A new US report questions investment climate in Nepal

Political instability, widespread corruption, cumbersome bureaucracy, and inconsistent implementation of laws have discouraged potential investment in Nepal, said a new US report.

While government authorities including the Prime Minister have been talking about simplifying the foreign direct investment (FDI) regime, a new report by the US Department of State has raised serious questions about the investment climate environment in Nepal.

The 2023 Investment Climate Statements released by the State Department says despite considerable potential—particularly in the energy, tourism, information, and communication technology (ICT), infrastructure, and agriculture sectors—political instability, widespread corruption, cumbersome bureaucracy, and inconsistent implementation of laws and regulations have deterred potential investment in Nepal.

The report has also questioned the government of Nepal’s commitment to implement the policies into meaningful practices. “While the Government of Nepal (GoN) publicly states its keenness to attract foreign investment, this has yet to translate into meaningful practices,” says the report.

The US government report has identified Nepal as an investment destination for those who're willing to accept the inherent risks and unpredictability of doing business in the country and who possess the resilience to invest with a long-term mindset.

While the report lauds the government’s efforts to bring some investment-friendly laws and regulations in recent years, it says significant barriers to investment still remain.

Corruption, laws limiting the operations of foreign banks, lingering challenges in the repatriation of profits, and controlled currency exchange facilities have undermined foreign investment in the country. The prohibition of FDI in certain sectors as well as a minimum foreign investment threshold of Rs 20m ($154,000), and the government’s monopoly over certain sectors of the economy (such as electricity transmission and petroleum distribution) are other factors that have dented foreign investment potential in Nepal.

Political uncertainty is a continuing challenge for foreign (as well as domestic) investors, according to the report. “Nepal’s ruling parties have spent much of their energy over the last years on internal political power struggles instead of governance,” says the report.

The US report has said what economists and business community members in Nepal have been saying for years. According to them, the political environment is one of the factors that affect the overall investment climate including FDI.

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

FDI pledges in the country dropped by 22.2 percent in FY 2022/23. FDI commitments totaled Rs 38.457bn in FY 2022/23 compared to Rs 49.431bn in FY 2021/22.

The other factor deterring foreign investors from putting money in Nepal, according to the report, is a lack of understanding of international business standards and practices among the political and bureaucratic class. “A legal and regulatory regime that is not quite aligned with international practices also impedes, hinder, and frustrate foreign investors,” says the report. “Elements of Nepal’s tax regime, in particular, may be inconsistent with international practices and could trip up foreign investors.”

Immigration laws and visa policies for foreign workers are cumbersome.  Inefficient government bureaucratic processes, a high rate of turnover among civil servants, and corruption exacerbate the difficulties for foreigners seeking to work in Nepal.

While the US still features among the top 10 foreign investors in Nepal, the US FDI in Nepal, compared to other countries such as India, and China, is less, accounting for about 2.9 percent of the total FDI stock.  

Economists say it is necessary 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 100m automatically has come into implementation from Jestha 1.

Citing the complaints about the higher threshold for FDI, the government in November last year lowered the threshold to Rs 20m from Rs 50m.