The political progress that Nepal has made since it became a democracy in 2008 suffered a setback during the course of 2009. In May 2009, Maoist leader and Prime Minister Pushpa Kamal Dahal, popularly known as Prachanda, resigned from his post over a dispute about how the Nepali army is run. The Maoists wanted the country's army commander sacked, a move which President Ram Baran Yadav did not support. The Maoist withdrawal from the government led to a deterioration in the security situation and brought Nepal's peace-building and constitutional process to an impasse.

As 2009 drew to a close, at least four people were killed during three days of protests and strikes called by the Maoists. Nepali media reports stated that the former rebels gave the government one month to sort out the dispute, threatening further action if they did not do so. There is no immediate threat of Nepal returning to conflict, but there is strong likelihood that the security situation in the country could worsen, threatening the peace process. It appears very unlikely that the 601-member Constituent Assembly (CA) will be able to meet its April 2010 deadline to have a draft constitution in place.

The CA, which has a significant representation of minorities, offers a good opportunity for minorities to be involved in the country's peace-building process. However, the stresses of the peace process, combined with the volatile security situation, put the country's minorities and indigenous peoples in a vulnerable situation. Tensions between the Madhesi and Tharu communities and Maoists continued to increase during 2009. In March 2009, transport services in the southern Terai region were disrupted and violence erupted, killing several people in the course of days of protests and strikes conducted by Tharu groups. Tharu were protesting the government's failure to recognize their unique identity by categorizing them as Madhesis. After several rounds of crisis talks between the government and Tharu representatives, an agreement was reached on 14 March to recognize the communities' separate identities. Despite this agreement, groups within the Tharu community continued to conduct protests in May and June. International human rights groups also accused police of using excessive force against the protesters.

Nepal's Terai lowlands are home to about half of the country's 27 million people, and the residents of the region, known as Madhesis, have long complained of discrimination by the Himalayan nation's mountain communities.

Nepal's foreign minister in the caretaker government, Upendra Yadav, who is also president of the Madhesi People's Rights Forum (the fourth largest party, with 53 seats in the CA) told Nepali media that his party would only continue to support the government if it made a written commitment to implement the eight-point agreement reached between it and the Joint Madhesi Democratic Front in 2009.

Nepal's 3.6 per cent Muslim population saw some significant positive changes during 2009, mainly in terms of political guarantees. At the beginning of 2009, following five days of protest, the still Maoist-led government reached an agreement with the United Muslim National Struggle Committee to arrange for legal provisions to ensure the independent identity of all minority groups, including Muslims. The government also promised to appoint a Muslim commission to look into the grievances of the community. In June, Nepalese Prime Minister Madhav Kumar expanded his cabinet to include two Muslim ministers.

For the first time in the history of the former Hindu kingdom, in September 2009 the Muslim holiday of Eid-ul-Fitr was declared a national holiday and celebrations were conducted across Nepal.

The situation for the country's small Christian population was considerably less positive. A teenage girl and a woman were killed, and over a dozen others wounded, when a bomb went off during mass at the Church of Assumption in Dhobighat on the outskirts of Kathmandu in May 2009. There were 150 people in the church at the time. A fringe Hindu extremist group called the National Defence Army claimed responsibility for the attack. The outfit also said that it had bombed a mosque in the east of the country last year, killing two people. A week after the incident, the same group demanded that the Nepal's 1 million Christians leave the country. Christians are politically marginalized in Nepal, and not a single member of the CA is from the community.

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