Kathmandu, June 5
While presenting the budget for the fiscal 2018-19, Finance Minister Yubaraj Khatiwada said Nepal would be established as a foreign investment destination. He also mentioned that foreign investment would play a complementary role in capital formation in the country.
These statements stoked hopes for higher inflow of foreign investment into the country, which lacks financial resources to meet huge investment needs. But by the time Khatiwada ended his speech, the statements he made started sounding hollow, as few measures were taken to achieve the ambitious goal of turning Nepal into a foreign investment destination.
“Incentives, such as tax holidays and subsidies, are what are lacking in the budget, as they are major triggers for foreign investors to make commitments,” said Sahil Agrawal, chairperson of International Investment Promotion Committee of the Federation of Nepalese Chambers of Commerce and Industry, the country’s largest private sector umbrella body.
The budget states that foreign investment will be ‘encouraged’ in export-oriented manufacturing industries and tax concessions will be provided to industries that start production within a certain timeframe.
The government has been providing tax concessions to certain industries for quite some time. For example, hydroelectric projects scheduled to come into operation before mid-April 2019 are entitled to seven years of income tax holiday and 50 per cent income tax concession for three years thereafter. The latest budget has extended that deadline to mid-April 2024.
Despite the deadline extension, the feel-good factor was elusive, because ‘hydroelectric projects are capital-intensive and can hardly generate profit in first five to seven years of commencing operation’, according to Agrawal, who is also the managing director of Shanker Group, a leading industrial and trading house. “There would have been some excitement had the tax holiday period been extended,” he said.
Instead of introducing meaningful policies for foreign investors, the budget has focused on ‘token actions’, such as making the process of registering and deregistering businesses simple, transparent and predictable, and simplifying legal and institutional processes to promote investment. Agrawal said these were ‘basic things’ foreign investors expected from any country they entered, and they should not be considered as icing on the cake.
Nepal needs hundreds of billions of dollars in foreign investment in the coming years to tap the opportunities in hydropower, transport, agriculture, tourism, information and communication technology and mines and minerals sectors, as domestic capital is not adequate to fund many of the projects. Yet Nepal attracted total foreign direct investment of Rs 13.5 billion in the last fiscal or 0.5 per cent of the gross domestic product, which is one of the lowest among similar countries in the world.
One area, apart from hydropower, where Nepal immediately needs foreign investment is tourism, where lack of tourist-friendly facilities, including standard hotels, are preventing foreigners from visiting many beautiful places in the country. The budget stated at least 200 new tourist destinations would be identified to help Nepal attract more tourists and generate more foreign income.
“We need billions of rupees in investment, both domestic and foreign if proper infrastructure is to be built in these new tourist destinations,” said Binayak Shah, general secretary of the Hotel Association of Nepal. “Let’s see what strategies the government will introduce.”
The budget has also sought to promote alternative investment, such as private equity, venture capital and hedge funds, which can attract foreign investment that can be diverted to various businesses. “But there is no clarity on this issue,” said Ajay Shrestha, chairman and managing director of iCapital, an investment and holding company.
The budget document states that ‘private equity, venture capital, hedge funds and similar institutions will be given access to the capital market’. “Does that mean investment funds will be allowed to float initial public offerings to raise capital and those instruments can be traded on the secondary market?” Shrestha asked. “If that is so, it would be a great start to promote alternative investment.”
A version of this article appears in print on June 06, 2018 of The Himalayan Times.