As the government prepares to host the third Nepal Investment Summit in 2024, it has overcome heaps of challenges to ensure that the event will be a meaningful one.
the HRM
Five years after hosting the second Nepal Investment Summit (NIS), the government is once again preparing to extend an invitation to the global investor community, in a bid to showcase that Nepal is open for business as an investment-friendly country. On November 26, the government announced its plan to organize the NIS 2024 on April 21-22 in Kathmandu.
The earlier two investment summits in 2017 and 2019 created significant anticipation and optimism, prompting the government to work on some key legal and institutional reforms in the country’s foreign direct investment (FDI) regime. However, despite the heightened expectations, realizing the investment intents and commitments of foreign investors into actual FDI has remained an arduous task.
NIS 2017 was hosted during a pivotal moment in Nepal’s political landscape, as the country was transitioning to a federal system of governance following the endorsement of the new constitution in 2015. At that time, the government aimed to send a message to the global investor community that Nepal’s focus was on economic development and creating an environment conducive to investment and doing business after the settlement of key political issues that the Himalayan nation had struggled to resolve for decades.
Although the goal of NIS 2019 remained the same, the government at that time positioned Nepal as a nation characterized by political stability and predictability. The emphasis was on assuring foreign investors that state agencies would play their roles as facilitators and there would be less bureaucratic red tape.
NIS 2024 is taking place at a time when there is a significant exodus of youths from Nepal, concurrent with economic recession and governance challenges. As a nation currently holding the unenviable position of being among the world’s least attractive destinations for FDI, the task is cut out for the Pushpa Kamal Dahal-led government ahead of the summit.
FDI in Nepal started to arrive during the final years of the Panchayat system after the government started structural adjustment programs targeting economic reform with assistance from the World Bank and the Asian Development Bank. After the restoration of parliamentary democracy in 1990 and the adoption of economic liberalization, FDI inflow grew noticeably as the country garnered the attention of foreign investors. However, the armed conflict and worsening political instability in the 2000s affected the earlier gains. Successive governments after the political change of 2006 have announced ‘making Nepal a lucrative destination for FDI in South Asia’ among their top economic agenda. However, the fact that Nepal shares its place among the lowest recipients of FDI in the world shows that attracting foreign investors remains an uphill battle for the country and a departure in policy and procedures along with a transformation in the mindset of politicians and bureaucrats is necessary.
The latest data from the Nepal Rastra Bank (NRB) reveals a notable decline in net FDI inflow, reaching a nine-year low in the last fiscal year. Year-on-year, net FDI plummeted by a substantial 67.88 percent, decreasing to Rs 5.96 billion in FY 2022/23, in contrast to the Rs 18.56 billion recorded in FY 2021/22.
A similar pattern is noticed in the realm of FDI commitments, indicating a reluctance among global investors to engage in Nepal. This is underscored by a noteworthy 22.20 percent decrease in FDI pledges over the preceding fiscal year, with commitments totaling Rs 38.45 billion in FY 2022/23, compared to the Rs 49.43 billion recorded in FY 2021/22.
As government officials are preparing for the upcoming NIS 2024, there has been a significant setback with Malaysia’s Axiata Group, the parent company of NCELL, deciding to exit from Nepal. After seven years of involvement in Nepal’s telecom sector, after it acquired the majority stake in NCELL from the Swedish telecommunication giant TeliaSonera, the Malaysian multinational telecommunications conglomerate formally announced to sell its stake in NCELL on November 30.
One of Nepal’s longest-standing FDI partners, Habib Bank from Pakistan, is also exiting the Nepali market. Habib Bank, which entered Nepal as one of the early foreign banks post-1990, is now exiting the country after three decades. The bank has concluded the sale of its stake in Himalayan Bank to Himalayan Reinsurance Company, marking the end of its presence in Nepal.
The exits of Axiata and Habib are purely coincidental, but their withdrawals are likely to create confusion among potential investors who are looking to invest in Nepal. This is especially significant in light of Axiata’s reference to the uncertain regulatory and tax environment as a contributing factor to its departure from the country.
Nepal is among those countries where official development assistance (ODA) and remittances are significantly higher compared to the FDI. In South Asia, Nepal performs inadequately in terms of FDI inflow, ranking sixth with a mere USD 65 million. The World Investment Report 2023 reveals that FDI flows to India increased by 10 percent to USD 49 billion in 2022, positioning the country as the third-largest host nation for announced greenfield projects and the second-largest for international project finance deals among South Asian nations.
Furthermore, in the context of Least Developed Countries (LDCs) and Land-Locked Least Developed Countries (LLDCs), Nepal lags significantly in attracting foreign investment. In 2022, FDI in the 46 LDCs of the world declined by 16 percent to USD 22 billion, constituting less than 2 percent of global FDI. The distribution of these flows was highly concentrated, with the top five recipients—Ethiopia, Cambodia, Bangladesh, Senegal, and Mozambique—comprising around 70 percent of the total.
