Nepal, a nation historically plagued by poverty, has set ambitious targets to transition into a middle-income country and achieve sustainable development goals by the year 2030. As the fiscal year in Nepal draws to a close, official data indicates that the country received an inflow of USD 229 million through foreign investments during this fiscal year. This figure represents a significant decline from the USD 413 million received in the previous fiscal year. One contributing factor to this decrease is the global economic recession experienced this year. Despite the government’s concerted efforts to attract foreign investors to Nepal, the country has struggled to entice international businesses to establish operations within its borders. Given the prevailing trends of globalization in international trade, Nepal confronts an immensely challenging task in realizing its goals by 2030 unless substantive policy-level changes are implemented. It is necessary to analyze the obstacles impeding Nepal’s progress toward becoming a middle-income country, and successfully attracting foreign investment in order to effectively address them.
Declining Foreign Investment in Nepal: The Current Scenario
According to the Systematic Country Diagnostic Report published by the World Bank in 2018, foreign investment accounted for a mere 0.2 percent of Nepal’s economy over the past decade, placing Nepal significantly below the median. In response, the government of Nepal has taken various measures since 2019 to transform the country into an attractive destination for investment. One such step was the enactment of the new Foreign Investment and Technology Transfer Act in 2019 (the “FITTA”), which established a centralized one-stop service centre, where all the services required by foreign investors including registration of industries, renewal, and exit, among others, are provided from a single building, to streamline foreign investment-related processes. Additionally, in 2022, the government lowered the minimum investment amount for foreign entities to USD 150,000. Despite these efforts, there has been no discernible increase in foreign investment inflows.
One major deterrent for foreign investors is the lack of harmonization of laws in Nepal. This stems from an ‘attitude of convenience’ among regulators, where laws and policies are framed to suit the convenience of regulators rather than with the intention of creating an investment-friendly environment. Prior to making foreign investments and commencing business operations in Nepal, entities are required to obtain approvals and complete paperwork with at least five regulatory authorities, which is considered excessive compared to other jurisdictions. For reference, in India, the approval of a single regulator is sufficient, in most sectors. Procedural delays and a time-consuming process act as deterrents for foreign investors. Given that foreign investment can significantly boost the economy and provide livelihood opportunities, the government should focus on providing encouragements that facilitate an increase in foreign investors seeking to do business in the country.
Furthermore, political instability, the associated risks of changes in laws, and inadequate infrastructure are other contributing factors deterring foreign investment in Nepal. According to the World Bank, Nepal ranks 130th in the world in terms of infrastructure readiness. Investors face challenges in efficient connectivity within the country due to poor road infrastructure, limited electricity, and water supply. Some investors have also faced difficulties repatriating their income from Nepal, as instances of bureaucratic obstacles and delays in approval of repatriation have created uncertainty regarding the timeline for repatriating their investment. Considering Nepal’s competition with global giants like India and China for investment, these factors push Nepal towards the bottom of the preference list for investors.
The Role of Foreign Investment in Nepal’s Development
While it is crucial to acknowledge that foreign investment alone cannot single-handedly solve all development challenges in Nepal, it does play a pivotal role in establishing a solid foundation for the nation’s economic growth and market practices. Increased foreign investment would inject much-needed capital into Nepal’s economy, providing the financial resources necessary for infrastructure development, industrial expansion, and technological advancements. These elements are essential for stimulating economic growth, improving productivity, and generating employment opportunities. Additionally, partnerships and collaborations with foreign entities enable Nepalese businesses to enhance their competitiveness in both regional and global markets.
Foreign investment also brings in foreign currency, which strengthens Nepal’s balance of payments and foreign exchange reserves. This, in turn, enhances the country’s capacity to finance imports, repay external debts, and maintain a stable macroeconomic environment. Given Nepal’s heavy dependence on imports and the importance of maintaining a stable foreign currency reserve, the inflow of foreign currency is vital for the landlocked nation. In 2022, Nepal faced a significant crisis with depleting foreign currency reserves, leading the government to impose a ban on the import of “luxury” goods, such as automobiles, non-essential FMCGs, and alcohol.
As recorded, Nepalese individuals heavily spend on foreign education and travel, which contributes to the outflow of foreign currency from the country. Without swift measures taken by the government and regulators, Nepal risks facing an economic collapse similar to that experienced by Sri Lanka in 2022. Sustained inflows of foreign currency can effectively mitigate this risk and address the challenges associated with maintaining a stable economy.
Paving the Way for Nepal’s Economic Transformation through Foreign Investment
To address the aforementioned concerns, the government of Nepal needs to streamline its regulatory framework concerning foreign investment. This entails reducing bureaucracy, eliminating unnecessary paperwork, and establishing transparent and efficient procedures for obtaining permits, licenses, and approvals. The implementation of clear and straightforward regulations is crucial in creating an environment that is conducive to foreign investors in instilling their trust. The FITTA includes provisions that aim to facilitate foreign investment through automatic routes, where prior approval is not required, as commonly practiced in many jurisdictions worldwide. Introducing automatic routes for foreign investment in specific sectors has the potential to be a transformative factor for Nepal. However, the regulators have interpreted the provision of automatic routes as merely issuing foreign investment approvals through an online platform. This approach, characterized by an “attitude of convenience” displayed by the regulators, is difficult to justify, especially when foreign investment holds such importance for the country’s economic growth and when Nepal is competing with global economic powerhouses for investors.
Implementing additional measures to attract foreign investors involves fortifying laws and regulations to ensure the utmost protection of investors’ rights and interests. This encompasses robust enforcement of contracts and intellectual property rights, establishing a fair and predictable legal framework, and creating effective mechanisms for resolving investment disputes that adhere to international best practices. By safeguarding the rights of investors, Nepal can foster confidence among foreign investors, demonstrating a steadfast commitment to providing a secure and stable business environment. Moreover, offering appealing incentives can significantly entice foreign investors to consider Nepal as a preferred investment destination. These incentives may encompass tax advantages, investment subsidies, and tailored incentives targeting specific sectors or regions. Such measures can mitigate the risks and expenses associated with investing in a developing nation, thereby positioning Nepal as a competitive choice for foreign investment.