Nepal: Confronting Challenges in Attracting Foreign Direct Investment

Image result for nepal foreign direct investment
Image credit: The Himalayan Times

by HARI PRASAD SHRESTHA   1 February 2019

Nepal’s Prime Minister KP Sharma Oli participated in World Economic Forum on 22-25 January 2019 at Davos, Switzerland. This was Nepal’s first presence in Davos at the prime minister’s level. ‘We’re in a new economic era: Globalization 4.0’. This was the theme of Davos 2019.

The prime minister emphasized on Nepal’s huge potential for investment; and called on the global community to invest in Nepal.

Nepal has some positive environments for investment – availability of cheap labor force, abundant natural resources, simplified regulations, improving infrastructures and skilled manpower, changing consumption pattern, second in South Asia after Bhutan, on the World Bank’s Doing Business Report 2018, surrounded by two populous countries, China and India, which has more than 35 percent of total world population.  

The potential and priority areas of investment are hydropower, transport, agriculture, tourism, information communication technology, mines and minerals, health and education, manufacturing and financial institutions.

However, Nepal has been in average level in attracting foreign direct investment. According to the World Bank, for year 2017 net flow of foreign direct investment in Nepal was 0.79% of its GDP, while India and Bangladesh receive FDI 1.54% and 0.86% to their GDP respectively.

Major countries of South Asia have less than 2.9% trade between them compared to trade with other countries of Latin America and Africa, and less than 5% of global trade between them. The infrastructures are weak and tariff and non-tariff barriers are also major problem here.

Hence, investment among South Asia countries are not encouraging and Nepal seems to be in bottom on regional investment.

Current status

FDI is open in most of the sectors in Nepal. There is equal treatment to foreign and local investors. Government ensures legal protection to foreign investment against nationalization and expropriation and allows repatriation of proceeds from sales of shares and profit. Significant investment incentives exist.

FDI has contributed in technology and skills transfer; establishment of new industries and export promotion; creation of linkages with, and associated upgrading of local enterprises; increase saving, employment, education and training, research development and technology; increased tax revenue, foreign capital, improved infrastructures, and lower prices in market place.

Some foreign direct investors have purchased companies by means of a merger or acquisition, setting up a new venture or expanding the operations of an existing one. Others include the acquisition of shares in an associated enterprise, the incorporation of a wholly owned company or subsidiary and participation in an equity joint venture. Besides manufacturing hydropower, tourism and infrastructure sectors are attracting FDI to some extent.

During the Nepal Investment Summit 2017, the development partners pledged in totaling USD 13.52 billion to investment in Nepal. Investors from China pledged USD 8.2 billion, 61 percent of the total letter of intends (LOLs) signed during the event followed by Bangladesh USD 2.4 billion. Thereafter, Japan and the United Kingdom pledged USD one billion each. Similarly, Sri Lanka and India pledged intents of USD 500 million and USD 317 million respectively. In the meantime, Nepali investors also signed LOIs totaling USD 11.5 million.

However, after two years of summit Nepal made and agreements equivalent to US$ 4 billion and real disbursement was only US$.1.5 billion out of pledged amount and according to Investment Board of Nepal, this amount includes 6 hydropower projects of 1432 megawatts. Whether these projects would be implemented there is still a big question mark. As a follow up of previous summit, yet again Government of Nepal is going to organize an Investment Summit on 28-29 March this year.

The three sectors – service, industry and agriculture sectors are the areas receiving highest foreign direct investment.The service sector received the major share of FDI followed by the industry and the agricultural sector. About 70.2 percent (Rs. 96.7 billion) of total stock of FDI is in the service sector, 29.5 percent (Rs. 40.6 billion) in the industry and the remaining 0.3 percent (Rs. 395 million) in the agriculture sector.

Under the service sector, transport, storage and communication received the dominant share of 47.0 percent. Manufacturing industries, and electricity, gas and water are main sub-sectors receiving FDI in the industry sector i.e. 15.1 percent and 13.9 percent respectively.

The dividend repatriation by FDI firms, based on approval from NRB, amounted to Rs. 17.24 billion in 2016/17 compared to Rs. 6.25 billion in 2015/16 and Rs. 7.21 billion in 2014/15.

The legal arrangements that govern FDI in Nepal include Foreign Investment and Technology Transfer Act (FITTA), 1992, Foreign Exchange (Regulation) Act, 1962, Investment Board Act, 2010 and Industrial Enterprises Act, 2016, Company Act, 2017, Investment Board Act, 2011, Contract Act, 2000, Arbitration Act, 1999, Income Tax Act, 2002, Labor Act, 2017, and Privatization Act, 1992. Similarly, Department of Industry (DOI), Investment Board of Nepal (IBN) and NRB are the agencies for administration and implementation of rules and regulations related to FDI.