While FDI in the 32 LLDCs collectively rose by 6 percent to $20 billion in 2022, the influx of FDI remained concentrated in a handful of economies. The top five recipients—Kazakhstan, Ethiopia, Uzbekistan, Mongolia, and Uganda—accounted for 83 percent of the total FDI to the LLDC group. These facts underscore Nepal’s challenge in attracting foreign investment compared to its regional and global counterparts.
Of Failed Commitments
NIS 2017 concluded on a positive note, securing investment commitments totaling USD 13.5 billion from six countries. However, when it came to actual realization, only a fraction of these commitments materialized.
During the 2017 summit, six Chinese companies had committed a total of USD 8.3 billion, constituting 61 percent of the overall investment commitment, demonstrating interest in investing across various sectors including hydropower, smart grid, airports, railways, roads, drinking water, healthcare, and minerals. According to the Investment Board Nepal (IBN), only four projects which include two hydropower plants and two cement plants totaling Rs 230 billion have progressed.
Fast forward two years to NIS 2019, and the event was a more meticulously planned affair compared to its 2017 predecessor. Unlike the 2017 summit, which took place without significant legislative reforms, NIS 2019 marked the beginning of the legal and institutional reform drive, albeit a hastily implemented one. Amendments were introduced to existing laws, including the Foreign Investment and Technology Transfer Act (FITTA), Companies Act, Special Economic Zone Act, Industrial Enterprises Act, and Labor Act. Additionally, a Hedging Policy was formulated to address investment-related obstacles, signaling Nepal’s readiness for investment after the conclusion of the prolonged political transition.
While it contributed to a notable increase in expressions of interest from foreign investors, the tangible outcomes were limited. Among the 50 projects showcased by IBN during NIS 2019, only 15 deals were signed at the summit. The summit saw investment pledges totaling USD 12 billion which includes deals signed among the Nepali private sectors with foreign companies.
Out of the 15 deals signed by the IBN with foreign investors, the prequalification process for companies competing for 14 projects was finalized. IBN has shortlisted proposals for seven agricultural infrastructure projects, five hydroelectric schemes, the highly anticipated Nijgadh International Airport, and the Kathmandu Outer Ring Road Project, with a combined estimated cost of USD 11.88 billion.
However, neither the Nijgadh International Airport nor the Kathmandu Outer Ring Road Project has progressed as expected. Similar is the fate of the Tamor Storage Hydroelectric Project. Despite a joint venture agreement between the government-owned Hydroelectricity Investment and Development Company and Power China for the 756 MW Tamor Project, it remains in limbo, with the IBN annulling the joint venture agreement.
Of the 15 applications for unsolicited projects during NIS 2019, 10 went ahead to conduct the necessary studies for implementation. The most talked about among them was the USD 105 million Motor Vehicle Assembly and Manufacturing Plant, with the Korean company Motrex. While the IBN entered into a project implementation agreement with the Korean company, the project is also stuck in limbo.
Govt’s Preparations
The government has claimed that the upcoming summit this time will be different in the context that it will lay importance on domestic investors and non-resident Nepalis apart from the foreign investors. Finance Minister Dr. Prakash Sharan Mahat during the meeting of the directive committee on November 26 asserted, “This time, the conference isn’t merely a formality; its objective is to present concrete proposals to capable investors, secure their investments, actively monitor investment commitments, and ultimately bring them to fruition.”
Later on December 11 during a meeting with the representatives of major international development agencies, he said that the process of Nepal’s sovereign rating will be completed before the summit. The finance minister also sought suggestions from the development partners to attract investment in Nepal. Speaking on the occasion, Chief Secretary Baikuntha Aryal said the government is ready to work on structural and policy reforms. “We have formed teams to study the areas for reforms,” he said. “We are ready to amend laws and make other decisions based on the suggestions given by the team.”
The government has formed three committees, a steering committee led by the finance minister, an implementing committee led by the chief secretary, and a technical committee led by the industry secretary. The secretariat of the NIS 2024 led by the IBN CEO will be housed at the IBN office. Chief Secretary Aryal has asked the ministries to submit the projects under their domains under three categories – the conceptualizing stage, feasibility stage, and DPR stage.
Similarly, a committee is led by the law secretary with representatives from the Finance Ministry to recommend the necessary legislative reforms. According to government sources, three major announcements regarding viability gap funding (VGF) regulation, hedging regulation, and Nepal’s country rating will be made ahead of the NIS 2024.
Stakeholders caution that the government’s impromptu decisions, lacking proper preparation, may lead to suboptimal outcomes in the upcoming summit. According to them, the government has fallen short of fulfilling its commitment to establish a conducive environment for ease of doing business.
Reforms are Imperative
Experts and private sector stakeholders have questioned the government for failing to implement necessary provisions that were committed in the previous editions of the NIS to attract FDI. They emphasize that the government should efficiently implement various measures such as expeditious execution of hedging regulation, viability gap funding (VCF) regulation, Nepal’s sovereign rating process, and resolution of issues about land acquisition. “Multiple reforms are required to simplify the company registration process in Nepal. This calls for the coordination of rules and regulations across different agencies, a step that has been missing. Currently, investors bear the responsibility of navigating the system, rather than the system itself facilitating their efforts. When engaging with foreign investors, the emphasis should be on assisting rather than introducing unnecessary obstacles and bureaucratic complexities,” said Siddhant Raj Pandey, Chairman of Nepal Private Equity Association.
