Prospects for peace in Nepal received a blow in September 2007 when the Maoists quit the government amidst looming threats of a return to conflict. In 2006 the Nepali government had entered into a peace agreement with the Maoists, ending years of conflict. In November 2007 the media reported on Maoists' warnings that they could take up arms again if the government did not meet their demand to scrap the country's monarchy.

Throughout 2007, Nepal was crippled by strikes and violent protests by ethnic groups, mainly the Madhesis, in the south of the country. Madhesis are amongst the poorest in Nepal and have faced years of marginalization and human rights violations. They are demanding greater representation in the peace process, guarantees of proportional representation and a federalist form of government. Strike action initiated by Madhesi groups shut down schools and businesses and crippled large areas of southern Nepal through most of April and May. In May, 27 people were killed when one such protest turned violent. In August 2007, the Nepal Red Cross Society said the strikes were hampering the distribution of aid to flood victims in the south.

Also in August, the Nepali government announced it had reached a crucial peace agreement with one of the major Madhesi groups, the Madhesi People's Rights Forum. The deal aimed at granting Madhesis more autonomy and expanded their political and economic rights. Smaller Madhesi groups, however, dissociated themselves from the agreement, claiming it was signed only by one group. These groups also accused the government of failing to grant their main demands – for electoral reform and federalism – and accused the ruling party of attempting to divide and rule. Some Madhesi groups have also been accused of engaging in incidents of violence and human rights violations, including killings and abductions.

According to local human rights groups, violence between the Pahade and Madhesi ethnic groups left at least 18 people killed and more than 4,000 displaced between September and October 2007. In early September two little-known ethnic militant groups – the Terai Army and the Nepal People's Army – claimed responsibility for a bomb blast in the volatile Terai region that killed four people and injured 30. In May the Terai Army also claimed responsibility for a series of bombings that injured 14 people in Rautahat.

Nepal's low-caste Dalits, who have faced years of structural discrimination, were also seen to be mobilizing themselves politically through most of the year. Dalits, like Madhesis, are clamouring for a bigger role in the constitution-making process. The country's new constitution is expected to be drafted by a Constituent Assembly. In July 2007, over 20 Dalit leaders were arrested for protesting against a government policy to allocate 6 per cent of the 497 seats in the Assembly to Dalits. The protest came a month after the first-ever National Citizen's Assembly of Dalits in Kathmandu, where more than 2,000 Dalit activists voted to demand one-fifth of the Assembly seats for Dalits. They also agreed to launch a campaign to convince the government to agree to the demand.

On 7 August 2007, the government and the Nepali Federation of Indigenous Nationalities (NEFIN) signed a 20-point agreement that included ensuring the participation of all the listed ethnic communities in the elections for the Constituent Assembly.

Despite the rising violence and worsening security conditions, Nepal's Prime Minister Girija Prasad Koirala in mid-September assured ethnic minority and indigenous groups that he would hold polls as scheduled in November to elect the Constitutional Assembly. However, on 5 October the Nepali government, having failed to come to an agreement with the Maoists, announced that the elections were suspended indefinitely. The Maoists had threatened to disrupt elections if an agreement was not reached with the government. Minority and indigenous groups that had strong expectations of the Constitutional Assembly elections are likely to be most affected by the suspension.

According to local and international human rights groups even during the last year – post the 2006 peace agreement – major human rights violations, including torture and abductions, prevailed. In June 2007, Human Rights Watch and the International Commission of Jurists called for the speedy implementation of a Supreme Court decision to investigate the disappearance of thousands of Nepalese during the conflict. Later in the year a local human rights group, Advocacy Forum, said that even after the peace agreement more than 1,300 Nepalese suffered torture, mostly at the hands of the country's police. According to a report by the Oneworld website, a majority of those affected by torture in Nepal are from minorities. The report quoted Nepali rights groups as saying that the Dalits have historically been victims of police brutality and torture, and their increasing public agitation in 2007 made them more vulnerable.

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