Nepal | July 08, 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:

Transport entrepreneurs deposit vehicle keys at banks in Pokhara

POKHARA: After failing to deposit the loan installment in the wake of extended lockdown, transport entrepreneurs handed-over vehicle keys to bank officials in Pokhara, on Monday. As many as ninety entrepreneurs associated with Prithvi Highway Bus Association handed over the keys to officials Read More...

175 suicide deaths in Sudurpaschim during lockdown

DADELDHURA, JULY 6 As many as 175 people have died by suicide during the nationwide lockdown in Sudurpaschim Province. Police said that suicide deaths have been reported from all nine districts of the province from March 24 till date. Police said suicide deaths were more common among males com Read More...

Facebook Gun Ban

Facebook, others block requests on Hong Kong user data

HONG KONG: Social media platforms and messaging apps including Facebook, WhatsApp, Telegram, Google and Twitter will deny law enforcement requests for user data in Hong Kong as they assess the effect of a new national security law enacted last week. Facebook and its messaging app WhatsApp said in Read More...

Traffic is seen as number of vehicles increases in the street after government and private offices, banks and financial institutions have partially been opened during 77th day of nationwide lockdown imposed amid concerns over novel coronavirus outbreak in Kathmandu, on Monday, June 8, 2020. Photo: Naresh Shrestha/THT

People face hardship with public transport off the road

Kathmandu, July 6 Mahesh Shrestha who lives in Harisiddhi, Lalitpur is finding it hard to travel to and from his shop at Mangalbazaar these days. Most of the time he walks to Mangalbazaar which is five kilometres from his home. Only sometimes and if he is lucky he gets a lift from motorcycle a Read More...

Iran, General Qassem Soleimani,

UN expert deems US drone strike on Iran's Soleimani an 'unlawful' killing

GENEVA: The January US drone strike in Iraq that killed top Iranian general Qassem Soleimani and nine other people represented a violation of international law, a UN human rights investigator said on Monday. The United States has failed to provide sufficient evidence of an ongoing or imminent att Read More...

NHRC urges govt to increase PCR tests

Kathmandu, July 6 The National Human Rights Commission has yet again urged the government to increase the number of PCR tests to identify more vulnerable areas and people and ensure additional measures to prevent and control the spread of coronavirus. The rights body had, earlier on March 24, Read More...

Government issues higher education facilitation framework

KATHMANDU, JULY 6 The Ministry of Education, Science and Technology has approved the ‘Alternative learning in higher education facilitation framework, 2077’ and introduced the framework for implementation through the University Grants Commission. The framework has made arrangement of alter Read More...

Public transportation under low govt priority

KATHMANDU, JULY 6 Despite being one of the top affected sectors by the COVID-19 and the lockdown imposed to contain the spread of the virus, the government has no plans on how to sustain the public transportation sector and help it revive. As a result, investment worth billions of rupees in the c Read More...