Foreign direct investment (FDI) in Nepal declined by nearly 40 percent in the second quarter of the current fiscal year, reflecting a deteriorating investment climate following the violent Gen Z protests in September and the continuing political uncertainty.

FDI inflows failed to keep the momentum seen in the first quarter as investors adopted a wait-and-watch approach amid the fallout from the protests and the uncertain political situation, officials said.

According to the Department of Industry, Nepal received FDI commitments worth Rs39.25 billion across 476 projects in the first six months of the current fiscal year until mid-January. This marks a sharp decline from Rs65.09 billion committed through 850 projects during the same period last fiscal year. The committed investments are projected to generate employment for 20,150 people.

Officials said the Gen Z protests in early September significantly dampened FDI inflows in the subsequent months. Political instability has created an uncertain environment that has discouraged both foreign and domestic investors. With the general election scheduled for March 5 and the uncertainty it brings over the next government, investors remain cautious.

“With global geopolitical uncertainty, investors are increasingly attracted to safe-haven assets, particularly commodities, as long-term secure investments,” said Gunakar Bhatta, former executive director of Nepal Rastra Bank. “The situation in Nepal has become fragile, and under such conditions it is difficult to convince international investors to invest in the country.”

Bhatta said the outlook for FDI does not look good over the next couple of years. He added that China and India, Nepal’s two major sources of foreign investment, are also in a wait-and-watch mode due to geopolitical uncertainties and are focused more on managing domestic and regional challenges. Investors from other countries, he said, appear to have shifted towards protectionist policies and domestic investment.

“The post-election political configuration and the ability of the new government to assure and attract international investors will determine Nepal’s FDI prospects in the coming years,” Bhatta said.

Officials said FDI commitments were growing in the first two months of the current fiscal year but slowed markedly after September. Large-scale industries accounted for the bulk of commitments, attracting Rs23.14 billion across seven projects. Small-scale industries received Rs13.72 billion through 460 projects, while medium-scale industries secured Rs2.39 billion from eight projects.

Sector-wise, agro and forestry topped the list with Rs21.88 billion committed for 13 projects. Tourism followed with Rs10.54 billion across 145 projects. The services sector received Rs3.48 billion for 32 projects, while manufacturing attracted Rs2.03 billion for 24 projects. The information, communication and technology sector saw commitments of Rs1.07 billion across 257 projects, while the energy sector received Rs184.25 million for a single project.

Government estimates show that losses during the Gen Z movement amounted to Rs44.93 billion in the government and public sector, Rs33.54 billion in the private sector, and Rs5.97 billion in community and other sectors. A government-formed committee tasked with assessing the damage has estimated that Rs36.30 billion will be required to reconstruct damaged structures.

Despite the commitments, the actual inflow of FDI remains low. According to Nepal Rastra Bank, net FDI inflows stood at Rs7.47 billion in the first five months of the current fiscal year until mid-December.

Nepal is scheduled to graduate from the least developed country (LDC) category in November next year, a transition that experts say will increase the need for foreign capital. To achieve its goal of becoming a middle-income country by 2026, Nepal would require around $20 billion in annual FDI—an almost impossible target under the current circumstances, economists say.

The private sector has repeatedly warned that the post-protest environment has eroded investor confidence. Without a secure investment climate and consistent policies, economic activity is unlikely to recover.

Kamlesh Kumar Agrawal, president of the Nepal Chamber of Commerce, recently told the Post that political uncertainty remains the main obstacle to attracting foreign investment capable of productively deploying the country’s excess foreign exchange reserves.

“Without political stability, economic activity will not improve,” he said. “Despite record-breaking reserves, investment is not happening because the economy has stalled.”