Although some important steps were taken with regards to the peace process, Nepal is facing increasing instability with a deteriorating law and order situation in the South and a deadlock over the Constituent Assembly (CA) elections. After an intensive debate between the Communist Party of Nepal (Maoist) (CPN-M) and the Seven Party Alliance (SPA), an interim government of 22 ministers was formed on 1 April. While the key ministries (Ministries of Home, Defense and Finance) plus two other ministries remain in the hands of the Nepali Congress (NC), the CPN-M received five posts; the CPN-UML six; the Nepali Congress (Democratic) four; and the NSP (Ananda Devi) and the ULF one post each. Interestingly, the eight parties (SPA & CPN-M) did not nominate a deputy prime minister for the ailing Prime Minister Girija Prasad Koirala (NC). Home Minister Sitaula (NC) remains in office despite earlier demands by Madhesi (inhabitants of the southern plains) groups and NC party members for his resignation. At the same time as the interim government was formed, the eight parties announced that the Constituent Assembly (CA) elections would be held on 20 June; they also declared a common minimum program for the new cabinet. The international community - including India, China, the US (while maintaining the terrorist tag on the CPN-M), the UK, the UN and the EU - welcomed the formation of the interim government and promised financial support for the peace process.
As a consequence of the popular uprising by the Madhesis in the Terai at the beginning of the year, the interim parliament on 9 March altered the interim constitution. The amendment to the constitution - although vague in its wording - declares Nepal a federal state and increases the number of electoral constituencies in the southern plains in order to allow for better representation of its population. An Electoral Constituency Delineation Commission, formed by the government on 15 March without the consultation of the CPN-M, presented its recommendations on 12 April. The recommendations call for the introduction of 28 new constituencies in the Terai and seven in the hilly region (at present, there are 205 constituencies country-wide, out of which 88 are in the Terai). The Madhesis People's Rights Forum (MPRF) rejected the recommendations of the commission and Madhesi parliamentarians - from all parties except the CPN-M - boycotted the decision by the interim parliament on this matter.
On 13 April, the Election Commission announced that is was technically impossible to hold CA elections by 20 June. This announcement, which did not come unexpected, was met with protests by the CPN-M and other leftist parties and led to mutual accusations amongst the leftist parties and the NCs. As of today, the eight party government has been unable to agree on a new date for the CA elections. With the CA elections remaining uncertain, the issue of the monarchy has moved to the forefront and polarized the ruling parties. The CPN-M, highly suspicious of the "royalist and reactionary forces," and the CPN-UML have asked for the immediate declaration of a republic, either by parliament or through a referendum. The NC and the NC-D, on the other hand, welcomed the shifting of the CA elections to a later stage and insisted that the democratically elected CA should decide over the fate of the monarchy, as stipulated in the November peace agreement. On 1 April, the eight parties had already agreed to introduce a second amendment to the interim constitution, which contains a provision to depose of the monarchy by a two-thirds majority if the latter is found to be derailing the CA elections. The CPN-M has declared that it will hold peaceful agitations from the third week of May if parliament does not declare Nepal a republic by then. The congress parties are considering unifying, while the leftist parties might agree on an electoral understanding for the CA elections (the leftist parties already have a majority in the cabinet and the interim parliament).
On 19 March, the Federation of Nepalese Commerce and Industries (FNCCI) decided in a bold move to shut down all industries and businesses in Kathmandu, in protest against the latest attack of the CPN-M on a hotel owner in Kathmandu. The CPN-M had reportedly abducted and beaten the owner on the previous day because he refused to pay donations to the CPN-M. The strike was called off on 23 March after assurances by the CPN-M that such incidents would not re-occur, and promises by the eight parties to address the business community's problems.