To capitalise on Nepal's unique geopolitical location, it must present itself as a suitable contender by offering a globally comparable environment to accelerate FDI flow
Attracting foreign direct investment (FDI) is particularly challenging for Nepal due to its geopolitical location, economic nationalism, entrenched political partisanship, widespread corruption and longstanding regulatory environment. Despite these obstacles, FDI has been acknowledged as a crucial development pillar since the 1970s and gained further emphasis after 1990 with the adoption of liberalisation and globalisation policies. Nepal's geographic location and natural resources present significant potential in infrastructure, hydropower, mineral-based mining industries, agro-based sectors and the commercialisation of agriculture, as well as IT-linked quaternary and high-tech services. Developing these sectors is capital-intensive and demands state-of-the-art technology, advanced management, extensive networks and product expertise. Therefore, attracting foreign investors would be a better alternative for their sustainable development.
The recent COVID-19 pandemic, declining global economic conditions and ongoing conflicts in Ukraine and the Middle East have negatively impacted the economy, making the investment environment in Nepal sluggish. Recently, policymakers have shown a strong interest in revitalising the economy by reviewing and reforming policies and incentives to foster development and encourage private sector investment. In this context, the ongoing 16th five-year plan (2024-28), which envisions an outlay of Rs. 11,400 billion and aims to raise Rs. 8,000 billion from the private sector, including FDI, is considered a significant milestone. Securing investment of this magnitude locally is difficult, highlighting the necessity of boosting FDI. Unfortunately, the current trend in FDI inflows is not encouraging, accounting for merely 1 per cent of GDP over the last five years. According to the latest Global Investment Report by the WTO, Nepal is ranked 145th, while Rwanda and the Maldives are positioned at 126th and 118th, respectively.
Two specialised agencies are responsible for attracting FDI in Nepal: the Investment Board Nepal and the Department of Industry (DOI). These agencies undertake various investment promotion programmes, streamline the approval process, coordinate and monitor with stakeholders, provide one-stop services, and evaluate the progress and administration of investment and FDI projects. Despite these efforts, substantial FDI inflow has not been achieved. Over the past five years, the total FDI inflow was only about Rs. 65.36 billion.
Vibrant and dynamic local private investors provide a solid playing field for FDI in any country. Investment from the local private investors has also plummeted in recent years, and investors are shy to invest reportedly due to an unfriendly and unfavourable environment. This shows a lack of harmony and sign of undistinguished and incompatible working mechanism. Our policy level authorities should bear in mind that attracting FDI has become a highly challenging task and our neighbouring countries as well as others have been extending multitude of attractive fiscal, logistical incentives in that quest.
Together there is an urgent need to discourage infiltration of offshore financing and bogus investors, make effective follow up and monitoring, timely available of various committed support services, better coordination with stakeholders, digital working system and less paperwork, and gainful involvement of Nepali missions abroad to promote foreign investment and trade.
Nepal's geopolitical location between India and China also provides a unique advantage for market access of more than 2.8 billion population. To capitalise on this, Nepal needs to present itself as a suitable contender by offering a globally comparable environment with aligned policies and governance standards to accelerate FDI flow. To that end, it is essential to strengthen and update policies, as well as reorganise instruments and practices, to attract FDI.
Consequently, the author suggests considering the following observations. Firstly, with the rise of the digital economy, Nepal should strive to meet international standards and regulations affecting technology and digital trade. It is also crucial to uphold the rule of law and implement efficient governance across all sectors, with clear and predictable policy guidelines to ensure a transparent, predictable and investor-friendly environment. Economic diplomacy, which uses economic tools, policies and resources to achieve a nation's economic interests abroad, is vital. Achieving bilateral economic and investment agreements with more countries in Europe and Asia, covering areas such as bilateral investment treaties, investment protection, avoidance of double taxation, transit and transport connectivity, tourism cooperation and development assistance, would be a significant accomplishment.
Additionally, it is important to regularly train diplomats and mission officials in economics, commerce and international trade to enhance their understanding and ability to engage effectively in economic negotiations and partnerships. Foreign missions should be given clear responsibilities, professionals and funds to undertake FDI promotional programmes. Furthermore, strengthening and expanding the network of Industrial Districts, Special Economic Zones (SEZs), investment infrastructures and coordination mechanisms with stakeholders, along with clear regulations and administration, is essential.
Lastly, ensuring transparency and a fair judicial structure by streamlining and synchronising acts and regulations concerning investment, and institutionalising legal frameworks that protect investment disputes and intellectual property rights, as well as providing legal protection for investors and prompt dispute resolution mechanisms, is crucial.
Pandey has 4 decades' work experience with investment promotion, trade and industrial research and planning