Nepal | August 09, 2020

Transforming FDI: Automatic route

Shashwat Satyal
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The automatic route in priority sectors would also put Nepal in a position to compete for FDI going into other South Asian counterparts by getting rid of the competitive disadvantage—the multilayer FDI approval system

Illustration: Ratna Sagar Shrestha/THT

There is a lot of optimism in the Nepalese economy with the conclusion of the Investment Summit leading to investment commitments of over USD 13 billion from foreign investors. Although the commitments paint a bright future for developing Nepal’s infrastructure through foreign direct investments (FDI), what is more important is for the government to work towards converting these commitments into actual investments. The actual inflow of FDI in Nepal has been much lower than the commitments made. Figures from Nepal Rastra Bank (NRB) and Department of Industries (DoI) for 2014-15 suggest that the actual FDI inflow–NPR 6.16 billion– amounted to less than 10% of the pledges totaling NPR 67.25 billion in the same period.

Nepal’s need for FDI is indisputable. With the goal to graduate to a developing country status by 2022 and to transition to a middle income country by 2030, the World Bank suggests Nepal needs an economic growth rate of 7–8% every year until 2022. With the backlog of the earthquake and the Indian border blockade, achieving such growth is unrealistic for Nepal; the only path which might take us any closer to this figure is through infrastructural developments driven by (FDI. The government’s goal to generate 10GW of electricity within the next 10 years would alone need about USD 16-20 billion in the power sector dominated by hydropower. With the credit crunch expected to continue for another year, it is realistic to assume that availability of such funds cannot be achieved solely through local debt and equity. A couple of billion dollars might be financed by development financial institutions but it would not be enough to get even close to the massive USD 16-20 billion requirement.

The only way that this gap can be financed is through FDI investments. Therefore, policy level changes need to be enforced to transform FDI commitments into FDI investments. According to the World Bank, in 2015, Nepal grossed the lowest Net FDI inflows per capita at USD 1.82 among seven South Asian countries. The comparable figure was a distant USD 182 per capita for China and USD 33 per capita for India, two of the fastest growing economies in the world. The net FDI inflows into Nepal was USD 51.9 million in 2015, which is a paltry annual sum that needs to grow exponentially if Nepal is to realize growth through infrastructural investments.

Nepal needs to be more foreign-investor friendly. This means cutting down the lengthy paperwork and reducing delayed approvals in bringing in FDI. The first step towards achieving this is following India’s footsteps in implementing the automatic route for FDI approval. Currently, Nepal is the only country in South Asia that has a bureaucratic two-layer approval system to bring in FDI. All these other countries have a one-stop approval, if not an automatic route for FDI in priority sectors. The automatic route requires no approval from the government to bring in FDI in the approved sector into the country. The investors are only required to intimate the Government body-usually the central bank- within 30 days of receipt of inward remittance, along with KYC and Anti Money Laundering documentation. The process is the opposite in Nepal, where foreign investors have to submit a list of documents first to DoI for approval and then another list of documents to NRB for their approval, only after which can investors transfer the investment amount into the country. The approval process is stretched out further, if the project’s total investment amount is over NPR 2 billion, where the Industrial Promotion Board needs to approve the project before DoI issues a letter to NRB for its approval.

Delayed approvals and the need for several trips to government offices just to bring money into the country gives a bad ‘first-impression’ of Nepal to foreign investors who are often wary of bureaucratic hassles they have to go through while investing in a foreign land. Therefore, with foreign investors that have the option to invest in several emerging markets in South Asia, Nepal is likely to be a ‘no-option.’ This could very well be the reason for Nepal’s low FDI per capita, although standing second only to Bhutan amongst all South Asian countries in the Ease of Doing Business index. This could also be the reason why Afghanistan – which stands 169th in the Transparency International Corruption perception index – has a greater absolute FDI inflow as well as FDI per capita inflow than Nepal, which stands 131st amongst 176 countries.

The automatic route is as beneficial for the local investors seeking foreign investments as it is for foreign investors. From the local perspective, a shorter turnaround time between signing the investment agreements and actual disbursement of funds means that the local private-sector is more willing and open to foreign investments. Such a process takes away the risk of delayed fund disbursements-which can often stall project development-due to time-consuming government approval process.

The automatic route in priority sectors would also put Nepal in a position to compete for FDI going into other South Asian counterparts by getting rid of the competitive disadvantage — the multilayer FDI approval system. This is seen as the most progressive step that the government could take to convert the large sums of funds committed into actual funds disbursed into the Nepalese economy.

A version of this article appears in print on March 15, 2017 of The Himalayan Times.

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