will remain subdued. Services, especially tourism, will remain weak, but remittance inflows are expected to stay resilient, and Nepal’s sound macroeconomic fundamentals are expected to temper the downgrade— assuming a stable interim government until elections.