Those who are dealing in FDI say numerous laws concerning aspects like intellectual property rights and repatriation procedures remain unresolved. Furthermore, the government has not succeeded in establishing a conducive environment to reduce costs and mitigate risks for businesses.
Economists, industrialists, and legal experts argue that the persistent bureaucratic red tape in Nepal has been a longstanding deterrent for foreign investments. They underscore the immediate need for enhancing current policies and resolving structural bottlenecks if Nepal intends to establish itself as an appealing investment destination. According to them, both structural and procedural barriers within Nepal act as obstacles, discouraging potential investors.
The primary obstacle to FDI, according to stakeholders, is not necessarily the laws and regulations themselves, but rather their implementation. They emphasize that the lack of urgency in facilitating deals and persistent delays within government agencies are the key issues. These challenges, they argue, have dissuaded foreign investors from actively engaging with Nepal. “Addressing historical concerns about implementation delays is paramount, and the government needs to assure investors on this front. Nepal must offer seamless entry and exit facilities to encourage investment,” said Suman Rayamajhi, Managing Director of Upaya, a logistics services company.
A quick look at Nepal’s FDI approval process reveals procedural complexities, as exemplified by Dabur Nepal, a subsidiary of the Indian multinational company Dabur. Despite establishing a manufacturing base in Nepal in the early 1990s, Dabur Nepal had to wait for two years to get approval on a reinvestment proposal from the IBN. Finally, in the last week of April 2023, Dabur Nepal reached an agreement with IBN to reinvest Rs 9.68 billion in Nepal.
The process of obtaining approval for FDI in Nepal involves multiple authorities, and repatriating dividends is both a costly and time-consuming affair. Repatriation of investments necessitates approval from various agencies, including the Nepal Rastra Bank and the government departments concerned. Furthermore, specific sectors, such as telecommunications, require approval from the Nepal Telecommunications Authority, and joint ventures need approval from the Ministry of Finance.
Members of the business community argue that inconsistent policies have impeded FDI growth in Nepal. An illustrative example is the fluctuating minimum FDI threshold. In May 2019, despite reservations from the private sector, the government raised the minimum foreign investment threshold from Rs 5 million to Rs 50 million. However, three years later, in the federal budget for FY 2022/23, the government lowered the minimum threshold back to Rs 20 million. While the rationale behind this reduction was to encourage FDI in small-scale businesses, insiders contend that even the Rs 20 million threshold remains excessively high.
Nepal is grappling with a lack of risk management tools essential for mitigating interest rates and foreign currency risks associated with foreign investments, particularly notable in significant hydropower and infrastructure projects funded by foreign debt. While the revenue from such projects is in Nepali currency, the debt repayment must be made in foreign currency.
Despite recent amendments to the highly anticipated hedging regulation last year, the Ministry of Finance is once again contemplating a third round of amendments. This regulatory revision is being considered as efforts are underway to identify an institution that can provide hedging services.
Another crucial factor is the scarcity of qualified human resources. Foreign investors often face difficulties in finding the specific skills they require, worsened by legal constraints on employing foreign staff. According to labor law, businesses operating in Nepal can only hire a maximum of 5 percent foreign workers.
Moreover, foreign investors have consistently raised concerns about Nepal’s Copyright Act, contending that it falls short of international standards for protecting intellectual property rights. Trademarks and brand names of well-known international companies are frequently violated, leading to numerous cases of trademark infringements. The insufficient enforcement of copyright laws and the protection of intellectual property rights act as deterrents for multinational companies (MNCs) to enter the Nepali market.
Another area where Nepal needs to act urgently is reforming the anti-money laundering (AML) regime, especially after repeated warnings from the Financial Action Task Force (FATF). “The looming possibility of Nepal landing on the grey list of the Financial Action Task Force (FATF) raises international concerns, demanding immediate attention,” said Pandey.
Initiating the sovereign credit rating process for Nepal is crucial as it serves as a pivotal step in attracting foreign investment to the country. Following the NIS 2019, the Finance Ministry opted for the US-based rating firm Fitch Ratings for this purpose. However, progress in the process has been stagnant since then. Sovereign credit rating is instrumental in determining Nepal’s creditworthiness and evaluating investment-related risks.
Experts assert that a sovereign credit rating allows potential investors to gauge political risks associated with investments, thereby alleviating the need for repeated assurances from the government regarding low risks in Nepal. Simultaneously, the pressure to achieve a favorable sovereign rating can act as a catalyst for enhancing the performance of the country’s institutions.
Furthermore, sovereign credit rating has the potential to address foreign investors’ concerns about facing unnecessary inquiries, such as those related to raising loans within Nepal. This is because the rating agency also assesses the efficiency of Nepal’s Banking and Financial Institutions (BFIs) and contributes to making the financial market more conducive for foreign investors.
