Foreign direct investment to Nepal nosedived by 93.61 percent year-on-year during the first seven months of the current fiscal year, which experts have attributed mainly to political instability.

According to Nepal Rastra Bank, foreign direct investment fell to Rs1.04 billion in the first seven months ended mid-February from Rs16.29 billion during the same period of the last fiscal year.

A World Bank report says that attracting and retaining foreign direct investment will be a crucial component of Nepal’s future growth. At less than 1 percent of the gross domestic product, Nepal’s current levels of foreign investment are the lowest among similar countries.

Nepal appears to have all the ingredients to reap benefits from the agriculture and tourism sectors. “But digging deeper reveals an economic morass marked by political instability, deficiencies in infrastructure, stifled investment, and skills shortages,” the report says.

More and more Nepali workers are seeking opportunities abroad, which has further dampened the country’s economic momentum. In addition, employers face a lengthy process to hire foreign workers, and repatriating profits is still difficult.

Nepal has prioritised several export sectors with potential–cardamom, ginger, tea, medicinal and aromatic plants, fabrics, textiles, leather, footwear, pashmina, carpets, tourism, professional services and IT engineering.

Low foreign direct investment is also holding back Nepal’s export potential in the agricultural sector. Many farm products, including teas, herbal remedies and spices, fit into Nepal’s “brand”, but the bulk of exports of these products is of low quality, with little value added

Restrictive investment policies and policies that make it difficult for exporters to access inputs from abroad negatively impact each of these sectors in a variety of ways.

“The then prime minister KP Sharma Oli had garnered a two-thirds majority to run the government for a five-year term. This had increased the confidence of investors, but the government tumbled. Following the latest election, there is political turmoil again,” said former central bank governor Dipendra Bahadur Kshetry.

“Investors are not confident in a country where there is instability.”

Experts say Nepal has plunged into another round of political instability, and this will hurt its aspiration to graduate to a middle-income country. The country saw its Parliament dissolved and restored twice within a short time.

The world's leading economies slid into recession as the global energy and inflation crises sparked by Russia's invasion of Ukraine cut growth, and this hurt Nepal too.

The government then imposed an eight-month-long import embargo on goods it termed as luxury items.

Experts and economists say these were the key factors behind what investors thought was not a good time to invest in Nepal.

“Currently, the incumbent prime minister himself is taking care of 16 ministries,” Kshetry said, adding that amid such political instability, investment is obviously a risk.

Economists say foreign investors consider factors like investment security, profit and facilitation.

“Political instability challenges these factors, and investors are reluctant to invest, and they go into a wait-and-see situation,” Kshetry said.

Potential foreign investors also consider the level of a country’s foreign exchange reserves before making investment decisions because they want to be sure they will be able to repatriate profits, Kshetry said.

There is a global recession. Central banks around the world are raising interest rates to control increasing inflation.

According to the Department of Industry, while foreign investment realisation has been dismal, foreign direct investment pledges nosedived 40 percent to Rs18.65 billion in the first seven months of the current fiscal year.

“Foreign investment has dropped because the country is going through a political transition. The impact of the global economic recession is also visible in Nepal,” said Prakash Kumar Shrestha, chief of the economic research department at the central bank.

“Foreign investors look for the prospect of profit, and political uncertainty and policy hurdles make investors think twice before making an investment,” he said.

Speaking at a programme on Tuesday, Prime Minister Pushpa Kamal Dahal said Nepal had made significant reforms in its investment climate.

“We are seriously working on simplifying procedures and fully operationalising the one-stop service for investors. Rules are being developed for automatic approval of foreign direct investment.”

But, according to experts, nothing has been done on the ground. They say that frequently changing trade and financial policies have been hurting investors.

“Nepal signed agreements with several hydropower developers last year that increased the volume of actual investments. Investments are being made in the cement industry,” Shrestha said. “As demand for cement has dropped, investments, too, have stopped.”

Nepal’s wildly changing policy confuses potential investors, say experts.

Last October, the government sharply lowered the minimum threshold for foreign direct investment to Rs20 million from Rs50 million in a bid to attract small investors.

Before that, in June 2019, the government had jacked up the minimum limit for foreign direct investment to Rs50 million from Rs5 million.

In November last year, Nepal tightened business visa rules for foreign investors to prevent misuse of the permit, and to narrow the gap between proposed investments and actual investments.

Investors lamented that they had to face problems bringing their family members to Nepal.

“We have not done much to encourage and attract foreign direct investment in Nepal. It will take time. The prolonged political uncertainty is one of the key reasons for declining foreign investment,” said Siddhant Raj Pandey, chairman and CEO of Business Oxygen, Nepal’s first private equity fund.

“It is also a fact that foreign investors do not have the appetite to invest post-Covid-19,” Pandey said.

“Nepal's macroeconomic situation is not so bad, but investment is not coming. Why? Because we have not been able to spread this message internationally,” he said.

“The government has provisioned the establishment of a hedging fund to reduce the risk of foreign investment in Nepal in the budget for the current fiscal year, but the plan is in limbo now. As it takes a long time to process investments, we are focused on the process; and we don’t care to ask what investors are looking for in Nepal,” Pandey said.

The government’s budget statement had also announced strengthening economic diplomacy to attract foreign investment in export, tourism and other sectors.

“But the priorities change along with frequent changes in government,” said Kshetry.