FDI commitments increase, improvement in inflows expected

In the fiscal year 2024/25, foreign direct investment (FDI) commitments in Nepal reached an all-time high, doubling from the previous year. The Department of Industry reported FDI commitments of Rs 61.9bn, compared to Rs 30.7bn in 2022/23. Despite this, actual investment inflow has remained low, with only Rs 8.4bn invested last year.

According to the Department of Industry and Nepal Rastra Bank (NRB), the situation is gradually improving, with Rs 12.12bn in FDI commitments made in just the first two months of the current fiscal year. Nepal has received a total of Rs 524.02bn in foreign investment so far, with 6,364 projects approved. These commitments could potentially create 333,908 jobs if the proposed projects are executed. However, the trend shows that actual FDI inflows have lagged behind commitments, despite several years of optimistic projections. Although recent legal reforms aimed at making Nepal more investment-friendly have contributed to an increase in approved FDI, the inflow of funds remains a challenge.

Arjun Sen Oli, director and information officer at the Department of Industry, noted that while investment commitments are promising, only 32-35 percent of committed funds have been invested so far. “Investment commitments are encouraging as they indicate that more funds are on the way,” he said.

In May, the government held its third investment conference, aiming to position Nepal as a prime investment destination. Both large and small investments are expected to materialize, though NRB data indicates that only a fraction of the committed investments has been realized.

Stakeholders believe that a stable government and consistent policies are crucial for further improvement. The Department of Industry has introduced a streamlined system for processing foreign investment proposals, making it easier for investors to apply from any country without needing to be physically present. This has helped create a more conducive environment for foreign investments. “This new system simplifies the proposal process and has enabled the government to foster a more investment-friendly market,” said Oli.

Additionally, the government has lowered the minimum threshold for foreign investments from Rs 50m to Rs 20m and removed limits on foreign investment in the IT sector. This has led to a surge in IT sector investments.

Inward foreign investment improves

Foreign investment into Nepal increased by 36.1 percent in the last fiscal year, according to data from the NRB. Although the government has introduced reforms to reduce investment fees and remove limits on IT sector investments, overall FDI inflows remain modest. In 2022/23, Rs 6.17bn was received, rising to Rs 8.40bn in 2023/24. However, this is still significantly lower than the Rs 18.56bn received in 2021/22, and other years have seen similarly fluctuating figures.

Economist Dilliraj Khanal believes that while recent commitments are encouraging, it will take time for these investments to materialize. “The commitments made last year are only now being implemented,” he said, adding that the government’s recent reforms have had a positive impact on IT investments, though overall FDI inflows remain underwhelming. He stressed that there is a significant gap between committed and actual foreign investment.

Khanal also noted that political stability and consistent policies are essential to attract more foreign investment. “The recent growth in investment is not surprising, given the lack of political stability and effective implementation of amended laws. The government's win-win approach is still not functioning effectively, making it harder to attract FDI.”

To build investor confidence, there is a need for more agile and transparent procedural arrangements, as well as an improved investment environment. Industry, Commerce, and Supply Minister Damodar Bhandari acknowledged that the investment environment has not developed as expected since the last investment conference. He cited political instability and the absence of a stable government as major obstacles. Bhandari recommended revising key policies, including the Mining Act, Commercial Policy, and the 2013 Industrial Policy.

Repatriation of foreign investment returns

A survey by the NRB revealed that in the fiscal year 2021/22, while Rs 18.56bn was committed, only 34.3 percent of this amount actually entered Nepal. Meanwhile, Rs 15.67bn was repatriated as dividends. In 2020/21, dividend repatriation exceeded FDI inflows, indicating a tendency for foreign investors to withdraw profits rather than reinvest.

Over the past 27 years, a total of Rs 411.5bn in FDI has been approved for Nepal. However, only 36.2 percent, or Rs 148.99bn, has actually entered the country. This highlights significant weaknesses in Nepal’s foreign investment sector, exacerbated by political instability and inconsistent policies. Economists argue that these challenges have limited Nepal’s ability to attract and retain meaningful foreign investment.