The Government of Nepal is bracing up for the third investment summit on April 28-29 in Kathmandu. Similar events were organised in 2017 and 2019 as well. The key objective is to promote Nepal as an attractive investment destination. Despite the unfailing policy rhetoric of attracting foreign direct investment (FDI) by every successive government since 1985, Nepal's success has been unimpressive, if not pathetic. According to World Bank data, except for three years in the last four decades—1997, 2010 and 2017—FDI inflow has even failed to reach 0.5 percent of Nepal's gross domestic product (GDP). As per the World Investment Report (WIR) 2023, published by the United Nations Conference on Trade and Development (UNCTAD), during the five-year of 2018-22, total FDI inflow into Nepal was only $639 million.

Incoherent data

There is a sheer lack of coherent data on the total commitment and actual realisation of FDI in Nepal. The latest FDI survey report published last September by the Nepal Rastra Bank (NRB) points to a significant gap between FDI commitment and actual net inflows. As per the Department of Industries, between fiscal years 1995-96 and 2021-22, the total actual net FDI inflow stood at around 36.2 percent of total approval.

The Industrial Statistics 2022, published by the government shows that the country should now have an FDI stock of $3.2 billion; the WIR 2023 estimates it to be USD 2.04 billion, while the NRB survey claims this amount to be only $2 billion. Out of this, 53.7 percent has been invested as paid-up capital and 31.7 percent and 14.6 percent as reserves and loans, respectively. The total FDI stock is estimated to be $1.98 billion, accounting for only about 4.8 percent of Nepal’s GDP of $40.83 billion.

Such data discrepancy is evident even among government agencies. The Department of Industries shows China as by far the largest foreign investor in Nepal, while the NRB report claims, based on realisation, that India has been the largest source of such funds. Although there is sector-wise variation in investment priority, it is evident that the energy sector, hydropower development in particular, has been the main choice of investors from both India and China. Undoubtedly, FDI from these two neighbours constitutes more than three-fourths of the total FDI in Nepal.

The bottlenecks

The importance of FDI for Nepal, one of the poorest countries in the world, can hardly be overemphasised. But all the governments so far have miserably failed to remove the policy and structural impediments, despite their recalcitrant and meagre performance in attracting FDI. Policies, particularly those about environmental impact assessment and land acquisition, coupled with extreme “bureaucracy” and lack of coordination among government agencies have gravely irritated even public enterprises, let alone foreign or private investors.

For example, Kul Man Ghising, Managing Director of the largest public enterprise, Nepal Electricity Authority, confessed in a recent radio interview that the construction of the transmission lines has been hampered by lack of cooperation from other government agencies like the forest ministry and local governments. It has delayed the evacuation of electricity produced by private producers, the supply of power to several industrial corridors and cross-border electricity trade with India. This in turn may serve as a repulsive disincentive to potential investors in Nepal's much-hyped hydropower industry.

The government has enacted some key laws like the Company Act 2007, Foreign Investment and Technology Transfer Act, 2019 (FITTA), Industrial Enterprises Act, 2020, and Public-Private Partnership and Investment Act, 2019. The Secured Transaction Act 2006 is also being amended. However, at the practical level, these initiatives seemed to have fallen short of assuaging the possible investors. Policies like higher electricity tariffs for industries and the government's indifference towards improving transport, digital and financial services infrastructure have proven to be additional deterrence.

On the structural aspect, frequent changes in the government are seen as the most denting factor for investors’ confidence. Both domestic and foreign investors alike are disgusted by unprofessional discords often brewed out of political differences between the fiscal and monetary authorities. Despite repeated promises, key institutional reforms such as the operationalisation of the One Stop Service Centre to provide investment-related services to foreign investors from a “single window” have for all practical purposes remained dysfunctional. An equally pertinent question is why domestic investors also deserve such an integrated service from a single point while entering and exiting the business. Other issues like the sovereign credit rating of Nepal, more liberalised capital account convertibility, export-enabling revenue policies and structured sovereign guarantee mechanism against large ticket-sized investments are undoubtedly critical. Having a ready-to-launch project bank, etc., certainly helps.

Realistic approach

Nepal has achieved very little against the expanse of policy debate and the political space about the inevitability of FDI. Going beyond ritualising the periodic investment summits, Nepal must now thoroughly and ruthlessly review the reasons behind its dismal performance in attracting a sizable amount of FDI despite immense possibilities in green energy, tourism, education, health and information technology industries, among others.

Nepal also needs to be differently strategised in its investment priorities and policies, given the country’s unique location and emerging geopolitical realities. First, Nepal is sandwiched between the two fastest growing, the second and (projected to be) the third largest economies of the world, China and India, respectively. These countries, which have the world’s largest consumer markets, will be the priority for foreign investors from the developed world willing to invest in this subcontinent. Second, the trend so far indicates that India and China will continue to be major foreign investors in Nepal.

Nepal’s future FDI policies can be calibrated in line with this reality to tap continental investment as well as vast consumer markets. Identifying the products and services of Nepal's comparative advantage with a focus on the markets primarily in its immediate two neighbours can only create a sustainable two-way flow of investment and trade. Third, Nepal should be able to facilitate access to both Indian and Chinese markets for investors eying an integrated regional market while making Nepal their production/operation base.

Without ameliorating these demand-side dynamics, aspiring for a huge FDI flow will only prove to be chasing a mirage.