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Prakash Kumar Shrestha, PhD is currently executive director of Economic Research Department, Nepal Rastra Bank. He has the responsibilities of macroeconomic data compilation and publication, monetary policy formulation and economic research as well as the role of economic adviser.

Despite various policies to attract FDI and tremendous potential in Nepal, the inflows of FDI in Nepal has remained comparatively low. Here is everything to understand on FDI—the problems and the solutions.

FDI in legal documents

As per Nepal’s Foreign Investment and Technology Transfer Act, 2019, foreign investment encompasses share investment in the form of foreign currency/reinvestment from the earnings thereof, loans in the form of foreign currency or capitalized assets, machinery, equipment on lease finance, foreign currency raised by Nepali companies issuing bonds and debentures in other countries with the prior approval of Nepal Rastra Bank, and investment by foreign institutions in listed companies in the secondary market.

‘Technology Transfer’ is also considered a foreign investment, which includes foreign technical consultancy, management and marketing services, trademarks of foreign ownership, goodwill, technological rights, specialization, formulas, processes, patents, or technical know-how of foreign origin. Similarly, the use of intellectual property such as patents, designs, specifications, formulas, processes, and technological knowledge, assignment, user’s licenses, and franchising is also considered foreign investment as technology transfer.

Importance and role

Since Nepal lacks enough financial resources for its development from internal sources, FDI can be a vital source of investment in the economy necessary for production and accelerating economic growth. FDI often brings managerial expertise and best practices, which can improve the efficiency and effectiveness of domestic firms. More importantly, FDI can help Nepal access international markets, opening doors for its products and services, which is essential for its economic growth.

Existing situation

As per the NRB survey, FDI stock in Nepal stood at Rs 264.3bn as of FY 2021/22, which is about five percent of GDP of that fiscal year. As per the UNCTAD’s World Investment Report 2023, Nepal received FDI inflows of $65m in 2022, compared to $722m in Maldives, $3.5bn in Bangladesh, $3.6bn and $49.3bn in India in the same time.

Moreover, there is a significant gap between approved FDI and actual net FDI inflows in Nepal. Between 1995/96 and 2021/22, total actual net FDI inflow stood at around 36.2 percent of total FDI approval, though Nepal has been receiving FDI from more than 57 countries. The NRB survey has found that the average return on equity of FDI companies is more than 14 percent.

Potential areas 

Nepal has tremendous potential in hydropower, tourism, herbal products, and mining industries. Nepal’s rich cultural heritage, stunning landscapes, and adventure tourism attract travelers worldwide. Investment in hotels, resorts, and eco-friendly tourism infrastructure can yield substantial returns. Nepal’s hydropower potential is immense. FDI in hydroelectric projects can contribute to energy security and export opportunities.

The IT sector has experienced remarkable growth. FDI in software development, IT services, and outsourcing can thrive. Export-oriented industries can leverage Nepal’s preferential trade agreements. Investment in hospitals, clinics, and educational institutions can address local needs and attract medical tourists and students. Rich biodiversity has endowed Nepal with a wide variety of herbal plants possessing significant medicinal value. Moreover, Nepal is endowed with a variety of mineral resources such as limestone useful for cement industries, iron, copper among others.

Legal provisions 

Nepal started attracting FDI by opening up its economy in the mid-1980s with the adoption of economic liberalization policy. Accordingly, many market and private sector-friendly policies and legal provisions have been enacted for the promotion of FDI.

Currently active legal frameworks for FDI include the Foreign Investment and Technology Transfer Act, 2019, Industrial Enterprises Act, 2020, Foreign Exchange (Regulation) Act 1962, and Public Private Partnership and Investment Act, 2019. There are related bylaws to these acts to govern the FDI inflows. FDI inflows have opened several sectors. FDI of below Rs 6bn is approved by the Department of Industry and the FDI above Rs 6bn is approved by the Investment Board.

Recently, the government has further simplified the process of approving foreign investments of up to Rs 500m through the automatic route. Investors are allowed 100 percent repatriation of profit from foreign investment and tax rebate for a certain period for various industries such as hydro, manufacturing, mine-based, infrastructure, and tourism sectors.

Constraints 

Continuous political instability and frequent changes in government over the years have created uncertainty and deterred potential foreign investors. Political unrest, including protests, strikes, and disruptions, can undermine investor confidence and discourage long-term investment commitments.

