Nepal needs a whole new approach to establish itself as a lucrative FDI destination.
When a country is at war with its neighbours, it hits investment and trade. Nepal is in a comfortable position to attract investment from its major neighbours, India and China, as there is no tussle with any of them. Nepal should become an investment haven for foreign investors.
While investment-related rules and regulations were earlier blamed as barriers for foreign investors, the enactment of the Foreign Investment and Technology Transfer Act, 2019 and subsequent rules and regulations have helped liberalise our market for investors to some extent.
They not only helped to reform Nepal’s foreign investment regime, but also made entry, approval and exit of investors simple and easy. The government has already started a one-stop service centre to provide all services for investors from a single window.
Although the government has made changes to laws, it has been slow in implementing its reform initiatives in the FDI sector. As all countries around the world are competing with each other to attract investors, the delay could mean losing out foreign investments to other markets.
However, there are still concerns about some of the provisions in the act including approval of the investment and negative list which must be addressed if the government is really serious about making Nepal a lucrative destination for investment.
Recent data shows that the amount of repatriation of dividends from foreign investors in Nepal is outstripping the inflow of foreign direct investment. This also indicates that investors are reaping good rewards in Nepal. This is one of our selling points.
Nepal has established bilateral relations with over 168 countries. Despite the presence of embassies and missions in most of these countries, the government has not been able to effectively mobilise them to attract foreign investment.
Investment diplomacy should be a top agenda for our embassies and missions abroad. Ambassadors’ terms of reference (ToR) should include promoting Nepal as an investment haven and to facilitate investment into the home country from the host country. Rather than solely focusing on mobilising foreign aid, our embassies abroad must pitch ideas connected to business and investment in Nepal.
In addition to that, the government should also join hands with the Non-Resident Nepali Association to promote Nepal among foreign investors.
Non-resident Nepali are also potential investors in Nepal. Like in India, the government should also introduce an automatic route for NRNs to invest in Nepal. Investments from NRNs should be allowed to flow into the country without the requirement of any approval from any government agency. Similarly, the automatic route can be gradually implemented for other foreign investors also.
The Shanghai Cooperation Organization (SCO) is another front that Nepal can advance. Though Nepal has a status of Dialogue Partner in the SCO, there is a possibility for a country with immense hydropower generation capacity to benefit from this grouping through energy cooperation in the long term.
There are also concerns about the political instability that has been discouraging foreign investment. Many countries that lack political stability have been able to attract foreign investment. Political instability, particularly when followed by widespread corruption, violence or labour tension, hurts investment to some extent. This is a factor that foreign investors consider before deciding to invest in any country.
However, it’s not the only decisive factor that drives the decision of investors. If an investor is assured that his investment is protected and there is a prospect of high return, investors might be inclined to take a bit of risk.
However, investors seek policy stability. They are concerned with any change in the investment related policies, rules and regulations that have detrimental effect on their investment. Since our rules and regulations get frequently changed, foreign investors are afraid and discouraged from making investments in Nepal. That should be stopped. The government should introduce changes or amendments in regulations only after carrying out a study about its potential impact and holding rigorous consultations with the stakeholders.
In Nepal, there should be a strong common commitment from all political parties to create a favourable environment for investment, regardless of who is in the government. They can come up with a charter pledging that their activities or actions would not hamper foreign investments.
The government’s recent decision to allow foreign investment in the agriculture sector prompted a debate about whether this sector needs to be opened for foreign investors. Nepal’s agriculture is largely based on subsistence farming. To overcome the subsistence farming, there must be investment in modern farming methods and technology. This is possible through foreign direct investment. The ‘negative investment list’ should be revised to allow more sectors to benefit from foreign investment. It’s not about the money that investors bring, the host country also benefits from the managerial skills, technology transfer and increased revenue that comes with the foreign investment.
Nepal should have a project bank and prepare a list of potential projects that can be implemented through foreign investment. They should be in the priority list which can be showcased in the international market. Some of these transformational projects could include smart cities in the seven provinces, exclusive casinos with helipads in Pokhara, Dhankuta and Bhairahawa and Inland Waterways in the Koshi basin. Investment Board of Nepal (IBN) should be more proactive to meet its objectives. While the establishment of the IBN led by the Prime Minister sends a message that Nepal is serious in facilitating foreign investment, there is more this mechanism can do. It should take initiatives to reach out to potential foreign investors, pitch them various projects and facilitate their investments.
Agriculture, manufacturing sector, hydropower and capital market are some of the main sectors where there is scope for foreign investors in Nepal. As the growing effects of climate change have put a spotlight on green investment, Nepal has a huge potential to become a haven also from that perspective. While many investors around the world are looking for avenues for green investment, Nepal can attract such investors in the hydropower sector. In a matter of a decade, we will have a huge surplus of hydroelectricity. This could become a competitive advantage for us as it could help foreign companies that enter Nepal to avoid carbon tax that many countries are now imposing.
Foreign Investment in Capital Market
Nepal’s stock market is still in a nascent stage. Sooner or later, the capital market will be a sector that will become a magnet for foreign investors. The country should now start laying the foundation for an international standard stock market. NRN investment is a starting point. Despite a lot of talk on allowing NRN investment in the stock market, there has not been any substantial progress made in that direction.
The 15th Plan (2019/20-2023/24) of Nepal prepared by the National Planning Commission has also laid out a strategy to attract small, domestic and foreign institutional investors in the securities market or portfolio investment. Prior to that, the government should carry out legal and structural reforms to make the capital market reliable and credible.
(Pokharel is the former Executive Director of Citizen Investment Trust.)