Nepal’s FDI potential: Investment summit: Insights and challenges

Nepal began receiving foreign direct investment (FDI) inflows after adopting liberalization policies in 1990. These policies opened up FDI-friendly situations along with the establishment of investment-friendly institutions. In the current situation, Nepal is seen as emerging as an attractive destination for foreign investors with its abundant labor and considerable natural resources.

However, Nepal is facing different types of financial scarcity, and the government is ineffective in fulfilling the state requirements due to limited resources. FDI has a positive impact on development by creating job opportunities in the country and attracting foreign investment in different sectors, like tourism, agriculture, industry and hydroelectricity. Many developing countries have utilized FDI as a crucial instrument for their economic development. It helps bridge gaps between domestic savings and investment requirements, government revenue and expenditure, and trade deficits. Additionally, it facilitates the transfer of knowledge, skills and technology from foreign investors to the host country. In our context too, FDI is crucial for Nepal to fill resource gaps and achieve development goals. It also boosts employment, transfers technology, enhances knowledge and skills, and improves internal trade efficiency. Without investment, it's challenging to foster economic progress within the country. To elevate itself to middle-income status and attain the Sustainable Development Goals by 2030, Nepal requires to bridge an annual financing shortfall of Rs 585bn. This gap can potentially be filled through foreign direct investment (FDI).

However, Nepal has attracted a low volume of FDI compared with other developing countries like China and India. Most of the FDI is concentrated in some more advanced countries and middle-income developing countries, whereas low-income countries have been able to attract proportionately less investment. In this situation, attracting investment has been very challenging in the context of Nepal.

FDI scene in Nepal

Nepal has received foreign investment from 57 different countries as of mid-July 2023. Although there are investment opportunities in Nepal, public investment remains inadequate, and the country has struggled to attract private investors. Resource management is a significant obstacle to Nepal's pursuit of those development objectives, and FDI can be a potential source for filling this financial gap. Though the GDP analysis of Nepal shows that the contribution of FDI is minimal, it nearly represents 0.03 percent, which ranks among the lowest globally (Trade Economics, 2022). However, enhancements to effective economic diplomacy efforts could potentially stimulate an increase in FDI.

Nepal hosted two Investment Summits, in 2017 and 2019, aiming to attract FDI. In the 2017 summit, global firms pledged $13.7bn in investments through letters of intent. During the second summit, 15 project investment agreements worth $12bn were signed. However, in this instance too, the FDI inflows fell short compared to what was committed during the summit and the desired goal of attracting foreign investment was not fully achieved.

As Nepal Rastra Bank’s FDI data show, not all of committed investments came by. The total actual net of FDI by inflows stood at around 36.2 percent of total approval between fiscal years 1995-96 and 2022-23. Despite efforts to bring in foreign capital, gaps persisted between pledged and realized FDI. This situation highlights the importance of developing strategic policies to close the gap between promised foreign investment and actual investment received. The Nepal Investment Summit (NIS) 2024 was able to get approval for investments worth more than Rs 9.13bn for four projects in Nepal. Despite the two NISs ,the desired goal of attracting foreign investment was not fully achieved. The reasons cited by scholars and academia are a) frequent government changes and political unrest b) complex administrative processes and corruption. Inconsistent enforcement of laws and a cumbersome regulatory framework deter investors further.

The  third NIS 2024 drew over 1,100 foreign participants, primarily from neighboring countries India and China, where the government proposed 148 projects valued at nearly Rs 900bn  for foreign and domestic investors. Many of these projects focus on the energy sector, manufacturing, the tourism sector, and IT, and officials are optimistic about FDI inflow and hope it will bridge the resource gap needed for economic development. Additionally, attracting FDI is essential for Nepal to achieve its goal of graduating from the grouping of least developed countries (LDCs) to a developing country by 2030, which aligns with the United Nations’Sustainable Development Goals (SDGs). Targeting the summit, Nepal’s Council of Ministers approved a bill seeking revisions in FDI-related policies on April 22, which sanctioned the President’s seal of approval on April 28. The ordinance entails revisions in various Acts, including the Land Act 2007, the Land Acquisition Act 2020, the Public Private Partnership and Investment Act 2019, the Foreign Investment and  Technology Transfer Act 2019 and the Industrial Enterprises Act 2020. These amendments are aimed at improving the legal framework to facilitate FDI in Nepal.

Taking everything into account, Prime Minister Pushpa Kamal Dahal emphasized at the recent investment summit in 2024 that Nepal's skilled workforce and low labor costs are appealing factors for international investors. He also noted that provisions ensuring equal treatment for all foreign investments and guaranteed repatriation in foreign currency further enhance Nepal’s attractiveness as an investment destination.

Finance Minister Barsha Man Pun stated that the summit aims to showcase Nepal as a rising destination for private sector investment, emphasizing recent reforms to improve the investment climate and regulatory frameworks, supporting both foreign and domestic investments.

In the same vein, Sher Bahadur Deuba, president of the Nepali Congress and former prime minister, emphasized that Nepal faces significant development challenges despite its potential. He highlighted the country's need for capital and technology to fully benefit from its development opportunities, underscoring the importance of the high-level event. He added that Nepal benefits from flexible labor laws, a youthful and energetic population, reliable power supply, and local raw materials, all of which contribute to lower production costs compared to higher-wage countries in the region.

Delegations from China, India, Kuwait, the UAE, the UK, and the USA, along with the World Bank Group, discussed cooperation and showed interest in investing in Nepal. They recognized Nepal as an attractive investment destination and pledged support for Nepal’s sustainable development efforts. Though Finance Minister Barsaman Pun described the summit as a great success, the agreements inked during the event did not reflect this sentiment. Many participants criticized Nepal's laws and a strict visa issuance process for foreign company workers, which they felt discouraged investment in the country. For developing countries, FDI is emerging as a vital factor for economic development. Private FDI is seen as a way to bridge the gaps in domestic savings, foreign exchange reserves, government revenue and the availability of skilled human capital within these nations.

Conclusion

On one hand, Nepal is in the process of economic development and needs more investment to achieve its goals. On the other hand, there is a significant gap between proposed FDI and actual FDI flows into Nepal, which needs to be addressed through economic diplomacy.

The low performance and indifference attitudes of bureaucrats and policy complications in approving FDI are other reasons behind the gap between promised and actual FDI in Nepal. According to the World Bank’s Doing Business reports, in many cases, committed FDI gets canceled or withdrawn not because investors have lost interest, but because of frustrations caused by excessive red tape and bureaucratic procedures. Likewise, many investors participating in the summit emphasized that the factors related to Nepal’s socio-political environment, investment policies, regulatory frameworks, and market access are also other obstacles hindering investment in Nepal. Some research findings also highlight that tax rates, labor costs, market size, and the availability of skilled human capital are the main factors that shape investors' decisions on choosing FDI destinations.

To address these multifaceted challenges effectively, a coordinated approach involving governmental bodies, private sector entities, and international partners is imperative. Comprehensive policy reforms are crucial for enacting legislation that fosters investment, safeguards investors' rights and establishes a framework for offering appropriate incentives to potential investors. Such reforms are essential for creating an environment conducive to sustainable economic growth and development. Therefore, Nepal needs to effect reforms in these areas to attract more foreign investment. Significant reforms in policies and laws are also necessary to stimulate investment. Moreover, emphasizing opportunities and potential in the global market is crucial to attract more new investors to Nepal. Only by addressing these problems with targeted solutions can Nepal create a more attractive environment for FDI.