Nepal also faces challenges related to regulatory uncertainty, bureaucratic hurdles, and inconsistent enforcement of laws and regulations. Complex and cumbersome administrative procedures, as well as delayed decision-making processes, make it difficult for foreign investors to navigate the business environment and obtain necessary approval. Concerns about security, stability, and the rule of law can dissuade foreign investors from making long-term commitments and deploying capital in Nepal.

Next is a weak implementation of provisions mentioned in legal documents to attract FDI. Despite the government’s efforts to establish a one-point service center for investor convenience, there have been complaints about its effectiveness. Still, there is a lack of integration of approval of FDI with the tax system, the compliance of which is taking much time and has to pass through the complicated procedures. Tax policy changes frequently and supersede other sectoral policies related to FDI.

Basic infrastructure like road connectivity and reliable electricity supply are still weak, making the economy expensive. Poor infrastructure hampers business operations, increases costs, and reduces the attractiveness of Nepal as an investment destination. Nepal’s small domestic market size limits the scale and scope of investment opportunities for large-scale foreign investment. There are also several non-tariff difficulties to reach the neighboring countries’ market.

Lastly, Nepal is prone to natural disasters, including earthquakes, floods, and landslides, which can disrupt business operations, damage infrastructure, and cause economic losses. The risk of natural disasters adds to the perceived risk profile of investing in Nepal.

Necessary strategies 

First, it is necessary to maintain a stable macroeconomic environment with fiscal discipline, low inflation, and exchange rate stability as well as enough foreign currency reserves in the economy, which also demands political stability with strong institutions.

Second, predictable regulatory frameworks and effective legal systems are essential to protect investors’ rights and ensure the rule of law.

Third, adequate infrastructure, including transportation networks, energy facilities, and telecommunications systems, is critical for attracting FDI. Governments should prioritize infrastructure investment to improve connectivity and reduce the costs of doing business for both domestic and foreign firms.

Fourth, access to a skilled and educated workforce is a key determinant of FDI attraction. Nepal needs to invest in education and vocational training programs to enhance the capabilities of their labor force and meet the needs of modern industries.

Attracting FDI

Governments can offer various incentives to attract FDI, such as tax breaks, subsidies, and preferential treatment for strategic industries. Corporate income tax rate should be comparatively lower than the neighboring countries. Also, Nepal must actively promote themselves as attractive investment destinations through targeted marketing campaigns, investment forums, and networking events. Government agencies, investment promotion boards, and industry associations can play a vital role in showcasing the country’s potential and facilitating business matchmaking.

Nepal needs to penetrate into the vast market of neighboring countries—India and China through balance and strategic economic diplomacy with them. Some old laws also need to be amended or replaced by new laws. Nepal needs to be attentive to catch the changing value chain dynamics in the neighboring countries.

Our private sector should also be dynamic and proactive to network and attract foreign investors in joint ventures. The business environment should be amicable so that investors feel secure and safe. The government needs to improve the investment climate, streamline regulations, and strengthen governance and institutions eliminating corrupt practices.  

Players 

Attracting FDI requires the active participation of multiple stakeholders. Primarily, the government must adopt a proactive approach by implementing appropriate policy and legal frameworks, fostering a conducive environment for investors.

Additionally, the central bank and banking institutions need to maintain robust capabilities to manage the inflow of FDI effectively. Government agencies, such as the Investment Promotion Board and overseas embassies, should play an active role in disseminating information and highlighting the potential opportunities to potential foreign investors. Moreover, the private sector should actively seek partnerships with foreign investors, contributing to the overall effort to attract and retain FDI.   

Risks 

Despite several benefits of FDI, if it is not used properly to generate foreign currency through promoting exports, repayment of FDI in the future may become challenging. FDI projects may have environmental and social impacts, including pollution, habitat destruction, displacement of communities, and violation of labor rights. FDI may displace local industries that are unable to compete with FDI firms. Hence, FDI should be promoted strategically by minimizing likely risks.

Madhukar Upadhya is a watershed expert and the author of the book, ‘Ponds and Landslides: Water culture, food systems and the political economy of soil conservation in mid-hill Nepal’. He contributes opinion pieces to leading national newspapers in Nepal, focusing on the rising tensions between a flourishing society and sustaining natural resources, including the emerging challenges of managing the climate crisis.  

