Kathmandu: Foreign Direct Investment (FDI) is crucial for developing countries like Nepal and Nepal is a nation that could largely benefit from FDIs. Over the years, the amount of FDI commitments has escalated. In mid-July 2020, Nepal received foreign investment from 52 countries. In 2020-2021, countries with the largest FDI investment in Nepal were China, the UK, Singapore, the USA and India, with China contributing the largest investment worth Rs 22.5 billion. Of various industrial sectors that have received investment over the past years, the hotel and tourism industries have been topping the list. It received FDI amounting to Rs 18.31 billion in 2021. The data indicates that foreign investments have been playing a vital role in assessing new technologies and business practices for shaping the country’s economy.
So, does this indicate Nepal’s economy is foreign investment-friendly?
A press release of the World Bank mentioned Nepal’s rank at 94 out of 190 economies on the Doing Business 2020. It was a significant achievement for the country to be in the top 100 economies based on the ease of doing business. The major transition measures that helped Nepal pull off to the top 100 were positive reforms on construction permits, access to credit, trading across borders, and contract enforcement. Nonetheless, the difficulties to do business in Nepal were also simultaneously accorded–starting a business and property registration were major problems.
Despite the efforts to position itself as an investment-friendly nation, what exactly is the FDI status in Nepal?
‘World Investment Report 2021’ presented by the United Nations Conference on Trade and Investment (UNCTAD) shows that global FDI inflow in 2020 declined by 34.7 percent to USD 998.9 billion. No doubt, Covid-19 had a sizable impact on all types of FDI around the world. But, a ‘Survey Report on Foreign Direct Investment’ in Nepal (2019-20) published by Nepal Rastra Bank has revealed that Gross FDI inflows in Nepal increased by 18.2 percent to Rs 19.68 billion in 2019/20, and Net FDI inflows by 49.1 percent to Rs 19.48 billion. Despite an exponential increase in the rate of FDI inflows within the nation, the FDI realization is dismal though the commitments have remained higher. The FDI approval may indicate an intended investment but in reality, the actual investments may not have taken place. Also, there is a significant time lag between the approvals and actual investments. For instance, in 2019/20 the approved FDI stood at 35 percent of the total FDI commitment made by the countries whereas the actual realization of 35 percent was only 20 percent.
A big deterring factor for the progressive inflow of the FDI and investments in the country has always been the country’s political instability. However, after the 2017 elections, the country got a stable government. Soon enough, to pursue and attract foreign investors, the government managed to organize Investment Summits like the Nepal Investment Summits of 2017 and 2019. Also, the government took various policy-based initiatives to improve and attract foreign investments by streamlining laws like Public-Private Partnership and Investment Act (2019) and by adopting new Foreign Direct Investment Laws. However, despite such initiatives, Nepal has not seen any drastic increase in FDI inflows. The investors have also not taken the ten-fold increment in the minimum investment ceiling set at Rs 50 million (USD 450,000) from Rs 5 million (USD 45,000) efficaciously. The pertaining reasons could be numerous unrecorded hurdles faced by investors while investing, operating, and repatriating their dividends or after-sale capital gain tax.
Compared to other South Asian countries, poor infrastructure facilities have become major constraints in inviting foreign investors to Nepal. According to the ‘Logistics Performance Index, 2018’ of the World Bank, Nepal ranked at 114th position in the continued poor transport infrastructure. This factor plays a significant role because Nepal has to compete with its neighboring countries like India, Bangladesh and Bhutan to bring in FDI. As such this poses big challenges in attracting FDI. As basic infrastructural development provides convenience in business operation, lack of basic necessity poses a threat of losing potential investors.
Also, another major challenge faced by FDI in Nepal is the unnecessary governmental hurdles foreign investors face while registering the company and acquiring land in the name of the company. Registering a company in Nepal generally takes four to five months. Some of the Indian companies like Manipal group and Reliance Cement discontinued their investment in Nepal citing unnecessary administrative hassles as a reason.
Infringements of Intellectual Property are rampant in Nepal. Due to the general practice of the ‘first come first serve’ registration process of a trademark in Nepal ignoring its international presence, many foreign companies seeking IP protection have been facing difficulties. For example, Kansai Nerolac Paints, an Indian subsidiary of Kansai Japan, registered Kansai Nerolac Nepal Pvt Ltd in Nepal. Soon after the registration, the company was barred from using Kansai Nerolac in Nepal since a Nepali company Rukmini Chemicals had already registered a trademark under the same name with Department of Industry (DOI). As a result, Kansai Nerolac Nepal had to import its products in Nepal under the name of KNP. The legal issue did get resolved later, after it was taken to the Supreme Court which ruled a verdict in favor of Kansai Nerolac Nepal allowing it to use its trademark. Such non-recognition of their rightful ownership could make a lot of investors withdraw their investment as it drags the company into unnecessary legal and procedural hassles in addition to the entire uneasy process.
Non-recognition of debt agreements concluded abroad for investment to be made in Nepal is also seen as a challenge to settle any disputes arising over the projects in Nepal.
Red tape also demotivates foreign investors. One such instance was of Arghakhanchi Cement, which has a considerable amount of investment from UMA Cement International, an India-based company. Argahkhanchi Cement had sought approval from the Ministry of Industry for issuing bonus shares to reinvest in expanding the capacity of the factory in 2018. Despite adhering to all the necessary required documents, the Ministry did not approve the request. Bureaucracy has the tendency to prolong the procedure deliberately to negotiate for bribes and such a tendency deeply discourages foreign investors.
Non-recognition of debt agreements concluded abroad for investment to be made in Nepal is also seen as a challenge to settle any disputes arising over the projects in Nepal.
The restrictive policies enlisted under FITTA could also affect the potential foreign investors in Nepal. The government could have made the investment area more flexible, like allowing agro-processing under a positive list. Nepal still lacks proper utilization of agricultural processing methods and marketing it despite being an agriculture-based economy. Even rice, a staple food of Nepal, is still largely imported annually.
When the aforementioned issues recur it could hamper the FDI inflows in the country and demotivate the investors. Thus, to make foreign investment more flexible, it is important to address every existing issue. Also, it is important to address the unrecorded complications prevalent in the investment sector to make the nation more investment-friendly because foreign investment is vital for Nepal which is aiming to become a middle-income country.
This content is prepared by Nepal Invests. Nepal Invests is Nepal’s investment facilitation agency initiated by the private sector. It guides the investors within the country and abroad to establish, operate and expand their businesses in Nepal. It tweets as @Nepal_Invests
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