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An investment-friendly political and socio-economic environment is urgently needed in today’s Nepal. Foreign Direct Investment (FDI) and national private investors must be encouraged and supported by the friendly policies and programs of the Nepal government. Such policies and programs are necessary to increase the pace of economic development, achieve relevant Sustainable Development Goals (SDGs) and create concrete economic grounds for graduation from the LDC status in the year 2026. There is a high potential and possibility for such an investment-friendly atmosphere in Nepal. The lack of political willpower, interest, honesty and clear-cut policies and implementation programs are preventing the creation of such an atmosphere.

FDI flow in S Asia

Nepal is in the sixth position in South Asia regarding FDI inflow, just above Bhutan, according to World Bank data for 2022. FDI inflow was just $65m in 2022 Nepal, which is a 0.15 FDI-GDP ratio. The Maldives is on the top, having $722m in 2022, and the FDI-GDP ratio is 11.7. India was second, and Bangladesh was fourth that year. Bangladesh had $3,480m with a 0.75 FDI-GDP ratio in 2022, whereas India had $49,355m with a 1.44 FDI-GDP ratio in the same year. The 2024 data show India received $105.23bn whereas China received just $70.23bn.

According to the same source, net FDI inflows to Nepal decreased by 4.9 percent to Rs 60bn in 2021-22. There is a significant gap between approved FDI and actual net FDI inflows in Nepal. Between 1995-96 and 2021-22, the total net FDI inflow stood at around 36.2 percent of total FDI approval. This is one of the weighty matters of concern for Nepal.

Vietnam and Cambodia

According to Vietnam’s Foreign Trade Agency, the country experienced a surge in FDI in January and February of 2024, recording an influx of over $4.29bn, marking a significant increase of 38.6 percent compared to the previous year. The major areas of FDI investment are Manufacturing, Services, Agriculture and Travel.

Cambodia’s FDI registered a growth of 12.1 percent of the country’s nominal GDP in Dec 2022, while it stood at 12.9 percent in the previous year. The significant areas of FDI investment in Cambodia are agro-processing, electronics/machinery, health, industrial parts, infrastructure and green energy.

Nepal’s failure

Some of the reasons behind Nepal’s failure to attract FDI are as follows:

Legal hurdles: Some Acts and Regulations responsible for this need to be immediately amended. For example, government itself has said Industrial Enterprise Act 2020, Foreign Investment and Technology Transfer Act 2019, Special Economic Zone Act 2016, Forest Act -2019, National Parks and Wildlife Protection Act 1973, Land Act 1964, Land Acquisition Act 1977, Environment Protection Act 2019, Electronic Transaction Act 2008, Civil Aviation Act 1959, Foreign Investment and Technology Transfer Regulation 2021 and Forest Regulation 2023 need to be revised. Also, some new Acts are needed to encourage the investors with mutual advantages and benefits with clear-cut policies from the point of license receiving to total facilities and support to be given and remittances (dividend) for return.

Bureaucratic hurdles: Bribery, corruption and red-tape are the main hurdles here. Whether national or foreign investors, this is their main complaint and grievance. Our legal and executive decisions and discipline should be such that they penalize and discourage the corrupt actors.

Political hurdle: We should be very fair and impartial, and it will be unfair to blame the bureaucrats alone. Our political circle is also tainted. Our politicians, bureaucrats and brokers have some kind of nexus through which they engage in corrupt practices and discourage investors. So, concerned government authorities and relevant agencies should pay attention here, and the culprits must be brought to justice.

Instability: Lack of political instability, marked by frequent changes in government, is one of the important reasons behind the failure to attract FDI in Nepal. Investors want political stability and policy consistency, and they hardly invest in politically-unstable countries. The political parties of Nepal must pay serious attention to this matter.

Facilities and taxation: FDI calls for a clear-cut taxation policy that is congenial to them and that provides information to them about facilities they are entitled to in a transparent manner. Our taxation policy should be distinctly clear and investment-friendly. We should provide them with all basic facilities that good plants and industries need. Why should we not offer them a special industrial zone like other countries by taking a cue from this saying: Facilities attract and invite capital and capitalists?

