FDI Flows to Nepal: Recent trends and challenges

A government survey shows that the stock of Foreign Direct Investment in Nepal increased by 16 percent to Rs 264.3bn at the end of the fiscal year 2021/22. Paid-up capital is the major component in FDI stock as it accounts for 53.7 percent of total FDI stock, whereas the reserves and loans in total FDI stock accounts for 31.7 percent and 14.6 percent respectively, the report says. 

The Survey Report on Foreign Direct Investment in Nepal published by Nepal Rastra Bank states that Nepal has received foreign investment from 57 different countries as of mid-July 2022.  In terms of total FDI stock, India takes top position with Rs.88.6bn followed by China (Rs 33.4bn), Ireland (Rs 20.9bn), Singapore (Rs 16.1bn), and Saint Kitts and Nevis (Rs 15.1bn).

Industrial sector accounts for 62.6 percent of total FDI stock. Of which, the electricity, gas, steam and air conditioning sector constitutes 32.8 percent and manufacturing sector 29.5 percent of total FDI stock. About 37.3 percent of total FDI stock is in the service sector. Of which, the financial and insurance services sector constitute 25.6 percent, accommodation and food services sector 5.3 percent, and information and communication sector 4.8 percent of the total FDI stock.

The electricity, gas, steam and air conditioning sector, particularly hydropower, in Nepal has been a preferred sector for FDI in recent years, the report says. A latest survey shows that 32.8 percent of FDI stock and 41.8 percent of total paid-up capital is in this sector. Moreover, the hydropower sector has also attracted other sources of external financing such as foreign loans in addition to FDI; the electricity, gas, steam and air conditioning sector accounts for 41.4 percent outstanding foreign loan at the end of the FY 2021/22, the report says.

Nepal has initiated institutional and legal reforms in recent decades with the aim of promoting FDI to complement the resource gap in capital formation. Gradual liberalization of FDI inflows in various sectors has been encouraged by creating an investment-friendly environment and prioritizing foreign investment-related reforms. There are several legal frameworks for guiding and encouraging FDI in Nepal:

• Foreign Investment Policy, 2015
• Foreign Investment and Technology Transfer Act, 2019 (FITTA)
• Public-Private Partnership and Investment Act, 2019
• Industrial Enterprises Act, 2020, e) Institutional reforms such as the establishment of One Stop Service Center to facilitate foreign investment
• Nepal Rastra Bank Foreign Investment and Foreign Loan Management Bylaw, 2021 (Second Amendment)

The World Investment Report 2023 published by UNCTAD shows that global FDI inflow decreased 12.4 percent to $1,294.7bn in 2022 from $1,478.1 in 2021. The Russia-Ukraine war, high food and energy prices, fears of a recession, and debt pressures resulted in the decline of FDI inflows around the world.

FDI inflows to Asia decreased 0.05 percent from $662.1bn in 2021 to $661.8bn in 2022. The region remains the largest recipient of FDI, accounting for 51.1 percent of global FDI (UNCTAD, 2023). However, the inflows are highly concentrated among its largest recipients: China ($189.1bn), Singapore ($141.2bn), and Hong Kong-China ($117.7bn).

In contrast to the global trend, FDI inflows to South Asia increased nine percent to $55.9bn in 2022. FDI in India, the largest FDI recipient of the sub-region, increased by 10.3 percent with inflows of $49.4bn in 2022. In 2021/22, Rs 15.7bn was approved for dividend repatriation by companies with foreign investment. The highest dividend repatriation approval was for the manufacturing sector followed by the information and communication sector.

According to the report, as of mid-July 2022, the outstanding foreign loans (excluding direct loans from foreign direct investors) of FDI companies stood at Rs.68.7bn. Such loans were Rs 40.7bn a year ago. The companies in the hydropower sector have utilized more foreign loans as the outstanding loan of this sector stood at Rs 28.4bn in mid-July 2022.