Nepal | May 29, 2020

Foreign direct investment

An instrumental tool

Bhubanesh Pant
Share Now:

Although Nepal has one of the most liberal investment regimes in the region, it has lagged behind many other developing countries in attracting FDI. There is urgent need for projecting a positive image of the country to prospective foreign investors

Thinker OfficerEarthquake-affected economies cannot be considered as normal economies. The majority of them fall under the least-developed category and are saddled with relative small market size, severe economic constraints and weak institutions necessary for a well functioning economy. Economic impacts are witnessed through the damage or destruction to assets or ‘stocks’, arising from the earthquake itself, or from events in the aftermath of an earthquake.

In the household sector, the major loss is the damage to houses and apartments and building contents. In the business sector is damage to buildings, but most crucial was the loss of machinery and other productive capital. Physical infrastructure is often destroyed, including electricity, water, transport and access to land. Development aid alone cannot transform these earthquake-affected economies, and it is here that foreign direct investment (FDI) can be an instrumental tool to revitalize industries and rebuild infrastructures.

However, the impact of FDI varies with the ability of local stakeholders to take advantage of the potential benefits of FDI. In particular, the local regulatory framework has to provide for competitive conditions that are conducive to local entrepreneurship. Moreover, local individuals and firms need to have the ability to learn from foreign partners.

In Nepal the devastating earthquake of 25 April 2015, measuring 7.8 on the Richter scale, and the subsequent aftershocks led to economic and institutional devastation of vital infrastructure. According to National Planning Commission’s Post Disaster Needs Assessment, the earthquake is estimated to push an additional 2.5 to 3.5 per cent Nepalis into poverty in FY 2015-2016 with the total loss estimated at Rs. 706 billion. Prior to the earthquake, the situation was such that the country had only come out from a decade-long conflict and was laying the foundation for stability and growth. It was on track for MDGs targets and poverty level was taking a downward trend.

However, the earthquake has posed daunting challenges to the policymakers with the task of creating an integrated and comprehensive approach to post-earthquake reconstruction with a view to sustainable economic development. In attempting to meet these objectives, foreign direct investment (FDI) can complement internally generated revenue and foreign aid and generate added advantages, both tangible and intangible. FDI assists in creating employment opportunities, which are urgently needed to attain long-term economic stability.

Nepal has not been able to draw on the potential technological and other contributions that FDI can make to the process of development. In this respect, a healthy enabling environment for business is paramount. The country should focus on infrastructure investment which is critical for economic growth and welfare. Infrastructure investment has the potential for increasing efficiency and competitiveness, and to promote both international linkages and domestic integration. However, obtaining the required financing on adequate terms is often a challenge, reflecting in part issues pertaining to the returns to infrastructure investment, government finance constraints, and long gestation periods. Likewise, policymakers need also to pay due attention in minimizing risks through good governance and capable institutions, high absorptive capacity and an effective regulatory framework. Although infrastructure is an area in which foreign investors used to shy away from investing in the past due to various risks associated with such projects resulting from long gestation and pay back periods, in the present context of Nepal, seeking FDI has become imperative.

Although Nepal has one of the most liberal investment regimes in the region, it has lagged behind many other developing countries in attracting FDI. There is urgent need for projecting a positive image of the country to prospective foreign investors highlighting measures undertaken for strengthening the legal framework, lowering transaction cost and improving investment climate.

However, it should be noted that presently Nepal, affected by the great earthquake, is not an ideal location for foreign investors to undertake projects as there are destroyed infrastructure and serious disruptions in economic activities, resulting in falling production and GDP—all factors that deter FDI.
Nevertheless, the country can take steps to actively pursue FDI, and to benefit from its potential contributions to investment, employment, public finances, macroeconomic stability, infrastructure, business development and economic growth in general.

To conclude, for 2015/16, the country’s urgent priority is to rebuild in a better way the areas devastated by the earthquake. In this respect, more foreign direct investment is needed to sustain the growth momentum.

In this respect, the Budget of 2015/16 has stated that the Foreign Investment and Technology Transfer Act would be revised to attract foreign investment and that Investment Forum would be organized for encouraging more investment. Still, various investment obstacles and possible reform measures must be resolved and implemented soon.

Dr. Pant is Director at Nepal Rastra Bank.

A version of this article appears in print on October 08, 2015 of The Himalayan Times.

Follow The Himalayan Times on Twitter and Facebook

Recommended Stories:

More from The Himalayan Times:

Finance Minister begins budget presentation for FY 2020-21

KATHMANDU: Finance Minister Yubaraj Khatiwada has begun the presentation of budget for the fiscal year 2020-21 at the Federal Parliament. The budget is being presented amid a joint meeting of the House of Representatives (HoR) and the National Assembly (NA). As the coronavirus continues to spr Read More...

Larry Kramer, playwright and AIDS activist, dies at 84

NEW YORK: Larry Kramer, the playwright whose angry voice and pen raised theatergoers’ consciousness about AIDS and roused thousands to militant protests in the early years of the epidemic, has died at 84. Bill Goldstein, a writer who was working on a biography of Kramer, confirmed the news to T Read More...

Cases registered against two lockdown violators in Udayapur

GAIGHAT: Police have registered cases against two youths who were arrested on Tuesday for violating lockdown in Udayapur district. The arrested have been identified as Surendra Gupta and Rakesh Sah, both in their 30s. Lalpatta-based police post arrested the duo after they were found bringing t Read More...

VIDEO: Nationwide COVID-19 count soars to 1,042 with 156 new cases

KATHMANDU: The Ministry of Health and Population shared its latest updates on COVID-19 response from across the country, as of today. The total number of coronavirus infection in the country has reached 1,042 with 156 new cases. With this, as of today, 940 males and 102 females have been infected Read More...

Looking in, looking out: world emerges from lockdown with mixed feelings

As much of the world begins to emerge from lockdown, people are looking back at time spent cut off from friends, family and colleagues by the coronavirus and forward to what happens next. Reuters has captured some of those reflections along with portraits from across Africa and the Middle East of Read More...

Legendary lyricist-poet Ratna Shamsher Thapa no more

KATHMANDU: Legendary lyricist and poet Ratna Shamsher Thapa has passed away. He breathed his last at 12:30 pm on May 28 at Norvic Hospital. He was 81. He succumbed to pneumonia, according to a close family member Shiva Acharya. He informed that Thapa was taken to the hospital in the evening of Ma Read More...

VIDEO: FM Yubaraj Khatiwada unveils FY 2020-21 budget

Kathmandu, May 28 Finance Minister Yubaraj Khatiwada is presenting the fiscal budget of 2020-21 at the joint meeting of House of Representatives and the National Assembly amidst everyone’s curiosity on how the government will address the pain inflicted by the COVID-19 in almost every sector of Read More...

Police recover two muzzle-loader guns in Kohalpur

NEPALGUNJ: Armed Police Force personnel recovered two abandoned muzzle-loader guns in Kohalpur Municipality-8 in Banke district, today. Deputy Superintendent of Police (DSP) Shyam Kumar Karki said that they recovered the weapons along with ammunition, shrapnel shells, and other items under Sikta Read More...