Trade union and exit plan: The FDI needs a transparent, solid, stable and investment-friendly labor policy. Foreign investors do not accept workers’ strikes and other forms of disturbances in the industries. They do not accept politics and politically-motivated activities within industrial areas. Does the government have a political will to address these concerns? Foreign investors are also very much concerned about their exit plans. They want to take their profit safely and smoothly back to their countries. They are also apprehensive about the principal amount they invest in. Our legal system, executive decisions and practices should be amicable and supportive of their exit plan.

Proposed areas: Our priority and proposed area must be clear and solid to attract FDI. As per the need and potential of Nepal, agriculture, tourism, hydro, connectivity, education, health, IT, and agro and forest-based industries are the appropriate areas for FDI investment in Nepal.

Learning lessons: In-depth studies are necessary to find the reasons behind Nepal’s failure to attract FDI. Serious studies of countries that have managed to bring in FDI big time, especially on the facilities and incentives they provide to foreign investors,  can show Nepal the way forward when it comes to attracting FDI. 

Conclusion

In conclusion, Nepal urgently requires a conducive environment for investment to accelerate economic growth and achieve SDGs. Legal, bureaucratic and political hurdles, along with instability and unclear policies, deter FDI inflows. To address this, Nepal must enact investor-friendly laws, combat corruption, ensure political stability, offer transparent taxation policies, provide facilities and address labor issues. Learning from successful FDI attractors like India, Bangladesh, Vietnam and Cambodia, Nepal should focus on sectors like agriculture, tourism, hydro, connectivity, education, health, IT and agroforestry, at a time when the country is gearing up to organize the Third Investment Summit.

India will go to polls this month to elect a government for the next five-years. The ruling Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) is seeking a third consecutive victory under the leadership of Prime Minister Narendra Modi with a bigger and broader mandate this time. In a politically charged atmosphere, blame games among and between political parties are common. 

In a surprise entry, Prime Minister Modi raised the issue of Katchatheevu island, a past territorial dispute between India and Sri Lanka resolved in 1974 by the two governments through an understanding. For an Indian electorate, the border dispute with Pakistan and China has made more sense in raising a nationalistic mood in the past. Still, Katchatheevu is a political masterstroke by the BJP targeting the electorate in the state of Tamil Nadu who continue to feel the ire of the 1974 agreement. 

In a recent tweet, Prime Minister Modi took a dig at the opposition party, Indian National Congress (INC), accusing it of weakening India’s unity and interests by giving away Katchatheevu island to Sri Lanka in 1974. Whether ceding Katchatheevu was a shortsighted move by the then firebrand Prime Minister Indira Gandhi, under whose leadership India had defeated Pakistan in 1971, the BJP leaves no stone unturned in framing it as one aimed at political gains. 

The fishermen from both sides used to access an island called Katchatheevu in the narrow Palk Strait between Sri Lanka’s northern district of Jaffna and India’s southern state, Tamil Nadu, to dry their nets and replenishment activities. Historically, Katchatheevu fell under British rule in India and became a contested territory post-Indian independence. 

Following long-held negotiations and existing goodwill, the then Indian PM Gandhi and her Sri Lankan counterpart Sirimavo Bandaranaike signed an agreement in 1974 to demarcate the maritime boundary where Katchatheevu ceded to Sri Lanka. 

Considering the resource richness of the waters, Sri Lanka soon asserted its sovereign rights over the island and prevented Indian fishermen from accessing it. It was against India’s expectations that Sri Lanka would consider cultural and historical aspects and allow Indian fishermen to access the territory. 

Katchatheevu has raised regional sentiments in Tamil Nadu following the detention of 6,184 Indian fishermen and seizing of 1,175 fishing vessels in the last 20 years—as reported by Indian Foreign Minister S Jaishankar. He added that while previous governments ignored and used the issue for political purposes, BJP takes the fishermen’s issue seriously. 

By selecting BJP headquarters to hold a press conference on a foreign policy matter, Foreign Minister S Jaishankar kept the matter under political ambit. He avoided making it the position of the government of India. The Sri Lankan foreign minister has responded, saying Sri Lanka does not intend to entertain further discussions on the matter. 

