Investment essentialsDespite the progress, a number of challenges remain on our way to sustainable development
Nepal has been pursuing an open and liberal economic policy regime to attract investment to exploit its untapped economic potential. Hydro energy, tourism, agriculture, infrastructure, manufacturing and Information, Technology and Communication (ITC) are the most principal areas for the investors, as highlighted in Nepal Investment Summit, 2017.
Attracting investment is fundamental for creating jobs, enhancing production and productivity, transferring technology, and bringing innovation and managerial skills to Nepal—all of which support in achieving inclusive sustainable development.
Theoretical and experimental research reveals that political stability, availability and access to natural resources, market size, access to new technologies, labor availability and productivity, quality of institutions and regulatory environment and efficiency of bureaucracy in host countries plays a crucial role for the companies in undertaking decisions for investment.
As a source of revenue, traditional foreign aid such as official development assistance (ODA), Aid for Trade is not sufficient to meet the resources needed for inclusive growth, socio-economic development and structural transformation. Private investments, specifically the foreign direct investment (FDI), are highly significant in fulfilling the resource gap. Furthermore growing trade tension due to the imposition of high import duties, retaliation and disagreements among the major players of the world economy could have a direct impact on FDI flows in the future. However, the landlocked countries (LLDCs) saw around three percent increment in FDI inflow.
The importance of investment in infrastructure and innovation, including ICT related innovative industries, renewable energy, and scientific research have been underlined in Goal 9 of 2030 Agenda for sustainable development as a crucial driver of economic growth and development. Research proved that the fourth industrial revolution driven by ICT, automation and robotics makes the production better, cheaper and faster than ever before, which provides possibilities of industrial upgrading and leapfrogging.
The investment climate in Nepal is continuously getting better, due to stability in the government, improved governance, increased consumption capacity of Nepali, huge market opportunities in neighboring countries and improved economic growth. An educated and ICT- savvy young generation, cheap labor, preferential market access facility in developed countries and several incentives in tax regimes also add to Nepal’s appeal to investors.
The Doing Business Report, which assesses the regulations through quantitative indicators that enhance or constrainbusiness activity and investment, mirrors this finding—Nepal’s rank has improved to 105 in 2017 from 107 in 2016. Also, the increased growth rate up to 7.4 percent in 2016/17 enhanced GDP per capita to USD 1004 from USD 866. This provides a positive gesture for investment. The official declaration to end loadshedding (power cuts) and increaset he use of e-governance are also sending a strong message to investors. At present, Nepal saw a significant increment in FDI inflow which reached 61 billion Rs. in 2017/18 from 17 billion in 2016/17.
The constitution, the Foreign Investment Policy, and other policies based on open and market-oriented economic policies provide important groundwork for governing, administering, facilitating the investment regime and protecting the rights of the investors. Similarly significant are increased IT-enabled coordinated institutional arrangements. However, despite this progress, a number of challenges remain. Poor infrastructure including the domestic and regional road network, insufficient coordination among the ministries, bureaucratic hassles and profit-seeking behavior of some civil servants, production and trade-related constraints including diversification, poor physical and digital infrastructures and connectivity, weak labor productivity and market barriers have posed challenges in setting an enabling investment climate. Similarly, a continuously ballooning trade deficit in which export-import ratio is 1:14.9 depicts several supply-side constraints including weak productive and competitive capacity of Nepal.
The investment framework
United Nations Conference on Trade and Development (UNCTAD)’s investment framework, proposes strategies and guidelines at the national level to create a conducive environment for investment. UNCTAD’s framework at the national level involves integrating investment policy into development strategy, incorporating sustainable development objectives in investment policy and ensuring the relevance and effectiveness of investment policy.
Furthermore, UNCTAD’s investment framework also proposes guidelines for national investment policies. This includes advice on policy action at the strategic, normative and administrative level. At the strategic level, policymakers focus on a broad roadmap defining the role of public, private and foreign investors in development strategy, enhancing productive and competitive capacity, technology transfer, and sustainable development. At the normative level, policy makers focus on setting rules and regulations related to trade, transaction, IP, competition, labor, environment policy, access to land and so on to support achieving sustainable development. Likewise, at the administrative level, policymakers focus on appropriate implementation and institutional mechanisms, clear priority, time frame, application of rules, assessment of progress, amongst other things.
Availability and accessibility of resources, market size, economic growth, skill and knowledge of human resources, the productivity of labor, among others, are fundamental in attracting the investment. Although Nepal possesses most of these elements as mentioned under the UNCTAD’s framework, development of strategies and guidelines and their faithful implementation in a systemic way, enhanced good governance at all levels, strengthened democratic processes and institutions, effective rules of law, facilitating bureaucracy, result-oriented coordination are highly imperative in attracting investment for sustainable development.
- Aryal is the Deputy Permanent Representative (Commerce) at the Permanent Mission of Nepal to Geneva.