Anand Bagaria, Managing Director of Nimbus Holdings thinks while conducting a sovereign country rating is valuable, Nepal needs to offer incentives to the investors. “In my opinion, the attractiveness of a business is not solely determined by legislation; it requires demonstrating profitability. To establish such allure, the government should consider offering incentives. It is essential to strategize by identifying specific sectors and determining what incentives can be provided to make those sectors more appealing to potential investors,” said Bagaria, adding, “A carefully researched strategy is crucial, concentrating on five key sectors and guaranteeing incentives, such as free land and electricity, are offered to both domestic and foreign investors for a designated period.”
the HRM
Fve years after hosting the second Nepal Investment Summit (NIS), the government is once again preparing to extend an invitation to the global investor community, in a bid to showcase that Nepal is open for business as an investment-friendly country. On November 26, the government announced its plan to organize the NIS 2024 on April 21-22 in Kathmandu.
The earlier two investment summits in 2017 and 2019 created significant anticipation and optimism, prompting the government to work on some key legal and institutional reforms in the country’s foreign direct investment (FDI) regime. However, despite the heightened expectations, realizing the investment intents and commitments of foreign investors into actual FDI has remained an arduous task.
NIS 2017 was hosted during a pivotal moment in Nepal’s political landscape, as the country was transitioning to a federal system of governance following the endorsement of the new constitution in 2015. At that time, the government aimed to send a message to the global investor community that Nepal’s focus was on economic development and creating an environment conducive to investment and doing business after the settlement of key political issues that the Himalayan nation had struggled to resolve for decades.
Although the goal of NIS 2019 remained the same, the government at that time positioned Nepal as a nation characterized by political stability and predictability. The emphasis was on assuring foreign investors that state agencies would play their roles as facilitators and there would be less bureaucratic red tape.
NIS 2024 is taking place at a time when there is a significant exodus of youths from Nepal, concurrent with economic recession and governance challenges. As a nation currently holding the unenviable position of being among the world’s least attractive destinations for FDI, the task is cut out for the Pushpa Kamal Dahal-led government ahead of the summit.
FDI in Nepal started to arrive during the final years of the Panchayat system after the government started structural adjustment programs targeting economic reform with assistance from the World Bank and the Asian Development Bank. After the restoration of parliamentary democracy in 1990 and the adoption of economic liberalization, FDI inflow grew noticeably as the country garnered the attention of foreign investors. However, the armed conflict and worsening political instability in the 2000s affected the earlier gains. Successive governments after the political change of 2006 have announced ‘making Nepal a lucrative destination for FDI in South Asia’ among their top economic agenda. However, the fact that Nepal shares its place among the lowest recipients of FDI in the world shows that attracting foreign investors remains an uphill battle for the country and a departure in policy and procedures along with a transformation in the mindset of politicians and bureaucrats is necessary.
The latest data from the Nepal Rastra Bank (NRB) reveals a notable decline in net FDI inflow, reaching a nine-year low in the last fiscal year. Year-on-year, net FDI plummeted by a substantial 67.88 percent, decreasing to Rs 5.96 billion in FY 2022/23, in contrast to the Rs 18.56 billion recorded in FY 2021/22.
A similar pattern is noticed in the realm of FDI commitments, indicating a reluctance among global investors to engage in Nepal. This is underscored by a noteworthy 22.20 percent decrease in FDI pledges over the preceding fiscal year, with commitments totaling Rs 38.45 billion in FY 2022/23, compared to the Rs 49.43 billion recorded in FY 2021/22.
As government officials are preparing for the upcoming NIS 2024, there has been a significant setback with Malaysia’s Axiata Group, the parent company of NCELL, deciding to exit from Nepal. After seven years of involvement in Nepal’s telecom sector, after it acquired the majority stake in NCELL from the Swedish telecommunication giant TeliaSonera, the Malaysian multinational telecommunications conglomerate formally announced to sell its stake in NCELL on November 30.
One of Nepal’s longest-standing FDI partners, Habib Bank from Pakistan, is also exiting the Nepali market. Habib Bank, which entered Nepal as one of the early foreign banks post-1990, is now exiting the country after three decades. The bank has concluded the sale of its stake in Himalayan Bank to Himalayan Reinsurance Company, marking the end of its presence in Nepal.
The exits of Axiata and Habib are purely coincidental, but their withdrawals are likely to create confusion among potential investors who are looking to invest in Nepal. This is especially significant in light of Axiata’s reference to the uncertain regulatory and tax environment as a contributing factor to its departure from the country.
Nepal is among those countries where official development assistance (ODA) and remittances are significantly higher compared to the FDI. In South Asia, Nepal performs inadequately in terms of FDI inflow, ranking sixth with a mere USD 65 million. The World Investment Report 2023 reveals that FDI flows to India increased by 10 percent to USD 49 billion in 2022, positioning the country as the third-largest host nation for announced greenfield projects and the second-largest for international project finance deals among South Asian nations.
Furthermore, in the context of Least Developed Countries (LDCs) and Land-Locked Least Developed Countries (LLDCs), Nepal lags significantly in attracting foreign investment. In 2022, FDI in the 46 LDCs of the world declined by 16 percent to USD 22 billion, constituting less than 2 percent of global FDI. The distribution of these flows was highly concentrated, with the top five recipients—Ethiopia, Cambodia, Bangladesh, Senegal, and Mozambique—comprising around 70 percent of the total.