With BJP expecting to sprout its political clout in Tamil Nadu in the forthcoming elections against powerful regional parties, including ruling Dravida Munnetra Kazhagam (DMK)—an ally of the Congress India National Developmental Inclusive Alliance—it finds Katchatheevu as a solid point to start its campaign. 

Away from the politics of Katchatheevu, small island and island countries are finding prominence in India’s geostrategic thinking today, especially after China’s expansionist entry into the Indo-Pacific. China’s presence in the regional waters became more prominent after Sri Lanka leased its Hambantota Port to China for 99 years. Also, with a China-friendly government in the Maldives, India needs allies to address the China challenge.   

Strategic consideration to find like-minded allies to counter China resulted in the Quadrilateral Security Dialogue or QUAD—a diplomatic partnership between Australia, India, Japan and the United States, committing to supporting an open, stable and prosperous Indo-Pacific that is inclusive and resilient. While China makes little in QUAD’s black and white, the unsaid understanding among the QUAD members is attempting to resolve the China challenge. 

In developing its capabilities, India’s ambitions as a naval power in the Indo-Pacific and beyond are visible from its assertion as a ‘responsible naval power’. Recent rescue missions by the Indian Navy concentrating on combating piracy in the Gulf of Aden and the Arabian Sea have involved deploying guided missile cruisers, marine patrol aircraft and drones to monitor commercial shipping activity in the region.

In conclusion, by raising the Katchatheevu issue, the BJP may have increased the political temperature in Tamil Nadu, but it has not affected India’s relations with Sri Lanka. If something comes up from Sri Lanka, India knows it’s manageable, especially after Delhi rescues it from the economic crisis. However, India’s signaling of its rising naval aspirations, including maritime security in the Indo-Pacific and beyond, must be seen from a broader lens of Delhi’s changing strategic geography.

Coleman Nee is senior economist at the Economic Research and Statistics Division of the World Trade Organization (WTO), where he has worked since 2004. Kamal Dev Bhattarai of ApEx spoke with him about global trade, problems faced by LDCs, and how geopolitics is affecting global trade.

How do you see the prospects of global trade in 2024?

We expect a gradual rebound in global trade volume for goods throughout 2024 and 2025, following a decline in 2023 primarily due to the persistent impact of elevated energy costs and inflation in developed economies, notably in Europe. Specifically, we project a 2.6 percent increase in merchandise trade for 2024 and a further 3.3 percent growth in 2025, following a 1.2 percent dip in 2023. Nevertheless, the presence of various downside risks has contributed to the uncertainty inherent in all economic predictions, particularly those concerning trade. These risks encompass regional conflicts, geopolitical tensions, and uncertainty in economic policies.

It seems we are making progress towards global trade recovery, what are the reasons behind it?

Inflation diminished real household earnings and reduced net earnings of businesses in 2023, leading to a decline in the demand for manufactured goods, which play a significant role in global trade. Conversely, as inflationary pressures diminish and policy interest rates eventually decrease, this should have a contrasting effect this year and the following, progressively boosting consumption and increasing the demand for imports.

What are the downside risks?

Geopolitical tensions and policy uncertainty could limit the scope of any trade rebound. While export growth should improve in many economies as external demand for goods picks up, food and energy prices could again be subject to price spikes linked to geopolitical events. Choosing an appropriate pace of interest rate cuts will also be challenging for central banks in advanced economies, and any miscalculation could lead to financial volatility later in 2024. The resilience of global trade is also being tested by disruptions on two of the world’s main shipping routes: the Panama Canal and the Suez Canal. 

The Panama Canal handles six percent of global trade, with over 70 percent of traffic destined for or originating from the United States. It is currently operating at partial capacity due to freshwater shortages, with restrictions likely to remain in place for some time. Meanwhile, the Suez Canal handles about 12 percent of global trade, and roughly one-third of container shipping between Asia and Europe. The diversion of traffic away from the Red Sea and around the Cape of Good Hope has added around 10 days to Asia-Europe journeys while boosting fuel costs.

Overall, risks are tilted to the downside, although there is some upside potential if trade in the European Union recovers faster than expected.

How does geopolitics affect global trade?

