Nepal has attracted foreign investment for more than four decades. Since 2038 B.S., Nepal has actively promoted itself as a desirable destination for foreign investment. The decade of the 1990s saw the beginning of an era of globalization, liberalization, and privatization that greatly increased the volume of foreign investment. Following the political upheaval in 2046 B.S., the government began prioritizing foreign investment and establishing programs to stimulate inflows. According to the Department of Industry, 44 industries have pledged a total of Rs 5.23 billion in foreign direct investment (FDI) for fiscal year 2046-047.
Reality of Foreign Direct Investment in Nepal
There are three categories of foreign investment: direct, indirect, and technology transfer.
The Foreign Investment and Technology Transfer Act of 2075 defines foreign investment as follows:
1. Share investment in foreign currency
2. Re-investment in an industry of dividends derived from foreign currency or shares
3. Investment made in venture capital fund
4. Lease investment
5. Investment made in listed securities through the secondary securities market
6. Investment made by purchasing shares or assets of a company incorporated in Nepal
The rate of FDI in Nepal has always been fluctuating. In the fiscal year 2051/52, Rs 380 million FDI was received. FDI of Rs 280 billion has been received up to the month of Baishak in Fiscal Year 2081. According to figures from the Nepal Rastra Bank and the Department of Industry, Nepal's annual average FDI inflow from 2051 B.S. has been only Rs 9 billion per annum. Following the adoption of the new constitution in 2073, Nepal organized an investment conference in the month of Falgun the same year to attract foreign investment. The total commitment raised at the investment conference was Rs 1.40 trillion. That year, an FDI of Rs 14 billion was received. This included Rs 2.30 billion from the investment conference, and the remainder coming from other regular commitments. Till the Jestha of the last fiscal year, Nepal had received Rs 7 billion in foreign investment. Over the last decade, foreign investment has increased at an annual rate of 16.26%.
Chart 1: Investment Commitments Versus Actual FDI in the Last Decade (in million Rupees)
Source: Foreign Investment in Nepal (2024) Industries Department, Survey Report on Foreign Direct Investment in Nepal (2021/22) Nepal Rastra Bank
According to a report conducted by Nepal Rastra Bank in 2022, Nepal received Rs 264 billion in FDI from 57 nations till the end of the fiscal year 2079 B.S. According to the Department of Industries' 2024 annual report, Nepal got Rs 7.76 billion in 2079/80 B.S., while the overall FDI inflow for the most recent fiscal year up to the month of Baishak was 7.4 billion.
Foreign Direct Investment and Priority Sectors
India, China, and Ireland are the major countries bringing foreign investment to Nepal. According to a report published by Nepal Rastra Bank in 2022, India is the leading FDI investor, with Rs 88.59 billion, followed by China with Rs 33.45 billion in FDI investments. China has committed the largest FDI in the last two years, totaling Rs 224 billion until Jestha in 2081. India is second on the pledge list with Rs 160 billion until the Jestha of 2081. A study from Nepal Rastra Bank states that Ireland ranks third among the FDI investors, with Rs 20.89 billion in foreign investment. Singapore is fourth on the FDI list with Rs 16.7 billion, while Saint Kitts and Nevis is fifth with Rs 15.9 billion. India provided 33.5% of all foreign direct investment, followed by China (12.7%), Ireland (7.9%), Singapore (6.1%), and St. Kitts & Nevis (5.7%), with the remainder coming from other nations.
Chart 2: : Share of FDI According to Country
Source: Survey Report on Foreign Direct Investment in Nepal (2021/22), Nepal Rastra Bank
As per NRB's survey report on FDI in Nepal, paid-up capital makes up 53.7% of total FDI stock, while reserves and loans make up 31.7% and 14.6%, respectively. According to the same report, 62.6% of FDI went to the industrial sector, 37.3% to the service sector, and 0.1% to the agriculture sector. By fiscal year 2077/78, six countries had made foreign direct investment (FDI) in agriculture, with China accounting for the bulk, focused on animal meat packaging and organic fertilizers. India and Mexico invested in meat packaging, chips, biscuits, and grains. The National Planning Commission feasibility study report for 2079 states that foreign direct investment is not necessary in the primary agriculture sector.
