The 1990s can be remembered as the decade when private capital started flowing into Nepal in the form of foreign direct investment (FDI). This is one of the remarkable features of globalisation. FDI contributes to productivity gains by providing new investment, better technology, management expertise, entrepreneurship opportunities and export markets. Market forces and the private sector are increasingly being relied upon as the engine of economic growth in Nepal given its resource constraints and lack of investment. FDI flows into Nepal have historically been very low. The reasons behind the low FDI inflow are uncertainty caused by frequent changes in government and insecurity created by the Maoist insurgency. Being a landlocked country in a slow-growth region has not helped.

Lower than expected

FDI has been expected to grow sharply since the insurgency problem has been solved, a constitution has been written and key elections have been held. However, there are still some obstacles to faster FDI inflow. Nepal joined the World Trade Organisation (WTO) in 2004. It is also a member of the South Asian Preferential Trade Arrangement (Sapta) and the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation-Free Trade Area (BIMSTEC-FTA). New FDI initiatives have been taken with the aim of enhancing sustained growth and reducing poverty. Nepal has adopted an open and liberal policy to welcome foreign investors. 

The Industrial Policy and the Foreign Investment and Technology Act 1981 initially paved the way for FDI. A clear-cut policy towards foreign investment was introduced with the enactment of the Investment and Industrial Enterprise Act 1987. Nepal encourages foreign investment as joint venture operations with Nepali investors or as 100 percent foreign-owned enterprises. Foreign investment is permitted up to 100 percent equity shareholding in medium- and large-scale industries.

Foreign investment, especially FDI, supplements domestic investment resources and acts as a source of foreign exchange and can relax the balance of payments constraints to growth. Considering the economic benefits and importance of FDI for promoting economic growth, Nepal has formulated wide-reaching changes in national policies to attract investment. South Asia, in general, realised that FDI was an important determinant of investment, economic growth and employment and became ‘facilitators’ during the 1990s to attract foreign capital. As a result, FDI inflow increased and South Asia became an attractive destination for foreign investors. 

Weakest in the region

Most countries have been effective in implementation. However, despite favourable policies in place, Nepal has not been as attractive to potential investors as its neighbours. This is because of Nepal’s poor business climate such as poor infrastructure, poor security, instability, unreliable energy, lack of policy coordination, a dormant special economic zone (SEZ) policy, lack of institutional reforms, severe corruption and cost and time overruns in infrastructure projects due to contractual and institutional failures. Nepal remains one of the worst performers in the region in terms of FDI despite a robust growth of 125 percent in 2011, according to UNCTAD data. In terms of the FDI potential index, Nepal ranks the lowest in the region, that is 175 out of 182 countries ranked globally.

While every post-conflict least developed country faces some typical challenges in terms of attracting and retaining investment, Nepal faces constraints that are neither common nor explained by any theory. Given the fact that there is a need to utilise FDI to achieve the government’s development objectives such as poverty alleviation and inclusive economic growth, these challenges become even starker. The constraints to FDI in Nepal are many. They include weak infrastructure, weak governance, procedural hurdles, weak economic diplomacy, lack of identification of viable sectors for FDI, weak negotiation capacity, weak coordination among line ministries, high cost of doing business, and too many entities for investment approval, concession, facilitation and promotion. Nepal does not seem to offer a hospitable investment climate for foreign investors.

Although there are several reasons that could deter investors from making long-term investments in Nepal, four problems stand out. One, political instability and resultant policy and legal uncertainty means foreign investors will think twice before putting money in Nepal. Two, poor infrastructure, in particular electricity and roads, which raises the cost of doing business in Nepal, works as a strong disincentive for foreign investors. Three, militant trade unions have created havoc in the overall business climate. Four, foreign investors have been deceived by untrustworthy and very unethical local partners.

Despite the attempts made by Nepal’s policymakers to attract FDI, a majority of foreign investors are Nepal’s own citizens who have migrated abroad seeking better education and opportunities. The synergy and motivation required to establish a functional system, attempts to introduce international standards and opportunities to add value to Nepal’s severely poor unemployment and economy frequently get shattered by trusted local partners. This is a grave but unseen deterring factor not only for internationally established investors but even non-resident Nepalis who are interested in investing in Nepal. The government of Nepal must make very stringent rules to discourage people who join as local partners with foreign investors and end up preying on them.

Kandel is chairperson of NEEV Investment Group, USA, an investor in the Whoopee Land Amusement and Water Park in Chobar