With global temperature rising by 1.2°Celsius compared to pre-industrial levels, we’re witnessing severe climate impacts from snow melt, loss of biodiversity, dwindling water resources, drying up of springs and small rivers, to increased frequency of floods and landslides, extended droughts, and deadly forest fires. Damage to settlements and infrastructure are increasing with every major event and such impacts are likely to be amplified with the relentless greenhouse gas emissions. For the first time in three decades, the COP28 climate summit helped center the issue of fossil fuels and the need to transition away from them in global climate negotiations; however, the jubilant initial response has now given way to skepticism and doubt. Against the backdrop of these catastrophic climate-induced events, which have never been as rampant, how far will transition away from fossil fuels help cut emissions? Estimates say we need to do so by 45 percent by 2030 to avoid the ongoing race towards a global catastrophe. And if not, how will low-income vulnerable countries, like Nepal, safeguard their interests against climate impacts? Under these circumstances, more than ever before, we need to be vigilant and work diligently to explore ways to protect ourselves from these growing threats.  Here are some of my takes.

The Government of Nepal, through concerted efforts, has formulated policies, strategies, and frameworks and laid out plans to cut emissions and adapt to the impacts. But we know that their implementation struggles to be as effective because addressing climate change is plagued by the same problems that have hindered our development efforts for decades. Unless they are legally binding, policies and strategies hardly get reflected adequately, and with the required urgency, in the planning and budgeting processes, nor are they discussed in Parliament or the Provincial Assemblies while approving annual plans. So much so, that even the plans of local governments hardly reflect them. These are preconditions for an effective implementation of climate responses.

Legal platform

First of all, we need to understand that unlike environmental problems, where cause and effect are often clear because they are usually confined to a local area, the complexities of climate change, with its global jurisdiction and wide array of teleconnections, make it too abstract for many to comprehend. Additionally, the climate discussion generally revolves around the saying that climate change is a global problem and requires global solutions. That is particularly true for mitigation since cutting emissions requires collective actions on a global scale, even though the efforts to limit warming to 1.5°Celsius is failing across the board. Small emitters such as Nepal can commit to be carbon neutral all we want but we know it won’t even have a nominal effect on mitigation unless global net human-caused emissions are cut by about 45 percent from 2010 levels by 2030, which seems unlikely. 

Adaptation, on the other hand, is equally if not more crucial for us and it’s a local issue. Moreover, this is where local leaders, communities and planners should be taking the lead. Unfortunately, this isn’t the case because the climate crisis remains absent from our political conversations.

Meetings SDGs

Consequently, we fail to recognize that we have to meet multiple international commitments such as the SDGs, NDCs, and other key national goals with limited funds available. Such obligations should put pressure on our planners to be prudent in planning and budgeting but that isn’t happening because these commitments aren’t legally binding. So, first and foremost, we need climate laws that obliges the planners to identify and prioritize our needs accordingly. 

International experiences

There are examples we can earn from. Countries such as Fiji and the Philippines have climate laws that obligate their governments to take concrete measures to mainstream climate change into their legal, policy and strategic frameworks. In Fiji, the government is required to introduce carbon budgets, adopt a climate budget tracking system, and provide information on the economic implications of climate change in a supplement to the national budget. In this way, climate laws provide a strong legal platform to articulate the broad contours for mainstreaming climate change including gender and social inclusion issues associated with it into national systems.

Mainstreaming 

The sooner we realize that climate change can't be tackled through projects because they are time-bound with limited scope and jurisdiction, the better it will be. Addressing climate change requires mainstreaming it with regular planning and budgeting processes. Furthermore, we know that climate change is a cross-cutting issue, yet we seldom pay attention to how this nature affects our decision-making while formulating sectoral plans. Each sector, from water, forest, agriculture to power and infrastructure follow traditional methods of formulating plans. A failure to align development interventions with the changing climate will leave us with a limited understanding of what needs to be done to avert the worst of climate consequences on sectoral goals and, by extension, national goals. 