While FDI in the 32 LLDCs collectively rose by 6 percent to $20 billion in 2022, the influx of FDI remained concentrated in a handful of economies. The top five recipients—Kazakhstan, Ethiopia, Uzbekistan, Mongolia, and Uganda—accounted for 83 percent of the total FDI to the LLDC group. These facts underscore Nepal’s challenge in attracting foreign investment compared to its regional and global counterparts.
Of Failed Commitments
NIS 2017 concluded on a positive note, securing investment commitments totaling USD 13.5 billion from six countries. However, when it came to actual realization, only a fraction of these commitments materialized.
During the 2017 summit, six Chinese companies had committed a total of USD 8.3 billion, constituting 61 percent of the overall investment commitment, demonstrating interest in investing across various sectors including hydropower, smart grid, airports, railways, roads, drinking water, healthcare, and minerals. According to the Investment Board Nepal (IBN), only four projects which include two hydropower plants and two cement plants totaling Rs 230 billion have progressed.
Fast forward two years to NIS 2019, and the event was a more meticulously planned affair compared to its 2017 predecessor. Unlike the 2017 summit, which took place without significant legislative reforms, NIS 2019 marked the beginning of the legal and institutional reform drive, albeit a hastily implemented one.
Amendments were introduced to existing laws, including the Foreign Investment and Technology Transfer Act (FITTA), Companies Act, Special Economic Zone Act, Industrial Enterprises Act, and Labor Act. Additionally, a Hedging Policy was formulated to address investment-related obstacles, signaling Nepal’s readiness for investment after the conclusion of the prolonged political transition.
While it contributed to a notable increase in expressions of interest from foreign investors, the tangible outcomes were limited. Among the 50 projects showcased by IBN during NIS 2019, only 15 deals were signed at the summit. The summit saw investment pledges totaling USD 12 billion which includes deals signed among the Nepali private sectors with foreign companies.
Out of the 15 deals signed by the IBN with foreign investors, the prequalification process for companies competing for 14 projects was finalized. IBN has shortlisted proposals for seven agricultural infrastructure projects, five hydroelectric schemes, the highly anticipated Nijgadh International Airport, and the Kathmandu Outer Ring Road Project, with a combined estimated cost of USD 11.88 billion.
However, neither the Nijgadh International Airport nor the Kathmandu Outer Ring Road Project has progressed as expected. Similar is the fate of the Tamor Storage Hydroelectric Project. Despite a joint venture agreement between the government-owned Hydroelectricity Investment and Development Company and Power China for the 756 MW Tamor Project, it remains in limbo, with the IBN annulling the joint venture agreement.
Of the 15 applications for unsolicited projects during NIS 2019, 10 went ahead to conduct the necessary studies for implementation. The most talked about among them was the USD 105 million Motor Vehicle Assembly and Manufacturing Plant, with the Korean company Motrex. While the IBN entered into a project implementation agreement with the Korean company, the project is also stuck in limbo.
Govt’s Preparations
The government has claimed that the upcoming summit this time will be different in the context that it will lay importance on domestic investors and non-resident Nepalis apart from the foreign investors. Finance Minister Dr. Prakash Sharan Mahat during the meeting of the directive committee on November 26 asserted, “This time, the conference isn’t merely a formality; its objective is to present concrete proposals to capable investors, secure their investments, actively monitor investment commitments, and ultimately bring them to fruition.”
Later on December 11 during a meeting with the representatives of major international development agencies, he said that the process of Nepal’s sovereign rating will be completed before the summit. The finance minister also sought suggestions from the development partners to attract investment in Nepal. Speaking on the occasion, Chief Secretary Baikuntha Aryal said the government is ready to work on structural and policy reforms. “We have formed teams to study the areas for reforms,” he said. “We are ready to amend laws and make other decisions based on the suggestions given by the team.”
The government has formed three committees, a steering committee led by the finance minister, an implementing committee led by the chief secretary, and a technical committee led by the industry secretary. The secretariat of the NIS 2024 led by the IBN CEO will be housed at the IBN office. Chief Secretary Aryal has asked the ministries to submit the projects under their domains under three categories – the conceptualizing stage, feasibility stage, and DPR stage.
Similarly, a committee is led by the law secretary with representatives from the Finance Ministry to recommend the necessary legislative reforms. According to government sources, three major announcements regarding viability gap funding (VGF) regulation, hedging regulation, and Nepal’s country rating will be made ahead of the NIS 2024.
Stakeholders caution that the government’s impromptu decisions, lacking proper preparation, may lead to suboptimal outcomes in the upcoming summit. According to them, the government has fallen short of fulfilling its commitment to establish a conducive environment for ease of doing business.
Reforms are Imperative
Experts and private sector stakeholders have questioned the government for failing to implement necessary provisions that were committed in the previous editions of the NIS to attract FDI. They emphasize that the government should efficiently implement various measures such as expeditious execution of hedging regulation, viability gap funding (VCF) regulation, Nepal’s sovereign rating process, and resolution of issues about land acquisition. “Multiple reforms are required to simplify the company registration process in Nepal. This calls for the coordination of rules and regulations across different agencies, a step that has been missing. Currently, investors bear the responsibility of navigating the system, rather than the system itself facilitating their efforts. When engaging with foreign investors, the emphasis should be on assisting rather than introducing unnecessary obstacles and bureaucratic complexities,” said Siddhant Raj Pandey, Chairman of Nepal Private Equity Association.
