Bishwambher Pyakuryal

Although Nepal is open to FDI, bureaucratic delays and inefficiency have distorted policy implementation.

Development work in the country has significantly deteriorated. 10 major donors have suspended targeted development projects since May 14, especially in Kailali, Jumla, Humla, Mugu and Dolpa, the most under-resourced and under-developed districts of Western Nepal. It has negatively influenced the structure and scope of foreign direct investment (FDI).

Since the conflict and political strife has weakened socio-political and economic environment, there is a need to gather investment-related information to address the index of investor optimism. Investors’ worries can be properly identified once we collect opinion on some selected indicators such as the security regime, outsourcing, existing investment policies and so on. It is necessary to prepare Nepal as an investor-friendly target country. Although Nepal is open to FDI, bureaucratic delays and inefficiency have distorted implementation of the policies. Business environment is guaranteed by opening up government’s monopolies such as the telecommunications and civil aviation to private operations. Alternative financing is being made through new banking institutions and 100 per cent foreign ownership is allowed by simplifying the licensing and existing regulations of Foreign Investment Policy (IP) of 1992. The government has also brought out Foreign Investment policy 2002 by addressing the gaps that were realised in the IP, 1992. The new policy has not yet been implemented because of the absence of parliament.

From 1989/90 through 2003/04, the government of Nepal approved a total of 890 projects with total project cost of Rs. 87413.38 million, where foreign investment constituted Rs. 25155.49 million. These investments generated 94269 employments. Indian ventures lead the list with approximately 32 per cent of the projects. Japan ranks second with 94 venture and the US and China rank third with 89 ventures respectively. South Korea, Germany, UK and Switzerland also have good investments. Most foreign investors are individual as against the larger companies. UNCTAD (2003) study reveals that majority of the projects with capital participation from developed countries are small-scale projects with individual investors. The major areas of FDI have been manufacturing, followed by services and, in particular, tourism. Those manufacturing products are popular which have the possibility for exports to India such as vegetable ghee, soap, toothpaste, herbal medicines and other Ayurvedic preparations. Disinterest of well-known firms to invest, negligible involvement of corporate entities, the predominance of JVIs even when 100 per cent equity ownership is allowed are some of the issues to be investigated.

FDI inflows in South Asia have risen steadily from an annual average of $ 1.7 billion during the second half of the 1990s to $ 4.6 billion in 2002. Studies have revealed that since 1980, FDI inflows contributed more to investment and to GDP growth in South Asia than an equal amount of foreign borrowing. Therefore, to the extent that some foreign capital inflow can be justified, FDI is preferable to foreign borrowing. Nepal’s FDI receipt remained low compared to other land-locked LDCs, at $ 90 million during 1995-2000. Despite policy-induced incentives such as cash grants, tax holidays and subsidised low interest loans and reform in the general business environment such as favourable macroeconomic policy environment and clarity of rules governing foreign investment, Nepal got poor FDI. There is a need to redefine governance and address new security regime by developing flexible implementing rules in partnership with Maoists. Other problems include inadequate rules concerning labour relations, capricious tax administration, power shortage, unskilled workforce, rugged terrain with difficult land transport, poor implementation of trade facilitation measures, and unavailability of direct access to seaports. There is a problem of coordination among the regulatory bodies and departments and ministries.

FDI is a source of capital. The impact of FDI is dependent on what shape and form it takes. This includes the type of FDI, sector, scale, duration and location of business and secondary effects. A refocusing of perspective, from merely enhancing the availability of FDI, to the better application of FDI for sustainable objectives is crucial. Prior to 1980, as long as most of the South Asian countries followed the import substitution strategies, the impact of FDI inflow on GDP growth rate was negative. When such policy was abandoned in favour of market-oriented principle, the impact was mildly positive in early 80s’, increasingly positive in late 80s’ and comfortably positive for early and late 90s’. Despite the fact that Nepal’s workforce is less hostile than in neighbouring countries, their productivity is low, necessitating skill development programmes. The development of infrastructure and expansion of the domestic market should be government’s priority to take advantage of liberal policy for integrating local market into the regional and global markets. Recently, Nepal’s three major areas — tourism, agriculture and hydropower are negatively affected by the insurgency. A common agenda for nation building between the parties, the King and the Maoists is therefore a necessary condition to promote FDI in future. Dr Pyakuryal is president, Nepal Economic Association