Therefore, mainstreaming climate change should be prioritized in local government’s plans in particular because that’s where they can be most effective and, constitutionally, local governments are responsible for implementing all local-level development programs. Unfortunately, there is a huge gap between what is expected of local governments and their existing capacity and capability to mainstream climate change.

Gender and social inclusion

The intersectional concerns of gender and social inclusion present an even more serious issue within the context of climate change because of specific vulnerabilities of women, children, and marginalized sections of society. It’s always these groups that are affected disproportionately in any disaster. Of the 34 odd earthquake victims who died of cold in Jajarkot included a significant number of women, followed by elderly, Dalits and children. Despite abundant policies and action plans to center gender and social inclusion, they leave a lot to be desired in terms of implementation and efficacy. For climate investments to have a positive impact on gender equality and social inclusion, it’s crucial to recognize the differentiated needs and interests of these groups, otherwise, climate actions will remain half-baked and any implementation ineffective.

The entry point

Climate-related events have continued to hit our primary economic sector—agriculture. The economic losses in paddy from 2001 to 2010 due to drought alone amounted to about Rs 10bn per year. Both severity and frequency of drought is increasing over the period. On the other extreme, for the first time in recorded history, the whole of Tarai was flooded on the same day, damaging crops and infrastructure equaling Rs 61bn in 2017. In 2021 alone, we lost ready-to-harvest paddy worth over Rs 11bn to post-monsoon floods. These examples of just one crop highlight how vulnerable our agriculture is to the changing climate. Moreover, what is often ignored while assessing flood damage is the loss of crop-land. 

Between 1971 and 2006, Nepal lost roughly 5,900 hectares of land to floods and landslides per year. If the average family owns roughly half a hectare, then at least 10,000 families lose their livelihoods every year. There is no data about the extent of land damage after 2006. Reclaiming land has traditionally been a way of adapting to land damage. Unfortunately, none of our national or local policies have recognized this inherent problem of our landscape and, therefore, there is no policy of land reclamation, which should be a major component of our climate intervention plans. Focusing on agriculture will help enhance communities’ resilience. 

Bolstering communal knowledge 

Another area of concern is the loss of local knowledge and skills required for enhancing communities’ resilience. The knowledge and skills gained through years of collective citizen-learning in managing local problems have been lost due to the decades of political instability which discouraged a generation of citizen-researchers who dedicated themselves to understand local problems and find innovative solutions to address them. Land and water management, bioengineering, building green roads, micro-hydro projects, and dousing forest fires are some key areas which have produced local experts to take the lead and develop the communal knowledge-base required for climate resilience. Unfortunately, we’ve lost most of them. Sustaining agriculture to enable communities to fight climate change in the warmer climate requires reviving such communal knowledge in a country with a climate and landscape as diverse as ours with 118 types of ecosystems.

Institutional lead 

In 2016, the Environment Protection Committee of the erstwhile legislative Parliament, after observing the increasing cases of floods and landslides and the extent of damage to settlements, infrastructures and farm land, directed the Government of Nepal to immediately establish a high-level climate change institution with a strict mandate to coordinate the planning and execution of climate actions. It was a clear political signal emphasizing the need for a strong institution to coordinate cross-sectoral climate planning across the country. However, the government hasn’t established any such institution in the last seven years. Paradoxically, the Federal Parliament no longer has an Environment Protection or a Climate Change Committee. This structural mismatch is hurting scrutiny and consolidation of cross-sectoral efforts to mainstream climate change.

Accountability 

Two formal agencies namely: the Parliament and the Auditor General’s office have the mandate to make the Executive accountable for every rupee it spends. Unfortunately, investment in climate change hasn’t been a part of their mandate yet except when it is dealt with as part of other programmes. Climate impacts are the reality of every constituency represented in the Parliament. Parliamentary hearings on how climate actions are helping communities to adapt and analyze the effectiveness of the budget invested on climate programs would help make the Executive more accountable. Likewise, Civil Society Organizations are other actors who can help ensure accountability. Their role in connecting communities and the government in formulating doable plans would help ensure that scarce resources reach the neediest to reduce their vulnerabilities.

Mountain specificities 

Nepal has spearheaded discussion on the mountain agenda and its issues at COP28 in Dubai. Though it’s a thing to celebrate, we should be wary of it being dominated by talks of snow-melt as has been the case when discussing climate change in the past.  Our mountains have three other specificities that require equal attention: diverse culture and livelihood impacted severely by climate impacts; dying indigenous practices of land and water management; and depleting groundwater that feed all the tributaries of Himalayan rivers and mountain springs. Future climate actions should consider these specificities as priorities instead. 

