Potential foreign investors put off by Nepal’s lax law enforcementFDI pledges in IT sector plunged 409 percent year-on-year in the first 11 months of the current fiscal year ended mid-June.
Potential foreign investors are not keen on putting money in Nepal’s information and technology sector because laws regarding cyber security and intellectual property rights are not enforced strictly here, industry insiders say.
Foreign direct investment (FDI) pledges in the information and technology sector plunged 409 percent year-on-year in the first 11 months of the current fiscal year ended mid-June.
According to the Department of Industry, Nepal received six small-scale FDI commitments in the information and technology sector worth Rs81.75 million in the review period.
In the last fiscal year 2020-21, FDI commitments in this sector totalled Rs3 billion for 16 projects.
Speaking at the Digital Nepal Conclave 2022 organised by ICT Foundation Nepal on Saturday, panellists said lax enforcement of regulations put off foreign investors.
“There are no proper cyber security laws in the country. The intellectual property rights that are governed by the Copyright Act 2022 and the Patent, Design and Trademark Act 1965 are all outdated,” said Siddhant Raj Pandey, CEO of Business Oxygen, Nepal’s first private equity fund.
“Nepal has become a risky country for foreign investors due to lack of laws,” he said. Pandey added that cyber security laws were very important to attract FDI.
Participants in the conference also pointed out that the FDI rules change with every change in government, and the inconsistent policy was hurting FDI growth in Nepal.
On May 23, 2019, the government raised the minimum foreign investment threshold to Rs50 million from Rs5 million despite reservations from the private sector.
The budget for the next fiscal year 2022-23 unveiled on May 29 has again brought down the minimum threshold to Rs20 million.
The reason given for the reduction is that the high threshold stopped the flow of FDI in small scale businesses.
“The minimum threshold for foreign investment is still too high. This will keep potential investors away,” Pandey said.
Cybercrimes are prosecuted under the Electronic Transaction Act 2008. The Ministry of Communication and Information Technology drafted a National Cyber Security Policy 2021 with the purpose of governing and addressing cyber security issues.
The Nepal Telecommunications Authority passed the Cyber Security Bylaw 2020 which aims to protect information and communication systems from cyber attacks and other associated risks.
Nepal moved up to the 94th position in the Global Cybersecurity Index 2020 from the 106th slot in the 2018 edition, showing that its commitment to cybersecurity has increased, according to the International Telecommunication Union.
The Himalayan republic scored 44.99 out of 100 points among 182 countries. It was placed 17th among the 18 countries in the Asia-Pacific region, said the International Telecommunication Union.
But Nepal still has a long way to go.
The panellists at the Digital Nepal Conclave said that education, skill development, government impetus and branding Nepal were equally important to bring scalable business from abroad.
“There is no shortage of finance to invest in the information and technology sector. The private sector is willing to invest, but the investment environment is not favourable,” said Sanjay Golchha, managing director of Neoteric Nepal, which provides information and technology solutions to companies and small and medium-sized enterprises.
“There is a big trust issue. There is no investment in skill development in the information and technology sector, and Nepal is not being branded as a place for offshoring," Golchha said.
Last week, the World Bank approved $140 million in support for the Digital Nepal Acceleration Project to expand access to broadband and engage more people in the digital economy.
According to the World Bank, the project will create better job opportunities for about 1,500 people by providing digital skills development training.
The project will support the implementation of the Digital Nepal Framework, the country’s digital economy strategy released by the government in 2019.
The project will improve access to high-quality and affordable broadband services, especially for people and businesses in rural areas.
It will also support and secure the delivery of digital government services through improvements in Nepal’s data infrastructure and cyber security.
Specific activities will seek to boost internet use, digital skills and entrepreneurship, and access to digital services by women, ethnic and social minorities, and persons with disabilities, the multilateral funding agency said.
The Covid-19 pandemic had hit all types of foreign investment in 2020. According to the UNCTAD's World Investment Report 2021, the global FDI inflow in 2020 declined by 34.7 percent to $998.9 billion.
The restrictive measures around the world in response to the Covid-19 pandemic led to a slowdown in project activity across Greenfield investments, project finance deals and cross-border mergers and acquisitions that resulted in significant decline of FDI inflows around the world.
FDI in the developed economies decreased significantly by 58.3 percent in 2020 to $312.2 billion from $749 billion in 2019 whereas inflows to the developing economies decreased moderately by 8.4 percent to $662.6 billion from $723.4 billion in 2019.
FDI inflows to South Asia increased by 20.9 percent to $69.7 billion in 2020.
Net FDI inflows to Nepal increased by 49.1 percent to Rs19.48 billion in 2019-20, according to Nepal Rastra Bank.
The recent trend of FDI realisation shows that there is a huge gap between approved FDI and actual net FDI inflows in Nepal. An FDI approval indicates an intended investment. The approved investment may not actually take place or there may be significant time lags between the approval and the actual investment, the central bank said.
In some instances, the realisation of the approved investment may take place over several years, as is usually seen in projects with a long gestation period.
“Hence, there is a gap between FDI approval and actual FDI inflows. Between 1995-96 and 2019-20, the total actual net FDI inflow in Nepal stood at around 34.1 percent of total FDI approval,” according to Nepal Rastra Bank.