Foreign direct investment (FDI) refers to monetary or non-monetary investment in another country that, besides providing capital, helps in the transfer of technology, intellectual property rights, managerial skills and so forth. Nepal is landlocked, and one of the least developed countries where the major challenge is the lack of adequate capital for growth and development. The potential areas for FDI in Nepal are hydropower, tourism, industrial manufacturing, agriculture, construction and mining. FDI is of significant value for a country like Nepal where there are huge quantities of unexploited resources awaiting strong finance.

According to the database of the United Nations Conference on Trade and Development (UNCTAD) World Investment Reports, FDI trends in Nepal from 1996 to 2006 exhibit a fluctuating pattern. It is observed that potential foreign investors are wary of putting money in conflict-driven societies and countries. During the height of the Maoist conflict, there was zero FDI (in 2004) and investment inflow was $7 million in the negative (in 2006).

Gradual improvement

Nepal experienced gradual improvement and increment of the flow of FDI between the years 2007 and 2014. The sharp rise in FDI inflows is a result of the change in the political structure. However, the country's political system was in a transition phase. There were frequent changes in government, and there was a lack of a concrete policy on foreign investment. As a result, foreign investment did not come into the country as expected. Between 2015 and 2018, there was a sharp increment in FDI. The importance Nepal has given to foreign investment protection and promotion is reflected in the hosting of the Investment Summit 2017 and Investment Summit 2019.

Nepal is gradually moving ahead to attract FDI. The government, in a bid to address the issues and concerns of foreign investors, came up with a new piece of legislation, the Foreign Investment and Technology Transfer Act in 2019. It is detailed and progressive for foreign investment protection and promotion. It consists of substantive provisions like national treatment, most-favoured-nation treatment, expropriation and an investor-state dispute settlement mechanism.

The Foreign Investment and Technology Transfer Regulation is in place to strengthen the Foreign Investment and Technology Transfer Act 2019. The Foreign Investment Policy 2015 stipulated the potential areas for FDI in Nepal along with the various concessions, facilities and exemptions to foreign investors. The government has established a one-window service under the chairmanship of the prime minister for the approval of FDI. To some extent, it helps to protect foreign investors from the existing administrative and bureaucratic hurdles. In the present context, as far as FDI is concerned, it looks like everything is well placed.

The figures for the years 2015 to 2018 are quite remarkable in the history of foreign investment in Nepal. They reflect the upward mobility of FDI in various potential sectors. The year 2018 marked the highest FDI inflow amounting to $161 million. In the World Bank Doing Business Report 2019, Nepal ranked in the 94th position among 190 countries. Only two South Asian nations placed above Nepal. India was at number 63 and Bhutan was at number 89. This is the best ranking for Nepal since the year 2015. The challenge ahead is proper and optimum utilisation while Nepal seeks to create opportunities for more FDI in the days to come.

An examination of the data shown in the Industrial Statistics published by the Ministry of Industry, Commerce and Supplies shows that among the industries approved for foreign investment by category in the fiscal year 2017-18, the service sector came at the top of the list with 1,501 approvals followed by tourism with 1,370 and manufacturing with 1,106. Others on the list include agro and forestry-based (267 approvals), energy-based (82), mineral (70), construction (46), and information and technology (35).

Although the above data reflects an encouraging FDI trend in various sectors, foreign investment in the energy sector is comparatively small despite the great hydropower potential in Nepal. It is high time the government identified the constraints and impediments to FDI in the energy sector.

Long journey ahead

Nepal has a long way to go to achieve economic growth, development and prosperity. The government must strive to expand basic infrastructure throughout the country which will ultimately pave new routes for FDI. The pertinent issue at present is the rampant corruption that impedes FDI inflow. The government must be serious and take the initiative to neutralise corrupt practices in any form. There must be zero tolerance towards corruption in Nepal.

Investment inflow through illegal channels must be checked and regulated. FDI from tax havens must be scrutinised before it enters the country. Nepal must not hesitate to sign bilateral investment treaties with other countries. It will provide an extra layer of protection to potential foreign investors in Nepal. Ultimately, it builds confidence among foreign investors to make micro and macro investments in various potential sectors. The government must be conscious of providing foreign investment protection while at the same time retaining its regulatory power.