In addition, reviving the abandoned mountain-friendly technologies such as ropeways, introduced a century ago, followed by locally-led initiatives to restore dying water resources that have proven effective in addressing water-induced disasters and declining productivity would probably be areas worth investing in to promote mountain issues.   

Last but not the least, climate change is an opportunity to start afresh; a new dawn of development by taking an approach that will change the way we’ve been addressing our core problems of poverty, resource degradation, disaster-risk reduction, and economic slowdown.

Sharada Prasad Trital is a former secretary of Nepal government. He has held various positions in the Prime Minister’s Office, Election Commission, Ministry of Land Management, Cooperatives and Poverty Alleviation, among others. He also headed the Lalita Niwas land grab scam probe committee. He is a student of good governance and anti-corruption.

Corruption remains a formidable challenge in our country, a sentiment widely shared among the populace. Despite numerous ideas, plans, policies and laws in place, corruption is prevalent and persistent. Addressing corruption effectively necessitates understanding and action on two critical fronts: prevention and the pursuit of curative solutions. Trital presents a 10-point blueprint to control corruption.

Preventive measure

Preventing corruption primarily rests upon the government’s shoulders, notably the prime minister as the executive head. Evaluating the post-2006/07 scenario, it is evident that, except for Sushil Koirala, all prime ministers were embroiled in corruption. Whether directly or indirectly shielding the accused, they contributed to corruption. Consequently, the government, parliament and political parties emerged as major contributors to the escalation of corruption. While bureaucrats are often perceived as key components in corruption, it’s imperative to recognize that without the support of political power, their involvement in corrupt practices would be considerably constrained. Therefore, the linchpin of corruption lies within the prime minister’s sphere of influence. Given the prime minister’s accountability to parliament, it assumes a significant role in combating corruption. The control that political parties wield over the parliament makes them crucial components in addressing corruption. Regrettably, in our case, neither the prime minister, parliament, nor the political parties have earnestly endeavored to combat corruption. This failure has inadvertently nurtured a culture of corruption in our society.

Curative measures

In addressing the curative aspect, institutions dedicated to combating corruption, such as the Commission for Investigation of Abuse of Authority (CIAA), have been deliberately weakened, restricting their ability to operate independently. It is evident that other corruption-controlling institutions operating under the government also lack the necessary strength. Enhancing the functionality of these institutions requires the implementation of laws, policies and structural improvements. Have we made progress in this area? Unfortunately, no. Upon ratifying the United Nations Convention against Corruption, the obligation to devise a national policy against corruption was incumbent upon us. Around 15 years ago, we formulated one: the National Framework to Control Corruption. Astonishingly, except for the individuals involved in drafting the framework, only a handful of individuals are aware of its existence. No further initiatives have been taken, nor have any other anti-corruption policies been introduced. Scant attention, if any, has been paid to implementing even one percent of the framework’s directives.

Legislature measures

Regarding legislation, our anti-corruption laws date back two decades, exemplified by the Prevention of Corruption Act, 2002. While the methods and mechanisms of corruption evolve annually, the laws designed to prevent corruption remain stagnant. Without updated laws, combating the various manifestations of corruption prevalent in today's society is an arduous task. In 2019, the Nepal Communist Party-led government proposed two amendment bills (CIAA Act and Prevention of Corruption Act) to the National Assembly, purportedly to modernize corruption-related laws. However, these amendments, upon closer examination, were found to pose more danger, potentially fostering a culture of corruption rather than effectively controlling it. Among the amendments proposed, certain provisions stipulate that a corruption case must be filed within five years from the moment when knowledge of someone committing corruption is acquired; otherwise, the case would be dismissed. This limitation could result in numerous cases going unpunished, as instances of corruption can surface at any time. Additionally, one provision in the amendments asserts that decisions made during Cabinet meetings would be beyond the scrutiny of bodies like the CIAA or other corruption-controlling entities. However, a critical issue arises from the absence of a clear definition for ‘policy decision’. Presently, the CIAA interprets Cabinet decisions as policy decisions, claiming that probing these decisions falls beyond its jurisdiction. This provision could potentially shield political influences, allowing them to evade accountability.