Those who are dealing in FDI say numerous laws concerning aspects like intellectual property rights and repatriation procedures remain unresolved. Furthermore, the government has not succeeded in establishing a conducive environment to reduce costs and mitigate risks for businesses.
Economists, industrialists, and legal experts argue that the persistent bureaucratic red tape in Nepal has been a longstanding deterrent for foreign investments. They underscore the immediate need for enhancing current policies and resolving structural bottlenecks if Nepal intends to establish itself as an appealing investment destination. According to them, both structural and procedural barriers within Nepal act as obstacles, discouraging potential investors.
The primary obstacle to FDI, according to stakeholders, is not necessarily the laws and regulations themselves, but rather their implementation. They emphasize that the lack of urgency in facilitating deals and persistent delays within government agencies are the key issues. These challenges, they argue, have dissuaded foreign investors from actively engaging with Nepal. “Addressing historical concerns about implementation delays is paramount, and the government needs to assure investors on this front. Nepal must offer seamless entry and exit facilities to encourage investment,” said Suman Rayamajhi, Managing Director of Upaya, a logistics services company.
A quick look at Nepal’s FDI approval process reveals procedural complexities, as exemplified by Dabur Nepal, a subsidiary of the Indian multinational company Dabur. Despite establishing a manufacturing base in Nepal in the early 1990s, Dabur Nepal had to wait for two years to get approval on a reinvestment proposal from the IBN. Finally, in the last week of April 2023, Dabur Nepal reached an agreement with IBN to reinvest Rs 9.68 billion in Nepal.
The process of obtaining approval for FDI in Nepal involves multiple authorities, and repatriating dividends is both a costly and time-consuming affair. Repatriation of investments necessitates approval from various agencies, including the Nepal Rastra Bank and the government departments concerned. Furthermore, specific sectors, such as telecommunications, require approval from the Nepal Telecommunications Authority, and joint ventures need approval from the Ministry of Finance.
Members of the business community argue that inconsistent policies have impeded FDI growth in Nepal. An illustrative example is the fluctuating minimum FDI threshold. In May 2019, despite reservations from the private sector, the government raised the minimum foreign investment threshold from Rs 5 million to Rs 50 million. However, three years later, in the federal budget for FY 2022/23, the government lowered the minimum threshold back to Rs 20 million. While the rationale behind this reduction was to encourage FDI in small-scale businesses, insiders contend that even the Rs 20 million threshold remains excessively high.
Nepal is grappling with a lack of risk management tools essential for mitigating interest rates and foreign currency risks associated with foreign investments, particularly notable in significant hydropower and infrastructure projects funded by foreign debt. While the revenue from such projects is in Nepali currency, the debt repayment must be made in foreign currency.
Despite recent amendments to the highly anticipated hedging regulation last year, the Ministry of Finance is once again contemplating a third round of amendments. This regulatory revision is being considered as efforts are underway to identify an institution that can provide hedging services.
Another crucial factor is the scarcity of qualified human resources. Foreign investors often face difficulties in finding the specific skills they require, worsened by legal constraints on employing foreign staff. According to labor law, businesses operating in Nepal can only hire a maximum of 5 percent foreign workers.
Moreover, foreign investors have consistently raised concerns about Nepal’s Copyright Act, contending that it falls short of international standards for protecting intellectual property rights. Trademarks and brand names of well-known international companies are frequently violated, leading to numerous cases of trademark infringements. The insufficient enforcement of copyright laws and the protection of intellectual property rights act as deterrents for multinational companies (MNCs) to enter the Nepali market.
Another area where Nepal needs to act urgently is reforming the anti-money laundering (AML) regime, especially after repeated warnings from the Financial Action Task Force (FATF). “The looming possibility of Nepal landing on the grey list of the Financial Action Task Force (FATF) raises international concerns, demanding immediate attention,” said Pandey.
Initiating the sovereign credit rating process for Nepal is crucial as it serves as a pivotal step in attracting foreign investment to the country. Following the NIS 2019, the Finance Ministry opted for the US-based rating firm Fitch Ratings for this purpose. However, progress in the process has been stagnant since then. Sovereign credit rating is instrumental in determining Nepal’s creditworthiness and evaluating investment-related risks.
Experts assert that a sovereign credit rating allows potential investors to gauge political risks associated with investments, thereby alleviating the need for repeated assurances from the government regarding low risks in Nepal. Simultaneously, the pressure to achieve a favorable sovereign rating can act as a catalyst for enhancing the performance of the country’s institutions.
Furthermore, sovereign credit rating has the potential to address foreign investors’ concerns about facing unnecessary inquiries, such as those related to raising loans within Nepal. This is because the rating agency also assesses the efficiency of Nepal’s Banking and Financial Institutions (BFIs) and contributes to making the financial market more conducive for foreign investors.
