FDI in Nepal: An Overview

Amish Dhungel

Dwaipayan Regmi

Foreign Direct Investment (FDI) is a remarkable indicator of a country moving into free market and accepting globalization. One of the potential markets for FDI is developing countries, as such countries have abundance of valuable resources that are untapped. Besides, FDI helps these developing countries to balance the gap between desired investment and domestically mobilized savings. Widely believed notion is that FDI role is tremendous in terms of bringing wave of economic changes that would benefit a country, and that is even more in case of developing country like Nepal.

Often referred to as a major tool of globalization post early 1990s, FDI increases ownership of assets across the national frontiers. FDI provides a country with access to global talent, global managerial skills and knowledge, optimum utilization of human capital and natural resources, enhances exports, makes industry competitive, provides forward and backward linkages and access to international quality product offerings, and facilitates more employment opportunities.

In the context of developing countries like Nepal, FDI can be regarded as lifeblood for rapid economic development.  FDI contribution to all round development of economy is crucial. Indian Management guru, Ram Charan reflects the importance as: “No country ever has grown without FDI, including America. FDI is not only money it’s what comes with it: technology, managerial knowhow, risk-taking.” Though Liberalization of national economy in 1990s opened door for FDI in Nepal, the country hasn’t been successful to attract significant amount of FDI.

The Foreign Investment and Technology Transfer Act 2049(1992) shapes the basic foundation for Investment in Nepal. The policy seems liberal. There is easy entry, as one can get ‘non tourist visa’ for six months if they tend to invest in Nepal. They can take every penny that they earn out of profit, share, dividend, equity and interest back to their country. There is no any Government interference in case of any dispute with the local stakeholders. The case will rather be solved following United Nations Commission on International Trade Law. Again, foreign investors are allowed to hold 100% ownership in any business apart from cottage industry and other few sensitive places.

The policy is beautifully designed, but the practical side is loaded with lots of side effects. Any foreigner cannot own land in Nepal. FDI is restricted for the ownership of commercial banks up to 66% only. There are various places where Government is enjoying monopoly; as such it is difficult for foreign investor to enter into these sectors. Nepal Electricity Authority, Nepal Drinking Water Corporation comes into these sectors. Foreign investors are not granted equal right as that of domestic investor. For instance, a foreign investor pays double rate to register a trademark. Above all, one can note that there is a political disturbance that creates fear within the mind of foreign investors. Government has not yet been able to take risk for their loss because of political disturbances. Failure of BIPPA has also showed negative impact to foreigners regarding investment in Nepal.

Despite the dark sides and limitations of the policy, there are rays of hope as well. World Bank’s Ease of Doing Business Indicator 2015 ranks Nepal as second best destination among the SAARC countries for investment. There are educated mass, who are always turning pages for looking job opportunities. This indicates, large number of educated mass is looking for job, so any investor would get educated manpower at comparatively low price. Nepal has recently come up from the ten years of civil war. History indicates that industries built after war times have been long lasting, so this hypothesis shows that this is appropriate time to invest in Nepal too. There are problems in sector of communication, electricity, water, fuels. But, these problems are actually opportunities for the investors.

After the end of ten years of Maoist insurgency, Foreign Investment in Nepal has showed a positive symptom. Although, the Investment Year 2012/13 effectiveness can be kept as a separate question to be answered, we can see that Nepal has received Rs 19.93 billion of FDI in the year 2012/13 and that of Rs 20.18 billion in the year 2013/14. There was 0.9% increment in FDI, however, 3.8% decline in foreign investment projects.

China has been the largest investor in Nepal investing Rs 2.71 billion and Rs 7.32 billion in the year 2012/13 and 2013/14 respectively.  It is then followed by India who invested Rs 2.8 billion and Rs 6.5 billion in 2012/13 and 2013/14 respectively. After Indian PM Modi’s visit this investment from India is likely to be increased in next year. Investment in the sectors like tourism, service, mineral, manufacturing, energy, construction, agro and forestry has been getting prime concern in Nepal.

In order to attract the new investors in Nepal, first thing that Nepal can do is create favorable environment. Government need to provide security to the investors, ensure good environment for business and its operation. There is again a necessity to shape a proper monetary and fiscal policy that would attract the investors. BIPPA and other bilateral and multilateral trade agreements should be formulated and implemented properly. There is still the fear of political disturbance in Nepal, this issue has to be properly addressed, and the one planning to invest should be welcomed.

The recent development in FDI sector has been praiseworthy with the arrival of largest ever FDI project in Nepal in Hydropower sector by Indian company GMR.

For a rapid growth of economy, Nepal has no option but to attract FDI. Being sandwiched between two giant economies of the world, Nepal holds the vast potentiality of benefitting from these humongous economies via FDI.

(This article was published on The Himalayan Times, dated March 9, 2015)