International experiences

Internationally, it’s a common practice for government officials to disclose details of their assets upon assuming office. This practice serves as a means to combat corruption, shedding light on their pre-office holdings in comparison to their present assets. However, the proposed amendments seek to abolish this practice, relieving individuals from the obligation to disclose their assets unless specifically requested by relevant institutions. Notably ironic, these amendments were tabled by a prime minister who championed slogans against corruption. Subsequently, three years later, the National Assembly passed the amendment to the lower house. This action effectively implicates the major three political parties in promoting corruption, casting doubt on their commitment to combating it. It’s evident that expecting genuine anti-corruption efforts from these political parties seems increasingly doubtful.

Curbing policy corruption

Policy corruption stands as a significant threat in Nepal. Typically, the Cabinet’s primary tasks involve making three major policy decisions: drafting or amending laws, addressing special cases such as disasters and emergencies and accepting foreign assistance and grants. The remaining 95 percent of decisions made during our cabinet meetings are of a general nature. However, there exists a troubling trend where seemingly simple decisions that could be addressed at a lower administrative level are elevated to the cabinet level to avoid scrutiny and potential punishment. The CIAA, the primary body tasked with probing corruption, has stated that investigating policy decisions falls outside its jurisdiction. This misuse of policy decisions in Nepal has facilitated and exacerbated policy corruption within the system. The control of policy corruption is heavily reliant on governmental involvement. However, it’s a widely acknowledged truth that governments in our country have consistently failed to address corruption. Instead, they often contribute to its proliferation through various means. Given this reality, the prospect of curbing corruption in Nepal seems nearly unattainable under the current circumstances.

Promotional aspect

The government can launch promotional campaigns including educational materials from the school-level to minimize corruption. It can also help in the organizational development of anti-graft bodies so that they can work properly. Else, the government can also form independent institutions to prevent corruption. Also, the government can see if the rules against corruption are implemented or not. It can also prepare different codes of conduct and implement them properly. The parliament should also direct the government to function properly. The parliamentary committees have the right to direct the government and they should exercise their rights to curb corruption. 

Role of civil society

On the preventive front, the active engagement of civil society and media holds substantial potential to exert pressure on the government. Unfortunately, contemporary civil society frequently aligns themselves with specific factions, compromising their independence. Additionally, major media houses often allocate insufficient coverage to corruption cases, limiting their impact. An internationally recognized practice involves governments investing in media houses to engage in investigative journalism, particularly concerning corruption cases. Implementing a similar strategy could prove beneficial for us. Take, for example, instances like the Lalita Niwas land grab case or the fake Bhutanese refugee scandal—neither the government nor mainstream media uncovered these cases. Instead, it was a handful of diligent journalists who dedicated themselves to investigating and exposing these scandals. Furthermore, the absence of legislation protecting whistleblowers is a critical deficiency in our efforts to combat corruption, highlighting the urgent need for such legal provisions.

Role of courts

In the realm of curative measures, the role of the courts is crucial, as anti-graft bodies are tasked with investigating cases, while the responsibility of delivering verdicts falls upon the Special Court and the Supreme Court. However, the overwhelming caseload within Nepali courts poses a significant challenge, leading to delays in reaching conclusions for corruption and other cases. Shockingly, there are decades-old corruption cases still pending in the courts. Moreover, the reluctance of our political parties, parliament, and government to fortify our institutions exacerbates this issue. Political involvement and appointments within these institutions have created an environment conducive to shielding corruption through political influence.

Conflict of interest

Nepal grapples with numerous instances of conflict of interest. It’s not uncommon to find individuals who simultaneously hold positions as bankers and lawmakers. This dual role often leads to the creation of legislation that directly benefits their affiliated organizations. Addressing these conflicts of interest is of paramount importance to ensure ethical governance and prevent the manipulation of laws for personal or organizational gain.

The role of political parties

Given the ineffectiveness of the primary three political parties in combating corruption, it’s imperative to contemplate alternative approaches. The upcoming election holds significant weight, poised to determine the trajectory of Nepal’s corruption culture. The decisions made during this election will shape the direction in which the fight against corruption progresses within the country.