Global Insight Perspective
Significance	The poor showing of Nepal's long-term political giants testifies to widespread fatigue with the country's long-ruling political elites, with the CPN-UML pulling out of government after emerging third in the election.
Implications	With the gains made by the Maoists, Nepal is set on a path of federal republicanism, but challenges are expected as various parties have differing perceptions of what this entails.
Outlook	Concerns that the Maoists' reforms will be radical and will put them on a collision course with the old guard are mediated by the CPN-M's expected lack of a simple assembly majority, pledges to work within the system, and record of pragmatism.

Seven Party Alliance Minus One

The Communist Party of Nepal-Unified Marxist Leninist (CPN-UML) has pulled out of the interim government as Nepal's former Maoist rebels-turned-party emerges as the dominant party following the Constituent Assembly election last week . The CPN-UML, which has been in charge of seven cabinet posts, including the important foreign ministry portfolio, has won an unexpectedly low 31 seats in the polls, compared with the CPN-M’s 116 out of the 240 seats allocated through the direct elections, with the remaining 335 to be distributed based on proportional representation. The CPN-UML has long been one of Nepal’s largest parties along with the Nepali Congress (NC), which also suffered a blow at the polls with just 34 seats so far.

Acknowledging Defeat

A joint resignation letter handed in by the CPN-UML ministers to Prime Minister Girija Prasad Koirala held that the move accorded respect to the mandate of the people, stating it had "lost the moral right to govern". The CPN-M yesterday called on the party to return to government, stating its interest in forming a broad coalition government, but the CPN-UML has so far declined. The NC also considered a similar move following the final declaration of results, but has so far decided to stay on, according to Ekantipur. Meanwhile, the Madhesi People's Rights Forum (MPRF) formed in 2007, which ran on a platform of seeking autonomy and further rights for the Madhesi people of southern Nepal, won an impressive 24 seats, testifying to the importance of this long-neglected constituency.

Outlook and Implications

The CPN-M as Nepal’s Dominant Party

The poor showing of Nepal’s long-term political giants, the NC and the CPN-UML, has come as a surprise, testifying to widespread fatigue with the country’s long-ruling political elites. Based on the votes counted so far, the CPN-M is as such set to become the dominant party in the Constituent Assembly, albeit without obtaining a full majority. After winning nearly 50% of the seats allocated following the direct vote, it is also expected to obtain around one-third of the 335 seats distributed based on proportional representation, according to election officials cited by Agence France-Presse (AFP). Final results for this are not expected until late next week. The CPN-M is as such forecast to win at least 230 seats in the 601-seat assembly. This means that it is set to emerge as the largest single party in the Constituent Assembly, albeit without giving it a clear majority, as this would require it to win an unlikely 60% of the proportional representation vote. Therefore, it will most likely have to govern in coalition with the NC and the CPN-UML, as well as the new MPRF.

Abolition of the Monarchy ahead

The first task when the Constituent Assembly congregates after vote-counting has been finalised will be deciding on the future of the monarchy. With the massive gains made by the CPN-M, Nepal has been irrevocably placed on a republican path, with even the option of constitutional monarchy having dissipated. The Maoists earlier this week called for the "graceful abdication" of King Gyanendra in favour of his forcible removal. This could trigger a backlash by monarchist forces, which have not fared well in the election, with the country’s national army also known to support the king. The second challenge will be that of rewriting the constitution—a process that the CPN-UML has agreed to take part in despite planning to pull out of government. Although the peace process has seen the members of the Seven Party Alliance agree in principle to make Nepal a federal republic, no solid consensus exists on what this means in practice. The Maoists have called for an executive president, with provinces under the federal structure to be carved out according to ethnic lines. Meanwhile, the NC merely wants a figurehead president. In any case, the parties will also have to provide for greater inclusion of the Madhesi if they are to find a political solution to the ethnic unrest in the southern Terai region, constituting a major concern regarding the peace process . In this sphere, the urgency of security sector reform and the demobilisation of the Maoist army and its integration into the national army must also be tackled.

Coming Conflict with Nepal’s Old Elites

The Maoists' unexpected gains have raised concern among the country’s high-caste political elite; their pledges to dismantle feudal structures and implementing radical reform based on distributive justice could place the two groups on a collision course. However, The CPN-M has for now taken a moderate conciliatory line, promising to work within a broad-based coalition without dismantling capitalist structures. Although a period of volatility is likely as the respective parties assert themselves under the new political system, the radicalism of the CPN-M is expected to be circumscribed by the need to deliver results, which requires welcoming domestic and foreign investors. The Maoists have pledged to improve the economic conditions for Nepal’s poor.

The Economy

The expected dominance of the Maoists in the legislature presents potentially complex scenarios for the economy. Growth has languished in recent years as capital spending has been undermined by the insurgency and protracted political uncertainty, also resulting in disruption from widespread industrial action. The manufacturing sector remains fundamentally undermined by low productivity levels and infrastructure bottlenecks, ranging from power outages to poor transport and communications. The ongoing insurgency in the south of the country also interferes with vital trade routes to India, while the textile sector faces intensifying global competition. Chronic levels of underemployment are reflected in rising remittance inflows as outward migration continues. Reviving investment, by creating an environment more conducive to foreign capital and sustaining the engagement of donors in the economy, remains essential to raising long-term growth rates. The economy does possess potential, primarily in tourism and increasingly in capital-intensive hydropower sectors. Fiscal consolidation is also required to boost public resources for investment in the economy. Maintaining good relations with India is also vital given the close integration of the economy with its booming neighbour. Subsequently, the Maoists have eschewed committing to a free market while pledging that nationalisation of key industries will not proceed. The commitment to form a coalition government of national interest should result in the stability required to boost the investment environment and support vital sectors such as tourism. Some areas, most notably labour relations, may be subject to greater regulation. However, accelerated economic development remains the overriding priority in policy, with socioeconomic distress a key source of momentum behind the Maoist movement. As such, Global Insight expects any Maoist government to act as a responsible stakeholder, placing national interest over party ideology.

Nepal’s Foreign Relations

Maintaining constructive relations with India and China, notably the former, will be key given that Nepal's economy is heavily dependent for fuel supplies. The CPN-M’s gains in Nepal are considered a challenge to the Indian establishment, which has traditionally worked closely with the NC. The CPN-M has long had an adversarial relationship with India, and the latter will now have to review its policies in the light of changed political realities. CPN-M leader Prachanda has, however, called for the fostering of "new relations" with India, indicating the CPN-M’s pragmatism and awareness of Nepal’s dependence on the country. China is also an important player and its role may grow in the light of Maoist gains, with the CPN-M likely to seek to attract as much goodwill as necessary from both the Beijing and Delhi governments to aid it in delivering on promises. China's interest in Nepal has grown due to interests in natural resources, not least after the eruption of unrest in the autonomous region of Tibet last month, as Nepal is likely to be considered an increasingly important player in addressing "splittism" on China’s western frontier. However, India remains the most important player in Nepal, and the new government is likely to have to engage in a difficult balancing act in this matter.