Nepal's foreign direct investment stock up 8.5 percent in 2019-20Bagmati had the highest share of FDI stock while Karnali and Sudurpaschim provinces accounted for the lowest, as per the central bank study.
Nepal's foreign direct investment (FDI) stock rose moderately in 2019-20 even as the coronavirus pandemic raised havoc across the world, indicating that moves to attract capital are kicking in, a central bank report said.
A study conducted by Nepal Rastra Bank revealed that FDI stock increased by 8.5 percent to Rs198.52 billion at the end of fiscal 2019-20, accounting for 4.7 percent of the gross domestic product.
Nepal has been gradually making reforms in policies and procedures to promote and facilitate foreign investment inflows, considering it as an important external source of development finance, the report said.
Jiblal Bhusal, director general of the Department of Industry, said that work on some important foreign direct investment projects, like Huaxin Cement and Hongshi, and some hydropower projects were being expedited.
The new Foreign Investment and Technology Transfer Act (FITTA) regulation states that investors need to bring 25 percent of the pledged investment within a year from the date of registration, 70 percent by the start of operation, and the remaining 30 percent within the next two years.
The vaccination programme is moving ahead globally, and cases have been gradually declining which shows a positive environment for investors with a decrease in the pandemic's impact, Bhusal said.
Gross FDI inflows increased by 18.2 percent to Rs19.68 billion in 2019-20. The divestment of foreign investment (repatriation of investment) during 2019-20 remained at Rs199.8 million which is around 1.0 percent of gross FDI inflows, as per the report.
Net foreign direct investment inflows to Nepal increased by 49.1 percent to Rs19.48 billion in 2019-20. Net FDI inflow was 6.4 percent in 2010-11.
There is a gap between FDI approval and actual FDI inflows, the central bank survey report showed. FDI approval may indicate an intended investment (the approved investment may not actually take place) or there may be significant time lags between approvals and actual investments, according to the report.
In some instances, the realisation of the approved investment may take place over several years as usually seen in projects with longer gestation periods, creating a gap between FDI approval and actual FDI inflows.
Between 1995-96 and 2019-20, total actual net FDI inflow stood at around 34.1 percent of total FDI approval, as per the report.
The gap between approved and actual inflow should be reduced by facilitating the inflow of approved FDI, the report said. More FDI should be directed towards export-oriented and import substitution industries to narrow the trade deficit, it added.
“Definitely, there is a gap between approved and actual inflow of FDI which is expected to decline in the coming days,” Bhusal said. It appears investors submit their proposal for foreign investment without studying the provisions carefully, and they also give up halfway after making an investment commitment, he added.
According to Bhusal, constant political upheavals in the country and its geographical condition combined with high investment costs drive potential investors to other countries.
Nepal received foreign investment from 52 different economies as of mid-July 2020. In terms of total FDI stock, India ranks in the top position with Rs62.45 billion, followed by China with Rs30.97 billion, Saint Kitts and Nevis with Rs15.27 billion, Ireland with Rs12.93 billion, and Singapore with Rs12.43 billion.
More than 96 percent of India's FDI stock is concentrated in three major sectors—manufacturing, mining and quarrying, electricity, gas and water, and financial intermediation.
Meanwhile, more than 99 percent of China's FDI stock is concentrated in the manufacturing sector (cement plants) and hydropower projects.
The industrial sector accounts for about 56.0 percent of total FDI stock. Within the industrial sector, manufacturing, mining and quarrying constitutes 28.3 percent, and the electricity sector accounts for 27.5 percent of the total FDI stock.
In terms of foreign direct investment stock, the manufacturing, mining and quarrying sector has the highest FDI stock of Rs56.07 billion (28.3 percent of the total) followed by financial intermediation with Rs54.29 billion, and electricity, gas and water with Rs54.66 billion.
About 43.9 percent of the total FDI stock is in the service sector. Within the service sector, financial intermediation constitutes 27.3 percent and the hotel and restaurant sector 6.0 percent of the total FDI stock.
The electricity generation sector, particularly the hydropower sector in Nepal, has been emerging as a preferred sector for FDI in recent years. The latest survey shows that 27.5 percent of the FDI stock and 36.4 percent of the total paid-up capital is in this sector.
The hydropower sector has also attracted other sources of external financing, such as foreign loans, in addition to FDI.
As per the report, the capacity utilisation of FDI-based manufacturing companies is constrained by the Covid-19 pandemic while the profitability of FDI companies remained satisfactory in the review year.
The survey also captures the capacity utilisation of manufacturing companies established with FDI. Their capacity utilisation stood at around 44.11 percent during 2019-20, down from 54.04 percent a year ago.
According to the report, the total sales of the surveyed companies during 2019-20 amounted to around Rs347.73 billion, compared to Rs381.58 billion a year ago. The average return on equity of the surveyed FDI companies was around 15.63 percent for 2019-20, which was around 16.08 percent a year ago.
Approvals for dividend repatriation by companies with foreign investment equivalent to Rs12.90 billion were issued in 2019-20. Dividend repatriation approval was the highest in the manufacturing sector followed by the financial sector.
In terms of FDI stock, Bagmati province took the highest share of Rs120.17 billion (60.5 percent) while Karnali and Sudurpaschim provinces accounted for Rs466.4 million (less than 1.0 percent).
The report said that the investment potential of provinces other than Bagmati should be explored and promoted to attract FDI in these provinces.
According to the survey report, paid-up capital and loans increased by 22.6 percent and 42.7 percent respectively while reserves decreased by 14.4 percent. The foreign liability of Nepal in terms of direct investment stood at around Rs198.52 billion as of mid-July 2020.
Paid-up capital is a major component in FDI stock as it accounted for 54.4 percent of the total FDI stock.
As per the global trend mentioned in the report, the Covid-19 crisis had a sizeable impact across all types of foreign investment in 2020. The restrictive measures around the world in response to the pandemic led to a slowdown in project activity across green-field investments, project finance deals and cross-border mergers and acquisitions that resulted in a significant decline of FDI inflows around the world.
FDI inflows to South Asia increased by 20.9 percent to $69.7 billion in 2020. FDI increased by 26.7 percent in India, the largest FDI recipient in the sub-region, with inflows of $64.1 billion in 2020.
As of mid-July 2020, Nepal's foreign assets and liabilities stood at Rs1,467.76 billion and Rs1,219.12 billion respectively. Consequently, the net international investment position (IIP) of Nepal remained positive at Rs248.67 billion, which was Rs188.86 billion a year ago.