by Hari Prasad Shrestha 10 December 2023
The government has announced its plan to organize the Third Investment Summit on April 21-22 in Kathmandu with the objectives of attracting foreign investment and encouraging domestic investment and investment from the Non-resident Nepali community. Nepali embassies abroad would be mobilized to facilitate the hosting of the Summit through economic diplomacy.
In spite of significant liberalization of the economy and providing attractive investment incentives, Nepal’s achievements in attracting Foreign Direct Investment (FDI) are far from satisfactory level and national expectations. Past investment summits were not that successful in attracting investments. During the Nepal Investment Summit 2017, the development partners from China, Bangladesh, Japan, the United Kingdom, Sri Lanka, and India pledged a total of USD 13.52 billion to invest in Nepal. However, after two years of summit, Nepal made agreements equivalent to US$ 4 billion and real disbursement was only US$.1.5 billion out of the pledged amount.
In a similar way, Nepal secured nearly $12 billion in commitments from the Investment Summit 2019 for the projects mainly in Kathmandu Ring Road ,Bus Rapid Transit Project, Tamor Storage Project, Dhulikhel Medicity, West Seti Hydropower Project, Nijgadh International Airport, International Convention Centre, Bhaktapur and Integrated Agriculture Infrastructure Projects in different districts, however none of the projects being implemented till date.
According to the World Bank, for 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. 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. Under the service sector, transport, storage and communication received the dominant share. Manufacturing industries, and electricity, gas and water are main sub-sectors receiving FDI in the industry sector.
The Nepal-India Trade Treaty 1996 crafted a favorable business environment for the multinational companies to enter Nepal. Thereafter, Nepal became a member of the World Trade Organization in 2004. It has signed an agreement on South Asian Free Trade Area (SAFTA) and Bay of Bengal Initiative for Multi-sectoral Technical and Economic Cooperation (BIMSTEC). The major MNCs operating currently in Nepal are limited in numbers, they are Dabur Nepal, Asian Paint, Colgate Palmolive, Unilever, SBI Bank, Standard Chartered, Hongshi Cement, Ncell, GMR, SJVN, Gezhouba, Silver Heritage, Tibet Airlines among others.
There is equal treatment to foreign and local investors in Nepal by law. Government ensures legal protection to foreign investment against nationalization and expropriation and allows repatriation of proceeds from sales of shares and profit. Moreover ,there is availability of cheap labor force, abundant natural resources, improving infrastructures and skilled manpower, changing consumption patterns, improvements in Doing Business Report, but FDI in Nepal has failed to make a significant contribution to the growth and development.
As a result of inability to attract enough foreign direct investment in Nepal, the share of public debt has dangerously increased from 22.30% in 2015 to 41.40% of GDP in 2022. There are also some concerns in Nepal on the side of the investors who were in full of controversies. For example, the huge tax evasion issue by selling NCELL telecommunication company many times, put in controversy to all three organs of the state related to capital gain tax. The Axiata company of Malaysia is also in process to repatriate investment by selling its shares in NCELL citing Nepal’s challenging outlook; and it does not want to take risk of asset ownership to the state if its license is not renewed in 2029.
Moreover, a couple of years ago, the Centre for Investigative Journalism-Nepal revealed how some Nepali politicians and businessmen are using foreign direct investment to bring illegal funds into the country. More than 50 Nepalis transfer illegally earned money to Tax Haven countries through illegal channels and bring such money through official channels 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.
The major question regarding investment in Nepal starts from why a genuine foreign country or companies should invest here. And FDI flow to Nepal remains dismal even after changes in legal and institutional frameworks to make them more FDI-friendly. Domestic investors also hesitate to invest in the productive sector. As a result of the high risk , a major share of our domestic capital has been invested in unproductive sectors, like real estate, cars, shares and gold etc.
The investors are still not confident – the political system changed but all other circumstances are unchanged even the operational and post operational support by the government are still challenging. Investors face lots of problems 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. Lack of adequate infrastructures has always been a major bottleneck for Nepal to achieve higher levels of investments. Reliance cement of India, Dongote of Nigeria, who left the country without investing in Nepal are examples of rising administrative hassle and difficulties in the system.
Another cause behind hesitant in investing, especially in the manufacturing sector is due to the open border with India from where consumer goods in excessive quantities enter Nepal through India in an illegal way without paying taxes, which has been almost impossible to control even after the government’s numerous efforts. Producers in Nepal can’t compete with such illegally imported goods. Even after providing many facilities and decreasing the limit of exports, investors are not interested in establishing factories in the Special Economic Zones.
Nepal’s agriculture sector is still in a primitive stage and deteriorating conditions. People are distracting from this sector due to declining domestic as well as external investment. The food situation in Nepal is so delicate that if India lacks foodstuff itself and stops exporting, we might be in a crisis of food insecurity. Nepal never learned lessons to be self-reliant even after many border blockades, a great earthquake, and pandemics, which created an extreme shortage of essential items including food items as well.
To make the planned investment summit more successful, Nepal’s global network of diplomatic missions should be mobilized perfectly in dealing with foreign government officials and external investors including Non resident Nepali to promote the country’s economic value proposition. They should prioritize engagement with countries that contribute the most to our economy through investments to make the summit successful. These countries can be classified based on top bilateral trades, top foreign investors, top bilateral development partners, top multilateral development partners and new emerging middle east countries and so on.
The Government has established an Investment Board for improving the investment process with specialized technical committees to work on developing concrete proposals and strategies to attract investment in development areas during the summit especially in sectors such as agriculture, hydropower, tourism, manufacturing, education, information technology, airport,railway etc. But importantly, the government with its concerned ministries and agencies must address the shortcomings in our laws and concerns over working procedures related to FDI before the summit. Without proper and meaningful timely preparations, only organizing investment summits could be repetition of past disappointments.