Complement, not replaceTo let FDI cause promising industries to die on the vine is not prudent
Attracting foreign direct investment (FDI) is not a walk in the park. There is competition. Every country wants it. Nepal, being a least developed country and without much in the way of natural resources, is not an exception. FDI can provide the country much-needed capital, not to mention managerial expertise and technical knowledge. Even to harness Nepal’s immense hydro potential, huge capital is needed. In an effort to build its reputation as a promising investment destination, the government (later this month)—on 29 and30—is hosting Nepal Investment Summit 2019. There was a similar event in 2017. Back then, letters of intent for investments worth almost $14 billion were signed with foreigners, but not much came out of it.
Remittances potential funding source
Just because policymakers have become aware of the important role FDI plays does not mean that they should take their eyes off one other crucial source: domestic investment. Until not too long ago, there was an acute shortage of funds generated internally. There still is. Hence the need to entice FDI. But as the number of Nepali youths going abroad for employment shot up, one other funding source has emerged. In the first seven months of the 2018-2019 fiscal year that ended mid-February, remittances increased 28.5 percent to Rs515.6 billion. Most of it was spent on household consumption, ranging from real estate to precious metal, and not much went towards building physical capital stock. This is where policies come in. The potential is huge. In the first seven months of the current fiscal, FDI was Rs5.2 billion, down from Rs14.3 billion a year ago. Now, assuming merely five percent of the remittances is channeled toward investment, we are talking Rs40-50 billion on an annual basis.
Entities such as the newly minted Nepal Infrastructure Bank (NIB) can serve as intermediaries. Nepal Rastra Bank (NRB), the central bank, granted an operating license to NIB in February. It is an ‘A’ class bank and is expected to come into operation by June. Established as a public-private partnership with the government owning 10 percent, NIB aims to fill the infrastructure-funding gap in the country. The bank will obviously need to raise capital in that endeavour. The government, through NRB, does issue foreign employment saving bonds, which are targeted at Nepali migrant workers and non-resident Nepalis, but not to great success. The problem is: these workers may not be financially literate enough to understand bonds and coupon payments. How these instruments are marketed are equally important. Not to mention the return on investment. It is an easier sell if rates offered are higher than savers would otherwise get at other financial institutions. Better yet, if financed projects are revenue-generating, such as hydro, granting of equity ownership should help generate interest.
In a resource-constrained economy, domestic sources can help, but they are not the be-all and end-all. To get genuine growth going, FDI is needed. Many countries in the Far East built their economies on FDI. Vietnam is the latest success story. It is cliché but true that without political stability, security and regulatory certainty it is not possible to even get registered on foreign investors’ radars. Vietnam also benefits from its geographical location, and so does Nepal in that sense— not from the standpoint of proximity to the technology supply chain but to two huge markets in China and India. This can be a selling point. Importantly, most FDI originates from Organisation for Economic Co-operation and Development (OECD) countries—plus China and India in Nepal’s case—that obviously are different from their non-OECD peers. It can be a problem when FDI-seeking policymakers come up with a pre-selected list of projects and expect favourable investor response. It does not always work that way. Foreign investors are capable of generating ideas on their own, provided the investing environment is conducive.
Embrace FDI, protecting promising industries
Globally, the US is the largest recipient of FDI. Last October, it announced a plan for tougher oversight of foreign investment in key technology industries such as telecom, computers, semiconductors and batteries. One of the reasons behind the ongoing trade dispute between the US and China is that Beijing blocks foreign access to several crucial industries. China’s so-called ‘negative list’ spells out industries where foreign investment is limited or prohibited. Last December, India announced changes to its FDI policy that can adversely impact both Amazon, which has spent billions in its India operations, and Flipkart, which last year sold a 77-percent stake to Walmart for $16 billion. Walmart and Amazon—both US-based—are notorious for deep discounts and exclusive product offers. The Indian retail industry—mostly made up of small, local traders and a key voting block—is not happy. The point in all this is that there is nothing wrong in having limitations—particularly so in a burgeoning economy like Nepal’s. The hard part is to decide which ones to protect and which ones to let go, and by what degree.
Nepali dairy farmers are opposed to FDI in milk production and processing, saying the country will soon be self-sufficient. Similarly, cement imports have declined as domestic production has risen. Nepal can become self-reliant in cement in the not too distant future. Should cement then be protected or would FDI help the industry gain efficiency to be able to export one day? Or take sugar. The 2018-2019 federal budget aims for self-sufficiency in a whole host of products, including sugar. In April last year, the government raised the import duty on sugar from 15 to 30 percent. The irony is that sugar is cheaper in India; Nepali consumers do not benefit from this.
It is not prudent to support inefficient zombies in the name of protecting domestic industry. In much the same way, it is not prudent to let FDI come in and cause a promising industry to die on the vine. The key is to find the right balance. Here is the rub: in a country like Nepal, politics often messes up things. Each party has its own agenda, catering to its own base. Altering FDI policy each time a new party comes into power does not help build predictability. The further away from politics the Investment Board of Nepal (IBN) is, the more consistent—and independent—its decisions. In the current set-up the IBN chairmanship lies with the prime minister. This raises odds—perceived or real—of politically motivated interference, and this fact probably does not sit well with foreign investors.
Pandey worked in the securities industry in the US for two decades. He tweets at @hedgopia.