Anand Bagaria, Managing Director of Nimbus Holdings thinks while conducting a sovereign country rating is valuable, Nepal needs to offer incentives to the investors. “In my opinion, the attractiveness of a business is not solely determined by legislation; it requires demonstrating profitability. To establish such allure, the government should consider offering incentives. It is essential to strategize by identifying specific sectors and determining what incentives can be provided to make those sectors more appealing to potential investors,” said Bagaria, adding, “A carefully researched strategy is crucial, concentrating on five key sectors and guaranteeing incentives, such as free land and electricity, are offered to both domestic and foreign investors for a designated period.”
Positive Developments
While the government needs to continue its work on regulatory and policy reforms to enhance Nepal’s appeal as an ideal FDI destination in South Asia, some efforts have been made to address the concerns of foreign investors. As part of the 2023/24 federal budget implementation, which aims to streamline the approval process, the Department of Industry (DoI), the government body overseeing tasks related to foreign investments, has introduced an online mechanism for the automatic approval of FDI up to Rs 500 million.
Additionally, the government has also eliminated the minimum threshold for approval of foreign investment through the automatic route in information technology-based industries. Unlike the previous uniform limit of Rs 20 million for all industries of this nature, these sectors within the IT domain now experience increased flexibility in investment.
In November 2022, the government reduced the minimum FDI threshold from Rs 50 million to Rs 20 million, a move intended to attract smaller foreign investors to the country. Since the adjustment, there has been an uptick in industry registrations, particularly in the IT sector, with a notable increase from seven IT companies registered in FY 2021/22 to 16 in FY 2022/23.
The government has also announced that reinvesting income generated from foreign investments will no longer require formal approval. Additionally, the budget commits to simplifying the procedure for foreign investors to repatriate dividends. Furthermore, the budget for 2023/24 outlines the government’s plan to expedite the negotiation of bilateral investment promotion and protection agreements and double taxation avoidance agreements, focusing on identifying countries where foreign investments can flow.
Historically, consecutive governments hosting investment summits have touted them as flagship events. Interestingly, Dahal was the Prime Minister during the organization of NIS 2017, and now, under his current premiership, the nation is hosting a new edition of the summit. NIS 2024 will seen as a litmus test for the Dahal government to turn the hype into tangible investments.
While the government needs to continue its work on regulatory and policy reforms to enhance Nepal’s appeal as an ideal FDI destination in South Asia, some efforts have been made to address the concerns of foreign investors. As part of the 2023/24 federal budget implementation, which aims to streamline the approval process, the Department of Industry (DoI), the government body overseeing tasks related to foreign investments, has introduced an online mechanism for the automatic approval of FDI up to Rs 500 million.
Additionally, the government has also eliminated the minimum threshold for approval of foreign investment through the automatic route in information technology-based industries. Unlike the previous uniform limit of Rs 20 million for all industries of this nature, these sectors within the IT domain now experience increased flexibility in investment.
In November 2022, the government reduced the minimum FDI threshold from Rs 50 million to Rs 20 million, a move intended to attract smaller foreign investors to the country. Since the adjustment, there has been an uptick in industry registrations, particularly in the IT sector, with a notable increase from seven IT companies registered in FY 2021/22 to 16 in FY 2022/23.
The government has also announced that reinvesting income generated from foreign investments will no longer require formal approval. Additionally, the budget commits to simplifying the procedure for foreign investors to repatriate dividends. Furthermore, the budget for 2023/24 outlines the government’s plan to expedite the negotiation of bilateral investment promotion and protection agreements and double taxation avoidance agreements, focusing on identifying countries where foreign investments can flow.
Historically, consecutive governments hosting investment summits have touted them as flagship events. Interestingly, Dahal was the Prime Minister during the organization of NIS 2017, and now, under his current premiership, the nation is hosting a new edition of the summit. NIS 2024 will seen as a litmus test for the Dahal government to turn the hype into tangible investments.
“Focus should be on providing facilitation rather than creating unnecessary obstacles”
Siddhant Raj Pandey, Chairman, Nepal Private Equity Association
Numerous reforms are needed to streamline the process for foreign investors seeking to invest in Nepal. This necessitates cross-agency harmonization of rules and regulations. Presently, the onus is on investors to navigate the system, rather than the system itself facilitating their endeavors. When dealing with foreign investors, the focus should be on providing facilitation rather than creating unnecessary obstacles and bureaucratic complexities.
Addressing the concerns of foreign investors requires a shift towards creating and offering more opportunities, minimizing hurdles, and avoiding unnecessary loops. Pressing issues demand government action to foster foreign investments and assure investors, especially with Axiata’s exit from NCELL casting a shadow over the upcoming investment summit. Then there is an issue related to tax on Further Public Offering (FPO) at premium rates which will be hopefully clarified soon by the court. The unprecedented application of retrospective tax on capital, diverging from global norms, merits careful consideration. The government’s intent to amend the Hedging Regulations is a welcome move, acknowledging that having a regulatory framework is better than none. However, long-standing discussions about Nepal’s sovereign rating need timely execution. The looming possibility of Nepal landing on the grey list of the Financial Action Task Force (FATF) raises international concerns, demanding immediate attention.