The global economy has been hit by several economic shocks in recent years while geopolitical tensions have been rising. In response to these and other concerns, some governments have become more skeptical about the benefits of trade and have taken steps aimed at re-shoring production and shifting trade towards friendly nations. These actions have had some impact on trade patterns, but evidence of a sustained trend toward deglobalization remains scant. One early sign of changing trade patterns is bilateral trade between the United States and China. Despite a record high in 2022, total bilateral trade between the world’s two largest economies grew 30 percent more slowly since 2018 than their trade with the rest of the world. 

In services, there are early indications also as data from the United States appear for example to show evidence of recent ‘friendshoring’ in information and communication technology (ICT) services. US imports of ICT services by region from 2018 to 2023. During this period, US imports from North American trading partners (mostly Canada) increased from 15.7 percent of total ICT imports to 23 percent. At the same time, US imports from Asian trading partners (mostly India) fell from 45.1 percent to 32.6 percent. 

Regarding the regional aspects, what are the prospects of growth in Asia?

In 2023, weak demand reduced export volumes in Europe and prevented a stronger recovery in Asia, while the picture in other regions was mixed. If the WTO’s trade forecast for 2024 is realized, Asia will contribute more to merchandise trade growth than it did over the last two years. The region is expected to add around 1.3 percent points to the projected 2.9 percent growth in world exports this year, or around 45. On the imports side it should add 1.9 percentage points to the anticipated 2.3 percent growth in world imports, or around 81 percent. Asia’s exports will grow 3.4 percent in 2024 and 3.4 percent in 2025. Asia’s imports meanwhile will grow 5.6 percent in 2024 and 4.7 percent in 2025. 

What are the key problems faced by LDCs countries in the global trade?

The impact of the 2023 trade slump on least developed countries (LDCs) is a matter of concern since these countries have limited resources to deal with global economic shocks. The drop in merchandise exports of LDCs last year was in line with the decline at the world level, but the contraction on the import side was larger, limiting consumption possibilities for LDCs. Merchandise exports of LDCs fell from $269bn in 2022 to $256bn in 2023, corresponding to an annual percentage change of -4.6 percent. This was roughly equal to the decline at the world level, leaving the share of LDCs in world exports stable at 1.1 percent. Meanwhile, merchandise imports of LDCs fell from $355bn in 2022 to $316bn in 2023. The -11 percent decline was roughly twice as large as the decline in world imports. As a result, the share of LDCs in world imports fell from 1.4 percent in 2022 to 1.3 percent in 2023.

LDC oil exporters recorded large merchandise trade surpluses in both 2022 ($24bn) and 2023 ($14bn). Other groups of LDCs experienced trade deficits last year, ranging from $36bn for countries that mostly export agricultural products to $4bn for ones that primarily export non-fuel minerals. According to preliminary WTO estimates for 2023, the US dollar value of LDC exports of fuels and mining products fell 16.5 percent in 2023. Their exports of agricultural products were also down 8.7 percent while shipments of manufactured goods dropped 12.6 percent. Exports of other products (including non-monetary gold) increased by four percent. These developments in value were influenced by corresponding price changes (for example, an eight percent rise in gold prices) as well as trade volume developments.

Nepali Congress has objected to the government’s decision to prorogue the winter session of the Federal Parliament.

A meeting of the Parliamentary Party held on Sunday morning concluded that the government has been ignoring the demand of the main opposition to form a parliamentary probe committee to investigate the alleged involvement of Deputy Prime Minister and Minister for Home Affairs Rabi Lamichhane in the cooperative fraud.

Congress Chief Whip Ramesh Lekhak mentioned that the government has been turning a blind to the demand of the party.

“There should be a serious and meaningful dialogue on the demand of the Nepali Congress to form a parliamentary probe committee to investigate charges against Deputy Prime Minister and Home Minister Ravi Lamichhane. But the government has been moving ahead against the parliamentary norms and values,” he said, adding, “The government should be serious on the people’s demand. The parliamentary practice cannot be undermined.”

He said that the Congress has not obstructed the Parliament, instead the House is being obstructed due to the irresponsibility of the government.

Congress has strongly condemned the government's decision to end the winter session.

Leader Lekhak said that the government has unexpectedly prorogued the winter session of the federal Parliament.