The recent trend of foreign direct investment (FDI) realisation shows that there is a huge gap between approved FDI and actual net FDI inflows in Nepal.

A survey report on FDI in Nepal (2019-20) unveiled by the Nepal Rastra Bank today has revealed that between 1995-96 and 2019-20, the total actual net FDI inflow stood around 34.1 per cent of total FDI approval.

"The FDI approval may indicate an intended investment (the approved investment may not actually take place) or there may be significant time lags between approvals and actual investments. In some instances, the realisation of the approved investment may take place over several years as usually seen in projects with longer gestation period."

Hence, the study has recommended that the gap between approved and actual inflow should be reduced by facilitating the inflows of approved FDI. Moreover, FDI should be more directed towards export-oriented and import substitution industries to narrow the trade deficit.

The survey revealed FDI in Nepal increased by 8.5 per cent to Rs 198.52 billion at the end of 2019-20. Paid-up capital was the major component in FDI stock as it accounted for 54.4 per cent of total FDI stock whereas the reserves and loans in total FDI stock accounted for 33.8 per cent and 11.8 per cent, respectively.

Nepal received foreign investment from 52 different economies as of mid-July 2020. In terms of total FDI stock, India ranked at the top position with Rs 62.45 billion, followed by China (Rs 30.97 billion), Saint Kitts and Nevis (Rs 15.27 billion), Ireland (Rs 12.93 billion), and Singapore (Rs 12.43 billion).

Industrial sector accounted for about 56 per cent of total FDI stock. Within industrial sector, manufacturing, mining and quarrying industry constituted 28.3 per cent and electricity sector 27.5 per cent of total FDI stock.

About 43.9 per cent of total FDI stock was in service sector. Within the service sector; financial intermediation constituted 27.3 per cent, and hotel and restaurant sector six per cent of the total FDI stock.

The electricity generation sector, particularly hydropower sector in Nepal has been emerging as a preferred sector for FDI in recent year, as per the survey, which showed that 27.5 per cent of FDI stock and 36.4 per cent of total paid-up capital was in this sector. Moreover, hydropower sector also attracted other sources of external financing such as foreign loans in addition to FDI.

The survey further revealed the capacity utilisation of FDI-based manufacturing firms was constrained by COVID-19 pandemic while profitability of FDI companies remained satisfactory in review year. "This indicates the investment potentiality exists in Nepal."

In terms of FDI stock, Bagmati province constituted the highest share of FDI stock (60.5 per cent) whereas Karnali and Sudur Paschim provinces accounted for less than one per cent of total FDI stock.

Thus, the study has said the potentiality of provinces other than Bagmati should be explored and promoted to attract FDI in these provinces.

A version of this article appears in the print on September 10 2021, of The Himalayan Times.