Four years after Nepal’s citizens kicked out a disgraced and ineffective king and agreed to a representative democratic government, the country’s squabbling main political parties have yet to write a new constitution. It appears unlikely that they will any time soon.

The 601-member Constituent Assembly, which has also served as parliament, adjourned in May without having finished the document. The parties must now decide whether to hold an election for a new assembly or revive the previous one.

This will be hard,” says a new report by the International Crisis Group. “Obduracy on federalism, bickering over a unity government, a changing political landscape and communal polarization make for complex negotiations, amid a dangerous legislative vacuum.”

The political impasse has had a negative effect on the economy, with double-digit inflation devastating the lives of ordinary Nepalese. Overall gross domestic product growth has dropped sharply from a relatively modest 5 percent in the 1990s to just over 2 percent in the past three years. Businesses are reluctant to invest, and the tourism industry, Nepal’s mainstay, has suffered.

After a decade of civil war by the Communist Party of Nepal, and following weeks of mass protest, Gyendra Shah, whose family had ruled Nepal since 1768, agreed to abdicate in 2008. The family had been discredited by a horrendous massacre in 2001 when a drunken Crown Prince Dipendra murdered King Birendra, Queen Aiswarya and seven other members of the royal family, allegedly because his parents had refused his choice of a wife.

A fractious amalgam of 26 major political parties and 48 minor ones has led to continuing chaos in which governing has been all but impossible. The issue over the constitution is federalism – or rather refusal to agree on federalism. “For groups that feel their culture, history or language have been sidelined by a unitary state-sponsored Nepali identity, it is also about dignity and recognition,” according to the 38-page Crisis Group report, which was released on Aug. 27. “A standoff has emerged between upper class and dominant hill-origin upper-caste populations on the one hand, and ethnic communities often described as historically marginalized on the other.”

The divisions, the report says, relate directly to party politics. The major ones are the Nepali Congress and the Communist Party of Nepal (Unified Marxist-Leninist), commonly known as UML, which emerged as the second and third largest parties in the 2008 elections to the Constituent Assembly.

“These parties, currently in the opposition, are skeptical about acknowledging identity in a federal model,” the report notes. “They have been encouraged by an upper-class, upper caste backlash against the new pro-federal and pro-identity politics order.

The two main forces in the ruling coalition, the Maoist party and the Madhesi Morcha, a front of parties representing populations of the southern Tarai belt, were the largest and fourth largest respectively in the assembly. The two joined forces with a cross-party caucus of assembly members from numerous ethnic groups outside the Hindu caste system who claim distinct languages, cultures and sometimes historical homelands) into a powerful pro-federalism alliance, with connections to social movements, the report notes.

“They say the agenda should be set by the majority, namely themselves. Public discussions have focused on whether “ethnic states” should be established. Skeptics of federalism sometimes define these as mono-ethnic entities where populations other than the majority ethnicity would be unwelcome.”

Yet it is clear that Nepal’s extraordinary ethnic and political diversity make it clear that no single group would enjoy a majority in any of the individual states.

Demands for preferential political rights to be granted to the dominant ethnic groups in each state were ceded two years ago. The Madheshi, who reside in the southern plains region and comprise about 40 percent of the population, as well as janajati and Maoist players want naming rights, and boundaries that give them a slight demographic and possibly electoral edge. Madhesi parties also focus on inclusion in state institutions.

The assembly ended because leaders of all parties, new and old alike, relied on “fear-mongering and extreme rhetoric,” the crisis group said. “Throughout the peace process, decisions on the main points, whether the constitution or the former Maoist army, have been hostage to bargains on government formation, enmeshing power sharing with substantive issues.”

The peace process has relied extensively on a tired idea of consensus between the parties. Until the constitution was completed, the main parties were to agree on all major decisions to ensure broad buy-in. This sometimes prevented the worst case scenario, but it also devalued democratic participation.

“Instead of discussions in the assembly on real issues, senior leaders cobbled together inadequate or unrealistic deals purportedly to save the peace process,” the report continues, “but often about their personal futures or getting a share of government. Deep disagreements between the parties were papered over. Donor activity has sometimes unwittingly supported this tendency.

Because no single party won an absolute majority in the 2008 elections – nor is likely to, given the vast numbers of contending parties, “the contingencies of unstable coalition politics allowed the parties to throw government formation into the fray with constitutional issues. The deep polarization over federalism meant that on 27 May 2012, any constitution could have elicited violent protests.

The situation has calmed, the report notes, but triggers remain. There is no agreement on the way forward and no minimum common understanding of federalism.

The absence of an elected parliament, coupled with the high trust deficit between the government and opposition parties, bodes ill for stability. For all the parties, deciding on how to resume constitution writing is inextricably linked to government coalitions and electoral calculations. Indeed, the discussion between the parties since the assembly ended has been dominated by questions of whether, when and how the government will change. A broader constitutional crisis looms if the opposition leans on the largely ceremonial president to challenge the government. The political context is shifting; parties are trying out new agendas and alliances and new actors are emerging.

Divisions are rife within the parties themselves. The Maoists, who staged the 10-year civil war that drove the king from power, have already split – and contradictions run deep in the alliances.

Denying moderate identity-based claims makes the polarization worse and risks stoking communal tensions, as does dismissing the fears of groups that feel they will lose out.

“Elections now could help clarify the context, but they will in effect be a referendum on federalism and risks of violence are real. For once, issues matter in Nepali politics. Mainstream parties are best positioned to reflect the country’s ethnic complexity, especially as the balance of political and social power is such that no single party will capture the votes of an entire group.”