In May 2019, the government of Nepal revised the minimum threshold for foreign direct investment (FDI) from Rs5 million to Rs50 million. The reasons cited were that 'Nepali entrepreneurs were capable of injecting a larger amount in businesses than in the past' and that there was a need to 'safeguard small domestic industries'. Fast forward to the present day: Things have changed drastically. The ongoing lockdown and the uncertainty surrounding Covid-19 have severely impacted small and medium enterprises as well as the investable capital available to Nepali entrepreneurs. As such, the time has come to lower the minimum threshold with a goal to attract more and diverse FDI for the good of the people and the economy.

First of all, lowering the FDI threshold helps to create new jobs at this time when unemployment is expected to increase significantly as thousands of Nepalis in foreign labour markets and at home lose their jobs. The lockdown adopted to contain the spread of the virus has hit businesses very hard. The Institute for Integrated Development Studies, an independent think tank, estimates that 60 percent of jobs in small businesses have already been lost. While a government task force has targeted creating 2.5 million jobs in the next four-five years, it is not going to be a walk in the park. As such, lowering the FDI threshold could attract a greater number of investments as our target investor base increases. This, in turn, leads to the creation of more enterprises, consequently adding much-needed jobs in the economy.

Similarly, lowering the threshold may lead to an increase in foreign currency reserves. An increase in smaller foreign investments also contributes to swelling in foreign currency reserves. At a time when Nepal’s foreign exchange reserves are quickly diminishing, and foreign labour engagement and tourism industries are dwindling (the Institute for Integrated Development Studies predicts a 20 percent decrease in remittance and a loss of $400 million in tourism revenues this year), small scale foreign investments might provide a much-needed foreign currency reserve cushion.

If the repatriation of profit and principle is of concern, institute a policy of a minimum timeframe for the repatriation of these 'small foreign investments'. Alternatively, allow tax breaks or tax credits for locking in foreign investment for a five-year period or for reinvestment of profits; that would help shore up foreign capital.

Smaller investment amounts don’t necessarily mean they will sideline small domestic industries. With strategic targeting, even less capital-intensive foreign investments can help Nepal build its own high-tech sector and contribute to a skilled resource pool. Therefore, reducing the threshold could also lead to an increased skilled talent pool. For instance, $350,000 is adequate to set up a small offshore office in Kathmandu and hire at least five-10 skilled tech employees for a minimum two-year period. The number of jobs could be higher in other parts of Nepal where office space and talent costs are cheaper.

Additionally, innovative jobs have a strong multiplier effect as studies show that one high-tech job could create five additional jobs in the service economy. Furthermore, new technology talent and knowledge transfer will be invaluable for the country in the long run as innovation is the key to future job creation. With the current threshold, we are missing out on attracting such investments.

Likewise, lowering the FDI threshold could also provide foreign investors with an opportunity to gauge Nepal. Foreign firms would rather initially test a frontier market such as Nepal than pour in large amounts of money right away. This is especially true given the global economic sluggishness plus the notoriety of Nepal’s bureaucratic hassles. We should welcome any 'pilot' investment opportunities, nurture these engagements and focus on delivering high-quality results so that the same firms invest larger amounts in the future.

Finally, a reduction in the threshold might assist in making a quicker economic impact. Typically, smaller investments move faster in decision chains, leading to a much faster flow of foreign capital into the economy. For instance, an investment of $100,000 goes through fewer hurdles than say a $1,000,000 investment. Megaprojects with millions of dollars in investment might take years to fully materialise with the actual impact on the economy being felt only years later. Smaller foreign investments could act as a critical tool to buttress shorter-term economic activities while building a solid backbone for longer-term development.

There is no handbook for manoeuvring through this unprecedented global public health crisis created by Covid-19. However, that doesn’t mean we cannot work with the tools at our disposal to not only weather the current storm but also be ready to leapfrog when things settle down. Lower the FDI threshold now, reach out to the world of fast-moving tech companies and other innovative firms, invite them to explore our nation, and present to them the potential and the people we have. Besides hydro and mega infrastructure opportunities, Nepal has a youth population that can crunch numbers, are social media savvy, and can work hard and learn new technology if given an opportunity. Lowering our FDI threshold and expanding our target investor market makes perfect sense currently.

***

What do you think?

Dear reader, we’d like to hear from you. We regularly publish letters to the editor on contemporary issues or direct responses to something the Post has recently published. Please send your letters to [email protected] with "Letter to the Editor" in the subject line. Please include your name, location, and a contact address so one of our editors can reach out to you.