The intensified political agitation and the curfews imposed in the Kathmandu Valley and a number of places in the country for the past week have taken a considerable toll of the economy. Indeed, the political confrontation between the government and the established political parties on one hand and the 10-year-old Maoist insurgency on the other have already made the country’s investment climate unstable even to many domestic entrepreneurs, let alone foreigners. Although the government’s policy has been to lure more and more foreign direct investment (FDI), the actual investment is reported to have declined considerably despite the official data showing a rise in both the number of projects and projected amount of investment based on the registration of firms. According to the Department of Industries (DoI), 76 FDI projects worth Rs. 2,146 million were registered in 2005 as against 35 totalling Rs. 546 million in the previous year. Most FDI projects fall in the service sector, such as hotels, restaurants and IT.

The political uncertainty triggered by agitations, bandhs, blockades, and curfews have been the bane of the hospitality industry. However, IT, supposed to be running on the idea of making software programmes here and selling them in India and the US, is less sensitive to such phenomena. Certainly, Nepal could make further progress in IT, creating a sizeable employment base for the local youth as well as giving a boost to the economy, through outsourcing. In IT, Indians, South Koreans and Americans have mainly pumped in the capital. Though IT is doing better than FDI projects in other sectors, the overall investment climate is less than friendly. It would thus be a surprise if more FDI were to flow in given the present political, security and commercial climate. On the contrary, the economists fear increased flight of Nepali capital abroad.

According to the DoI, about 80 per cent of the registered FDI projects are in operation now. Most of FDI is concentrated in the Kathmandu Valley, which is thought safer than the rest of the country. But the present flare-up of the agitation in the capital may force even the existing foreign investors to have second thoughts about their investment, foreclosing the possibility of further FDI. At a time when almost all the economic fundamentals present a grim scenario, with some leading economists even predicting an economic collapse, entertaining any hope of more FDI inflows would be like living in a fools’ paradise unless, of course, urgent drastic steps are taken. According to the Asian Development Bank Outlook 2006, both public and private investment, including FDI, has remained sluggish in 2005, and, regrettably, this trend will continue irrespective of the government’s policy as long as the present political crisis remains unresolved.