The foreign invested firms under export goods like juice, tooth powder and paste, feeds, crude mustard and soybean oil, among others, whereas the industrial goods producing firms with FDI

export goods like galvanize sheets, GI pipe, black pipe, fittings, loop mats, gabion boxes, plastic closures, among others

Multinational Companies (MNCs)

The Nepal-India Trade Treaty 1996 crafted favorable business environment for the multinational companies to enter Nepal. Nepal became a member of World Trade Organization in 2004. By now, it has signed agreement on South Asian Free Trade Area (SAFTA) and Bay of Bengal Initiative for Multi-sectoral Technical and Economic Cooperation (BIMSTEC).

Dabur, Asian Paints, Colgate Palmolive, Unilever, SBI Bank, Standard Chartered, Hongshi Cement, Ncell, GMR, SJVN, Gezhouba, Silver Heritage, Tibet Airlines among others are the major MNCs operating currently in Nepal.

The firms engaged in telecommunication, hydro power generation, airlines, hotels etc. have borrowed from their foreign investors.

Multinational companies attempt to sell their brands by promoting modern lifestyle as a status symbol.  MNCs sometime play role as the representative of their home countries and the strategies of MNCs alone do not determine their effects on development. The actions of multinational corporations are strongly supported by economic liberalism and free market system in a globalized international society.

The most important competitive advantages enjoyed by multinational firms in Nepal are: economies of scale arising from their large size, managerial and marketing expertise, superior technology owing to their heavy emphasis on research, financial strength and differentiated products.

The state is a national actor which makes choices to maximize the benefits on its side. Thus, the crucial part of the impacts of MNCs on development is dependent on how state mediates this relationship.

Some believe that MNCs are if not properly managed, they invite several non-economic impacts challenging the state, creating political and social division and finally taking control over the economies of their host countries.

The multinational corporations draw resources for their most profitable use, thus bringing positive impacts upon economic condition of the “individuals, families, companies and societies”

Some problems with the FDI is than some companies returned without investing and a well stablished company sold its shares without paying capital gain tax to the government.

Reliance cement of India, Dongote of Nigeria has already left the country due to administrative hassle and difficulties and some other investors are finding difficulties in transferring their dividends.

A multinational company on communication – Ncell, paly to emptied government treasury. The tax evade issue by selling NCELL telecommunication company 12th times, put in controversy to all three organs of the state related to capital gain tax. Finally, the Large Tax Payers Offices assessed NRs 61 billion tax to be paid by this company, which has now increased with interest to around NRs 71 billion.

Critical aspects

A survey report by the Nepal Rastra Bank (NRB), the central bank of Nepal, in June last year said FDI totaling Rs137.68 billion has been endowed to the industries currently operating in Nepal. More than 60 percent of the FDI share, amounting to Rs82.65 billion, comes from tax haven countries, the report says, adding that the British Virgin Islands and nearby countries alone have an investment worth Rs62.78 billion in Nepal.

Recently, the Centre for Investigative Journalism-Nepal has revealed how some Nepali politicians and businessmen are using foreign direct investment to bring illegal funds into the country. More than 50 Nepalis transfers illegally earned money to Tax Heaven countries through illegal channels and brings such money through official channel citing it as foreign direct investment in Nepal.

The purpose behind transfers of such funds seems to launder the illegally earned wealth rather than establish legitimate businesses that can be beneficial to the country and its people.

This disclosure could lead to a situation, where Nepal could be blacklisted by the Financial Action Task Force, an intergovernmental organization formed to combat money laundering.

The prolonged state of insecurity during Maoist insurgency and government changed in every nine months in the country gave a message of instability to external investors. Investors still scared to invest even after peace process, constitution promulgation and elections in all levels of government. The investors are still not confident – political system changed but all other circumstances are unchanged even the operational and post operational support by the government are still challenging.

Major share of our domestic capital has been invested in unproductive sectors, like real estate, cars, shares, gold etc. and government is not capable to spend capital expenditure in considerable amount.  Lack of transparency and corruption are also caused to backtrack the investors.

The major question regarding Foreign Direct Investment (FDI) in Nepal starts from why a foreign country or companies should invest here.

The manufacturing sector investment from India and China is not easy to attract in Nepal as manufacturing items have lower production costs there compared to Nepal. They prefer exporting goods to Nepal instead of operating production plants in Nepal. Annually, India US$ 8 billion and China US$ 2 billion worth of goods export to Nepal. For India Nepal is the largest market in South Asia.

