This paper investigates the reasons for the continued political and economic instability in Nepal. The role of the political institutions of Nepal, especially the political parties, the monarchy and, the military, and their effects on the democratic system of that country is presented in this study. The democratic system in Nepal is elite-driven and has failed to improve the living conditions of the vast majority of the Nepalese population, which continues to live in poverty. Consequently, the Maoist movement has flourished because it offers these people an alternative to the present political system. The ineffectiveness of the democratic system in addressing the needs of the rural people in general and, the inability of the Nepalese ruling class to bring about changes in the nation's socio-economic structure have brought Nepal to the brink of anarchy. The dissatisfaction of the people with democracy has given fuel to an armed uprising led by the Maoists, called the "people's war". The failure of democracy in Nepal seems to be the cause for the Maoist insurgency movement gaining ground across the country.