The data from the Department of Industry showed that FDI commitments totaling Rs 75.13 billion were made between 2071 B.S. and Jestha of 2081. Of these commitments, 68% were for small-scale enterprises, 19% for large-scale industries, and 12% for medium-sized industries. The Industrial Enterprise Act of 2076 defines small industries as those with fixed capital of up to Rs 150 million other than micro-enterprises or cottage businesses. Similarly, industries with fixed capital above Rs 150 million but not exceeding Rs 500 million are classed as medium, while those with fixed capital greater than Rs 500 million are categorized as large industries. The service sector accounts for 55.63% of the commitments, while tourism accounts for 28% of the committed investment. Third on the list is the productive infrastructure development industry. Foreign investors were able to repatriate Rs 13.68 billion in dividends in 2078/079, as per the Department of Industries' FDI 2024 report.
Challenges in Foreign Investment
The establishment of democracy in Nepal opened up new avenues for legal, procedural, and structural reforms to attract international investment through economic liberalization, privatization, and globalization. Following the adoption of the federal structure, three investment conferences were held in 2073, 2075, and 2081 to attract foreign investors. The administration led by Maoists (Pushpa Kamal Dahal, Prachanda), who gained prominence after emerging from an armed conflict, held an investment conference in Falgun in 2073. Approximately 250 investors from 23 nations pledged Rs 1.4 trillion in investment at that conference. However, only Rs. 230 billion of the commitment was realized for four projects. Two of those projects were for cement manufacturing plants, and the remaining two were for hydroelectricity power plants.
Two years later, a second conference was conducted. 800 investors from 40 countries attended this conference hosted by the CPN-UML (KP Sharma Oli)-led government. A total of Rs 2.3 trillion in investment was pledged; however, only Rs 92 billion was invested in different projects. The third investment conference was conducted in Baishak last year (2081 B.S.). Pushpa Kamal Dahal was again the Prime Minister of Nepal for this conference. More than a thousand investors from 55 different nations attended this conference. 151 investment opportunities were presented to the investors. Foreign investment of more than Rs 9 billion was approved at the investment conference. The hard reality that foreign investors have not followed through on their investment commitments shows that they are still not confident in investing in Nepal despite government efforts.
Economic analysts have identified the following as the primary factors for Nepal's difficulty in attracting international investment:
a) Political parties' lack of commitment to a shared agenda on foreign investment.
b) Political instability.
c) Investors' lack of confidence due to political turbulence.
d) Uncertainty in dividend repatriation rules
e) Uncertainty in sectoral preferences and foreign investment terms and conditions
f) Complexity in processes and employee approaches
g) Delays in project implementation
h) Limited domestic market and uncertainty of access to foreign markets
i) Difficulty acquiring industrial land.
Policy, Implementation, and Effectiveness
The Foreign Investment Policy of 2071 aims to attract foreign investment, skills, technology, and talent in national priority areas to enhance exports, minimize imports, maintain trade balance, and make the national economy progressive and dynamic. The Investment Board Nepal was created in 2068 B.S. under the chairmanship of the Prime Minister to promote economic development by fostering an investment-friendly climate and managing and mobilizing domestic and foreign investment. The board has approved investments totaling more than Rs 1.2 trillion in 34 projects, 24 of which are in the energy sector and 14 in the non-energy sector.
The 16th 5-year plan aims for an average economic growth rate of 7.1%, with a projected investment of Rs 9.482 trillion in the public, private, and cooperative sectors. The government has agreed to alter the Industrial Business Act, Direct Selling of Goods (Management and Regulation) Act, Bankruptcy Act, Labor Act, and Hedging Regulations in this year's budget to address foreign investment issues.
Conclusion
The biggest difficulty right now is the inability to turn investment commitments into actual investments. A country's GDP and FDI are directly related. A country benefits from attracting FDI to develop its economy. FDI has a direct impact on job creation and poverty reduction. The scale and scope of FDI should be carefully balanced with the country's needs. Outdated rules and regulations that hinder FDI inflows should be updated, and a favorable environment for investment should be created. Efforts should be taken to reduce the difficulties associated with FDI, as well as to close the gap between approved investment commitments and actual investments.