Another cause behind hesitant investing in manufacturing sector is that due to open border with India, consumer goods in considerable quantity enter Nepal through India in illegal way without paying taxes. Producers in Nepal can’t compete with such goods. Even after decreasing the limit of export, investors are not interested to invest in Special Economic Zone, is its latest example of unwillingness to invest.

Medical education in Nepal has high potential for investment but the continued instability and tug of war between the government and the opposition have ruined this sector too. We have large market for medical education, only students from India are more than enough to develop this sector.

Hydropower sector investment depends of mercy of India, if India accepts to buy Nepal’s power investors would certainly invest in this sector. There is no consistency in policy in India to support Nepal on hydropower, it is very up and down. If India assured to buy power from Nepal, certainly this sector could bring crows of foreign investors in Nepal

Moreover, the tourism sector investment is also not very satisfactory. For nine years Nepal is trying to get western air routes between India and Nepal, however India obstacles in providing air routes with conditionalities have also hindered aviation sector as well as tourism in Nepal. External investors hesitate to invest in large scale in this sector.

In manufacturing sector, globally consumed labor-intensive items like garment manufacturing and its exports are most viable sectors as we have previous good record of export in this area to USA and European countries. As the United States of America has already provided us duty free access to our garments products, now we can attract more investors in this sector. This is the most viable sector for Nepal’s manufacturing exports.

It would be difficult to export and compete with India and China related to labor intensive manufacturing products until they upgrade their economy towards high technological and digital products.They have shown interest investing other than manufacturing sectors, such as hydro power, transport and tourism. Both the countries may not be interested to lose huge export to Nepalese market.

Nepal has tested India more than 60 years for its investment in Nepal, it supported India in almost all affairs of state but India’s support in investment was discouraging. India has always supported Nepal for political change, however for economic change, it is not supportive.

We must search and attract investors from USA, Europe and east Asian countries instead of depending solely on India and China. It is certain that without strategic support of any developed country, economic development in third countries is almost impossible. Newly Industrializing Countries of east Asia and Latin America are its strong example.

Moreover, Bangladesh, Vietnam, Cambodia have developed their economy through investment from USA and the European countries. Bangladesh is performing best in its garment industries and its export.

Both India and China are investing to upgrade border customs infrastructure with Nepal, which has been supportive to international trades. However, our customs border infrastructures with India and China – whether it is dry ports, Integrated Check Posts and other border infrastructures are more supportive for import rather than for exports.

Way forward

Nepal has been devastated by great earthquake 0f 2015 and reconstruction of infrastructures need great attention for its timely completion through injecting increased investment. The economic losses by the great earthquake were estimated to be as much as $10bn. The cost required for its rebuilding is $5bn. Federal structures require approximately eight billion dollars for construction of infrastructures in the initial stage and on top of it. It is not possible to fill the budgetary gap only through internal resources.       

The Government has initiated a comprehensive reform program to streamline all investment-related procedures and to attract more private direct domestic and foreign investment. The Government has established an Investment Board for improving the investment process from one window. The Board assigned specialized technical committees to work on developing concrete proposals and strategies in order to overcome all main obstacles. Government is in process to amend different laws and policies related to investment to attract more investments in forthcoming summit.

Investors are still facing lots of problem in Nepal. From the burdensome process of company registration, renewal to problematic land acquisition and annoying taxation systems- arbitrations to settle business disputes also stop many potential multinational – repatriation of their investments and remit of dividends as the processes are quite lengthy and are often full of discrepancies. 

Similarly, things such as electricity and water are a scarce commodity. The time-consuming processes of getting these essentials are often marred by bureaucratic hassles and corruption. In the age of digitalization, after registration of firm and obtaining necessary documents, government officials should not comply investors to visit office physically, for the procedures like renewal, submission of reports, property rights, tax clearance, employment authorization, visa extension and so on; most of these works should be done electronically.

Lack of adequate infrastructures has always been a major bottleneck for Nepal to achieve higher levels of economic growth.  It is estimated that Nepal needs to spend over 10 percent of its GDP in infrastructure development annually which covers around four to five percent at present.

In Nepal, it has been observed that the international development partners are always helping to all form of political systems and the governments through increased assistance. Their motto appears to be development and economic growth in Nepal. They are not bemused by any political system. Nepal should feel fortunate in this regard.

Whether Nepal has been successful in transmitting the message that Nepal is safe and secure for foreign investment in World Economic Forum at Davos, Switzerland, we must wait and see until the investors come to Nepal for investment. Moreover, we can also observe the tendency of the investors in the forthcoming Investment Summit of 28-29 March 2019; if correct message has been transmitted in Davos, the tendency would be certainly positive in investment summit otherwise the usual tendency would again back track the nation in economic development.

Posts Carousel

Leave a Comment

You must be logged in to post a comment.

SAJ on Facebook

SAJ Socials


Top Authors