Nepal | July 14, 2020

EDITORIAL: Credit rating for FDI

The Himalayan Times
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Investors cannot be expected to put their money here merely on the assurances given by the government

Despite repeated clamour by the government that Nepal is a promising investment destination, especially now that peace has returned to the country, investors remain wary to put their money here. Naturally, they cannot be expected to invest here merely on the assurances given by the political leaders, without being fully convinced that their investment will give good returns. So, in a bid to attract foreign direct investment (FDI) in key sectors of the economy, the government has initiated the process to acquire a sovereign credit rating from renowned international rating agencies. Such a rating should give a clear picture of the investment climate while also determining the risk of doing business in the country. The Finance Ministry has given the responsibility of carrying out the necessary preparatory works to Standard Chartered Bank Nepal before engaging a sovereign credit rating agency. If all goes as planned, Nepal hopes to acquire such a rating by the end of the current fiscal year.

Barring Afghanistan, Bhutan and Nepal, all other countries of South Asia have already acquired a sovereign cTheredit rating. Such a rating takes into account the political, social and financial risks, and determines the level of risk involved while investing in a country. Nepal is to make a pick from among the three largest credit rating agencies of the world, namely, Moody’s, Standard & Poor’s and Fitch Group – all US-based agencies. Once the agency is finalised, the rating can be completed in about 10 weeks from the day it starts its work. The credit rating is necessary not only to give an insight to foreign investors about the opportunities and risks of doing business in Nepal but also to gain access to international bond markets to raise funds. International financial institutions also demand such ratings before lending money to domestic financial institutions and companies that hedge foreign exchange risks in big infrastructure projects that have foreign investment.

Nepal has held three investment summits — in 1992, 2017 and 2019. During the second summit in March 2017, the government was thrilled by the $13.5 billion investment commitment made then, but little of that has been realised. During the third summit in March this year, out of the 50 projects worth billions of dollars prepared by the government, investors showed interest in 17 of them. Pledges, however, make little sense – though running into billions of dollars – if no money is coming into the country. Recently, in a bid to improve the investment climate, the government passed two foreign investment-related bills. In March, on the eve of the third investment summit, the House of Representatives passed the Public Private Partnership and Investment Bill and Foreign Investment and Technology Transfer Bill. Among others, this has done away with the hassles associated with registering an FDI company in the country. Although much still needs to be done, the risks of doing business in Nepal are now lower, and one can expect a more favourable credit rating. Hopefully, this will help attract crucial foreign investment even from countries that have shown little or no interest in investing here.

PAN provision

The government and the private sector have agreed that a Permanent Account Number (PAN) card will not be necessary for commercial enterprises while making payment to their employees who work on a daily wage basis and earn up to Rs 2,000 a day. However, those workers whose daily wage exceeds Rs 2,000 must obtain a PAN card to receive the payments. Both the sides have also agreed that the employees receiving regular salaries must compulsorily possess a PAN card. Earlier, the government had made it mandatory to obtain PAN for payment of more than Rs 1,000.

The PAN card was introduced from this fiscal to make all financial transactions transparent. It
also aims to collect taxes even from people working in the informal sector. The private sector had
drawn the government’s attention towards the impracticality in issuing a PAN card to Indian daily wage workers. The government needs to raise awareness about the PAN’s importance. The PAN card will reveal the number of people working in the country and the amount of taxes they pay to the government. Once this system comes into full operation, even the daily wage workers will get the minimum salary fixed by the government.

A version of this article appears in print on August 22, 2019 of The Himalayan Times.

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