Despite government assurances of an improved business environment in the country, Nepal has failed to attract significant foreign direct investment in the last fiscal year.  Foreign direct investment (FDI) pledges in the country dropped by 22.20 percent in FY 2022/23. FDI commitments totaled Rs 38.457bn in FY 2022/23 compared to Rs 49.431bn in FY 2021/22.

A total of 327 industries having FDI pledges have been registered at the Department of Industry (DoI) during the last fiscal year. The majority of industries approved by the department are small-scale industries. The DoI approved 297 small-scale industries, 25 medium-level, and five large-scale industries. The department has also approved 64 technology transfer agreements.

The service sector and tourism sector are the two most preferred areas of foreign investors in Nepal in the last fiscal. According to DoI, 82 percent of the registered industries are in the service sector and tourism sector categories. Only nine percent of industries have been registered for the manufacturing sector while it was five percent for the IT sector.

Government officials point out the global economic downturn, the lowering of the minimum threshold for FDI, and the tightening of visa rules for foreign investors by the Nepal government for the decline in FDI pledges. In November last year, the government lowered the minimum threshold for FDI to Rs 20 million from Rs 50 million to attract even the small foreign investors in the country. Since the FDI threshold has been lowered, there is an increment in the number of industries' registration but the investment amount has remained lower than that of the last fiscal year.

There has been growth in the number of companies registered in the IT sector. A total of 16 IT companies were registered in FY 2022/23 compared to seven in FY 2021/22.

FDI commitments also declined this fiscal due to a slowdown in investment commitments from China. The investors from the northern neighbor have been committing the largest amount of FDI in the last several years to Nepal. With China facing economic problems due to renewed Covid-19 crisis, and supply chain disruptions, investment pledges from the northern neighbor have also been affected. 

Nepal falls among the countries that receive the lowest FDI in the world. Despite many talks on attracting FDI in the country, the country has failed to attract foreign investors as expected. At less than one percent of GDP, Nepal’s current levels of FDI are the lowest among similar economies.

Economists and industrialists say it has become imperative to improve the existing policy and structural system to bring more foreign investment into Nepal. According to them, while the immediate reason for the decline in FDI might be the global recession and domestic political situation, there are structural and procedural obstacles in Nepal that discourage investors. 

Despite introducing a one-door system in the Investment Board Nepal and Industry Department, FDI has not come in as expected. “It has failed to facilitate FDI so far because it has failed to become a complete one-stop service center,” the economist said.

In the second week of March, Prime Minister Pushpa Kamal Dahal had said that the government is seriously working on further simplifying the procedures, fully operationalizing the one-stop service, and developing necessary rules for the automatic approval of foreign direct investments (FDIs) applications. 

Of late, the government has eased procedures related to FDI. The Department of Industry (DoI), the government agency responsible for providing services to foreign investors, has developed a mechanism to approve foreign direct investments (FDIs) through the online channel. The mechanism that allows the department to approve FDI worth Rs 100 million automatically has come into implementation from Jestha 1. 

The private sector says the country has not received the net FDI as per the investment pledges. "The actual FDI inflow is much less than what has been committed by the foreign investors," said Pashupati Murarka, former president of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI). 

According to Murarka, there was a huge drop in the demand for goods and services in the last fiscal year.  “At a time when domestic investors are reluctant to invest, we cannot expect foreigners to invest in the country,” said Murarka. 

Net FDI inflow plunges by 73.2 percent

Nepal received less than Rs 5bn in net foreign direct investment (FDI) in the first 11 months of FY 2022/23. According to the latest macroeconomic data of the Nepal Rastra Bank (NRB), net FDI inflow as of mid-June stood at Rs 4.64bn, a decline of 73.2 percent. The country received net FDI worth Rs 17.35bn during the first 11 months of FY 2021/22.

 

Box 1

Month wise FDI commitment

 

Box 2

Net FDI in Nepal (First 11 months)