Diplomatic Eye: EP-04

FDI in Nepal: Rhetoric and Reality

All countries place a high focus on economic growth. To understand what drives economic growth, study has been ongoing. According to the World Investment Report UNCTAD, published in 1984 as cited in Sengupta and Poori (2018), a number of factors, including (a) abundant investment capital, (b) advanced technology, (c) a skilled workforce, (d) reliable transportation and communication infrastructure, (e) well-established political and social institutions, (f) low tax rates, and (g) a favorable regulatory environment, can help or hinder a country’s economic growth. The fluctuation in these elements determines the rate of growth, and in addition to these, foreign direct investment (FDI) has been demonstrated to have a significant impact on economic growth.

The recent study of Shekhar, Jena & Seth (2022) ‘FDI in India and its impact on economic development: An empirical assessment’ reveals that foreign investment drives the economy in ways other than only export. As a result, increased FDI influx will stimulate additional economic development activities.

In many nations, foreign direct investment (FDI) has grown to be a significant source of private external financing. Because it enables the transfer of technological know-how, skills, and access to international markets in addition to financial resources, it is particularly significant in emerging economies. Nepal has also worked to boost FDI in order to encourage domestic production. Nepal Rastra Bank has published a Survey Report on Foreign Direct Investment in Nepal (2020/2021). Out of 604 businesses that received FDI licenses from Nepal Rastra Bank at the end of 2020/21, 197 are included in the survey.

According to the report, Nepal’s FDI stock climbed by 14.8% to Rs. 227.9 billion by the end of 2020/21. This is equivalent to USD 1.75 billion. Paid-up capital makes up the majority of FDI stock, making up 53.9 percent of the total, while reserves and loans make up 31.6 percent and 14.5 percent of the total, respectively. Ironically, Binod Chaudhary, the Chairman of the Chaudhary Group, has a net worth of USD 1.8 billion, which is higher than the whole amount of FDI in Nepal.

As of mid-July 2021, Nepal had received foreign investment from 55 different nations. With Rs. 75.8 billion in total FDI stock, India leads China (Rs. 33.0 billion), Ireland (Rs. 16.5 billion), Singapore (Rs. 15.5 billion), and Saint Kitts & Nevis (Rs. 14.5 billion).

FDI can take the form of stock investments, equipment leases, technology transfers, reinvestments, and venture capital funds. The three most common types of FDI are technology transfer, share/cash investment, and reinvestment.

Nepal’s efforts to draw FDI are hampered by a number of issues, including inadequate development of its macroeconomic environment, poor state of its physical and economic infrastructure, pace of technological advancement, its unfavorable geographic location, and a lack of managerial and entrepreneurial skills.

Navin Srivasthav, the Ambassador of India to Nepal put FDI as a good cholesterol. FDI is meaningful with the transfer of technology according to him. According to popular belief, bureaucracy, formal norms and standards that are deemed to be excessive, stiff, or redundant, as well as restrictive, impede or inhibit FDI activity or decision-making. Therefore, he argued, “The nation needs to switch from a strategy of red tape to red carpet.”

Hari Bhakta Sharma, the Executive Director of Deurali –Janta Pharmaceutical Company, recently asserts that the Nepal Government looks happy in controlling industries rather than nurturing them. At least 21 needless laws and regulations have been imposed, and they are detrimental for investors. Due to unstable and unpredictable policy, unnecessary control in regulation, increase in income tax, and process oriented mindset among others are some of the practical hurdles in FDI in Nepal. Sharma candidly reveals that Federal System has come but governance has gone. One has to remember that investment does not have a color. You cannot attract significant investment, including FDI, to Nepal unless you shift your mindset from one that is process-oriented to one that is result-oriented.

In general, it appears like things are improving. But is the environment becoming favorable in practice as well? I would say no.