The challenge lies in the lack of effective communication and harmonization within intra-agencies. When creating a one-stop shop like the investment board, it is crucial to delegate full authority to it. While the Investment Board is chaired by the Prime Minister, a significant challenge persists in the form of bureaucratic red tape. Swift decision-making powers are essential for any investment to materialize, given that the global landscape is not inclined to wait, and investors may opt for opportunities in other countries.
Alternative investments such as private equity and venture capital (PEVC) in Nepal are on the rise, signaling the country’s potential to attract diverse investment opportunities. It is essential to have a variety of players in the ecosystem offering different investment modalities. While Sebon has introduced regulations for strategic investment funds, the current framework is not favorable for FDI. We communicated our requirements to them through a wish list over a year ago, but as of now, there has been no response.
“The government should consider offering specific incentives to attract foreign investors”
Anand Bagaria, Managing Director, Nimbus Holdings P. Ltd.
The announcement of hosting the investment summit comes at a significant juncture, coinciding with the exit of two foreign investors, Axiata Group and Habib Bank, from Nepal.
Overall, Nepal possesses a comprehensive set of laws and regulations governing the FDI regime. However, the challenge lies in the effective implementation of these regulations. Addressing the implementation issue requires more than mere verbal assurances.
I believe the government should consider offering specific incentives to attract foreign investors to Nepal. Waivers, such as providing land and free electricity for a certain period, could be extended to foreign investors. However, careful consideration is needed to avoid potential concerns about favoritism. To address this, a well-researched approach is essential, focusing on five key sectors and ensuring that equivalent facilities are provided to both domestic and foreign investors for a specified duration.
While conducting a sovereign country rating is important, the process typically takes two to three years for international investors to make investment decisions based on the rating. In my opinion, the attractiveness of a business is not solely determined by legislation; it requires demonstrating profitability. To establish such allure, the government should consider offering incentives. It is essential to strategize by identifying specific sectors and determining the incentives to make those sectors more appealing to potential investors.
“Streamlining of FDI approval process is essential”
Suman Rayamajhi, Co-founder/Managing Director, Upaya City Cargo
The existing regulatory arrangements for FDI in Nepal are reasonably sound, clearly outlining the processes for investment and repatriating dividends. However, the challenge for foreign investors lies in navigating various government agencies. Despite the Department of Industry implementing the ‘one window’ system, the requirement to engage with multiple government bodies still exists. At the upcoming investment summit, the three key government agencies responsible for managing FDI—Investment Board Nepal, Department of Industry, and Nepal Rastra Bank—should streamline communication regarding the investment processes and profit repatriation for investors.
The state agencies must recognize that FDI in Nepal is not intended to remain indefinitely. Addressing historical concerns about implementation delays is paramount, and the government needs to assure investors on this front. Nepal must offer seamless entry and exit facilities to encourage investment.
With the Know Your Customer (KYC) system in place, the screening of incoming investments poses minimal challenges. Therefore, simplifying the regulations governing capital inflows and outflows is advisable.
The emergence of private equity and venture capital as alternative funding sources in Nepal is positive. Given the scale of Nepal’s market, large global equity funds may not immediately invest here. To attract more investments, particularly from development finance institutions (DFIs) like BII, IFC, and FMO, Nepal should emphasize the impact investment narrative.
Significant Barriers to Investment Exist in Nepal: US State Dept
Political instability, widespread corruption, cumbersome bureaucracy, and inconsistent implementation of laws have discouraged potential investment in Nepal, said a new US report.
The 2023 Investment Climate Statements published by the State Department says despite considerable potential – particularly in the energy, tourism, information, and communication technology (ICT), infrastructure, and agriculture sectors – political instability, widespread corruption, cumbersome bureaucracy, and inconsistent implementation of laws and regulations have deterred potential investment in Nepal.
The report has also questioned the government of Nepal’s commitment to implement the policies into meaningful practices. “While the Government of Nepal publicly states its keenness to attract foreign investment, this has yet to translate into meaningful practices,” the report said.
The US government report has identified Nepal as an investment destination for those who are willing to accept the inherent risks and unpredictability of doing business in the country and who possess the resilience to invest with a long-term mindset.
While the report lauds the government’s efforts to bring some investment-friendly laws and regulations in recent years, it says significant barriers to investment exist in Nepal. Corruption, laws limiting the operations of foreign banks, lingering challenges in the repatriation of profits, and controlled currency exchange facilities have undermined foreign investment in the country. The prohibition of FDI in certain sectors as well as a minimum foreign investment threshold of Rs 20 million (USD 154,000), and the government’s monopoly over certain sectors of the economy (such as electricity transmission and petroleum distribution) are other factors that have dented foreign investment potential in Nepal.
Political uncertainty is a continuing challenge for foreign (as well as domestic) investors, according to the report. “Nepal’s ruling parties have spent much of their energy over the last years on internal political power struggles instead of governance,” the report stated.
The other factor deterring foreign investors from putting money in Nepal, according to the report, is a lack of understanding of international business standards and practices among the political and bureaucratic classes.
