Foreign direct investment (FDI) pledges have surged as the country grapples with political instability and diminishing foreign reserves, but how much of the promised money will materialise remains uncertain as commitments and approvals normally do not match, government officials said.

According to the Department of Industry, FDI commitments showed a 27.85 percent year-on-year jump to Rs33.42 billion as of the third quarter ended mid-April. The investment is expected to create 9,256 jobs.

The growth in investment pledges has cheered the economy battered by the Covid-19 pandemic and resulting economic slowdown.

According to Nepal Rastra Bank, net FDI increased by 60 percent to Rs16.30 billion in the first eight months ended mid-March. Net FDI in the same period of the last fiscal year 2020-21 was Rs10.18 billion.

"Despite the jump, the commitments fell short of the government's expectations," said Director General Ramchandra Tiwari of the Department of Industry.

According to the World Bank’s latest report, encouraging FDI inflows, currently the lowest in the region, would not only support Nepal’s foreign exchange reserves, but also make the private sector more competitive through skill transfers and know-how.

FDI has the added benefit of not adding to the country’s debt and reducing pressure on foreign exchange reserves, thus mitigating the risks that further import and capital flow restrictions could have on growth, the report said.

“Investors always look for assurances of good economic condition, good market competition, secured investment and profit, and political stability before deciding to invest in a foreign land,” said Tiwari.

“FDI inflows will be slow in a country whose financial health is not good, and where there is political instability. There are many factors why Nepal is falling behind in attracting FDI. There is still a huge gap between commitments and approvals. As of now, 50 percent of the foreign investment pledges are being realised,” he said.

"We have found that the intention of some foreign investors is to get visa privileges in the name of investment. It is obviously difficult to check whether they are real investors or posing to be investors. Besides, there are hassles regarding land acquisition to set up factories, and in many cases, there are some lapses in facilitating investment. So, 100 percent of the commitments are not converted into actual investment," Tiwari said.

The FDI pledges received in the first three quarters of the fiscal year are for 155 different projects—four large scale industries, 37 medium scale industries and 114 small scale industries.

Tiwari said that investors put money in large scale industries if there are export possibilities. “More investors in Nepal are investing in small scale industries because it does not involve big risks.”

The World Bank’s Nepal Development Update report said that in the absence of significant FDI inflows, the current account deficit was primarily financed by trade credit, external concessional loans and reserve drawdowns.

FDI in Nepal remained marginal, after having contributed only 0.5 percent of GDP in the fiscal year 2020-21, the report said.

Dinesh Shrestha, vice-president of the Federation of Nepalese Chambers of Commerce and Industry, said that foreign investors have been in a wait and watch mode for a long time because the country has again plunged into political instability.

"As banks are not in a position to provide loans due to a liquidity crunch, FDI becomes a key source of funding in any nation," he said.

“Nepal has huge potential in the production of daily consumable goods as market demand is high if we attract foreign investment and technology. If the government discourages the import of such goods, there is a huge possibility of foreign investment pouring into such industries,” Shrestha added.

"For instance, the government banned the import of energy drinks and opened the way for the establishment of factories producing energy drinks. This is a good policy. If the government creates such a policy for other consumable goods as well, investments will come. But for this to happen, the government should provide subsidies and encouragement,” he added.

Shrestha said that the government could encourage foreign investors by announcing tax holidays.