Investment Summit: How to attract FDI in Nepal?

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.