On the contrary, Shankar Sigh Dhami, the Director of the Department of Industry claims that we do have comparative advantages of investment in Nepal. This include;

  1. Market accessibility in South Asia, which has a population of 2 billion, and the two major economies
  2. As an LDC, duty-free and quota-free market access
  3. Relatively inexpensive labor
  4. Accessible, reasonably priced land
  5. Nearly all MNCs have extremely high rates of profitability.
  6. Concessions, tax relief, incentives, and additional amenities.
  7. All climatic benefits, and
  8. A young and active populace

In addition to these, Ample of hydropower resources; Participation in multilateral/regional trading systems, such as the WTO, SAFTA, BIMSTEC, UNCTAD, BRI, MIGA, and UNESCAP; A transit or transportation arrangement with China and India; Enhancing infrastructure (Special Economic Zone, Integrated Check Point, Inland Container Depot) relevant to industry and trade;  BIPPA with five nations and Double Tax Avoidance Agreement (DTAA) with eleven; and Ratified and/or ratified bilateral trade agreements and accords with seventeen nations, including the USA make us conclude that Nepal is an appropriate nation for FDI according to Mr. Dhami.

In a seminar organized by AFCAN and CDD, he asserted that there are at least 11 Investment related policies in Nepal. It is perceived that when you have too many policies and agencies involved, you cannot meaningfully achieve the objective, if the objective is to bring FDI in Nepal.

Table 1: FDI Approval Monthly Report

Technology Transfer Agreement (TTA),

Share Purchase Agreement (SPA)

Source: Department of Industry, Nepal (2023)

The table above demonstrates the upward trend in the number of New FDI approvals. According to Department of Industry data, 306733 committed jobs were approved for new foreign direct investments between the beginning and end of the Jestha. Although hopeful, this is insufficient.

Figure 1 Profit Repatriation Process

Source: Department of Industry (2023)

Under Nepali law, royalties, dividends, and investments may be repatriated. The DoI approves repatriation, and the NRB approves currency exchange. Within 15 days following the application, the recommendation for repatriation must be finished (2019 FITTA Article 20).

In general, it appears like things are improving. But is the environment becoming favorable in practice as well? I would say no. Let’s assume that the industries will receive all the incentives that are available. The query is still open: Why don’t we bring FDI in Nepal? In order to review the current policies and create the atmosphere that will effectively encourage FDI in Nepal, there should be sufficient involvement among the government, corporate sectors, experts, and academicians.

If a prominent industrialist had to choose between Kathmandu and Dubai for FDI, where would he prefer to invest, and why?

I posed this query to a prominent industrialist in Nepal. He would rather go to Dubai. There is an easy solution. Here, he is subject to 39% tax. Dubai is a place where there is no income tax, thus he is not required to provide proof of his investment. Additionally, there is a single window policy that encourages investment. In contrast to the UAE, Nepal has political struggles and administrative obstacles. He claims with a heavy heart that the state even refuses to provide him with a paracetamol that costs Rs 10 if his business fails and he falls ill. Apparently, Investors in Nepal appear to be both disheartened and dejected.

The UAE government was able to create an environment that attracted foreign investment by passing laws, offering sophisticated banking and communications services, as well as other factors like its strategic location, which made it a key commercial gateway to various regional markets, the effectiveness of governmental services, the judicial system, the standard of financial, tax, and customs systems, and the availability of infrastructure.

Dr Narayan Manandhar has different views on FDI. FDI involves full guarantee on repatriation in addition to attractive promises to invest. Foreigners in India think that it is virtually impossible to repatriate capital from India. The scenario in Nepal is similar, and we wind up with situations like Ncell and Bottlers Nepal (Coca-Cola), where ownership changes occur without the government’s awareness.

There are eight pertinent factors that affect FDI in Nepal according to Dhirendra Prasad Koirala, the FDI researcher from Kuala Lumpur University Malaysia. They are:

1) Corruption 2) Labor force 3) Central Bank Independence 4) Gov. Taxation Policy 4) Institutions and Administrative Barrier 5) Exchange rate 6) Inflation rate 7) Interest rate and 8) Financial market capitalization.

Political stability is only the moderating factor. According to him, the primary goal should be to minimize the enormous investment gap that prevents FDI and the creation of jobs.

In a nutshell, Nepal might still be a better investment destination for investors if it created a stable and pragmatic strategic plan with a comparative analysis of various countries without political intervention. Ineffective political leadership and a sluggish bureaucracy fail to grasp the importance of FDI in Nepal.