Foreign direct investment (FDI) pledges plunged by 25.70 percent year-on-year in the first 11 months of the fiscal year ended mid-June.

Experts have attributed the steep drop to policy instability and bureaucratic hassles. They say that investment commitments have also fallen as a result of the economic slowdown.

According to the Department of Industry, Nepal received FDI pledges worth Rs34.74 billion for 274 projects in the review period. During the same period in the last fiscal year, investment promises were worth Rs46.76 billion.

The projects slated to be launched with the promised capital will create 14,613 jobs.

Nepal received FDI pledges totalling Rs54.15 billion in the last fiscal year 2021-22. According to Nepal Rastra Bank, net FDI amounted to Rs18.56 billion that year.

“I also don’t know the exact reason for the decline in foreign direct investment in recent times. It might be due to the slowdown in the global economy brought about by Covid-19 and the subsequent Russian invasion of Ukraine,” said Shankar Singh Dhami, director at the Foreign Investment and Technology Transfer Section at the Industry Department.

“Investors fear to bring capital at a time when there is a slowdown in the market,” he said.

“High interest rates and political instability are the main reasons for the drop in foreign direct investment in the past two years,” said economist Pushkar Bajracharya. “Neither the amount of FDI pledges nor the actual flow of investment is encouraging.”

The crisis in the external sector like balance of payments and foreign exchange reserve in the last two years did not give a good outlook about Nepal for investors.

“Investors normally analyse the market and make investments,” Bajracharya said.

The gap between FDI commitment and realisation has been getting wider.

According to Nepal Rastra Bank, net foreign direct investment declined from Rs16.65 billion in the first 10 months of the last fiscal year to Rs4.36 billion in the same period of this fiscal year.

Both FDI pledges and actual investments have been declining in the past few years.

"FDI commitments and actual realisation completely depend on the business environment," said Bajracharya. “Despite government assurances of an improved business environment in the country, this has not happened,” he said.

"The government has provisioned a one-window policy, but investors still face hassles with regard to land, transmission line, and company registration and approval from the local level, among other problems," he said.

Rajesh Kumar Agrawal, senior vice-president of the Confederation of Nepalese Industries, said, “Policy instability is a major hindrance in Nepal to bring FDI. Investors expect to make a long-term investment and they seek policy stability for 10-15 years. But in every budget statement, the government keeps changing its tax policy, whether income tax or other taxes.”

Dhami said, “If we can assure investors that there will be no frequent changes in policies, then only can we expect more investment. There is a need for improvement in the governance system to attract investors.”

He added, "There is a need to promote potential sectors in the international market as the government has done barely anything on the promotion front to attract foreign investments."

Bajracharya said, "The government has a policy to bring more foreign direct investment, but political instability and negative economic indicators might put investors in a wait-and-watch mode."

Among the 274 projects proposed by investors, 247 are small-scale industries, 22 are medium-scale industries and five are large-scale industries.

The service sector accounts for 119 projects, 104 projects are in the tourism sector, 25 projects are in the manufacturing sector and 15 projects are in the ICT sector. Of the rest, nine are infrastructure projects, one is an energy project and one is an agriculture project.

Foreign direct investment in the hydropower sector is expected to improve in the next fiscal year, experts say. But there are concerns that investment in other sectors is not improving.

“There are bureaucratic hassles and operational issues despite clear government policies,” Bajracharya said. "The administrative mechanism is not transparent," he said.

"The Foreign Investment and Technology Transfer Act 2019 still needs improvement to facilitate repatriation of investment and dividends," Agrawal said.

"There are many points in the act which still need improvement. The old laws which are more than 30-40 years old need to be amended so that the act, bylaws and regulations can be aligned," Agrawal said.

Experts say that even though there is a one-window system, an investor has to visit every concerned ministry for permission and approval.

The department has provided 1,619 business visas for investors, 263 for representatives and 726 for dependents in the first 11 months of the current fiscal year.

The repatriated amount was Rs2.32 billion in the first 11 months of the current fiscal year while dividends totalled Rs13.82 billion.

The Ministry of Industry, Commerce and Supplies has amended the Foreign Investment and Technology Transfer Rules 2021 and allowed investors to submit an application for investment through automatic route or electronic medium.

The amended provision went into effect in mid-April. Foreign investors can submit their documents by logging in through the official website of the Department of Industry.

The department will send confirmation of the approval of the investment to investors to their e-mail address along with the application number. Investors can also get an investment approval certificate through the department's website.