FDI inflows in Nepal

At the loop of mixed economic policies

Foreign Direct Investment (FDI) in Nepal has always been a buzzword for Nepal’s economic revolution; its history goes back to 1980’s, (from the 6th Development Plan: 1980/81-85) when a decade long financial inflows was recorded (USD 5.78 millions, according to the Industrial Statistics FY 2067-68). This was the time Nepalese economy started harmonizing with other global economies and one of the fertile times for around the globe regarding policy development of FDI.  In 1990’s, after the arrival of multi-party democracy, government undergone reform regarding FDI and introduced ‘One Door Policy’. The policy simply designated the Department of Industry (DOI) as the sole government office to handle foreign investment related works in Nepal. In the year 1992, DOI drafted and launched the Foreign Investment and Technology Transfer Act 1992, Industrial Enterprise Act 1992, Company act 2006 and Investment Board Act 2011.

Nepal, sandwiched between world’s two fastest growing economies, has a huge potential for business growth. The India and China could be the best market for manufactured and service industry in Nepal. Nepal has made some fair development in building bilateral trade deals to make Nepali market into the global competitive market. Under the treaty signed in 2009 between India and Nepal, India provides duty free access to Nepalese manufactured articles excluding cigarettes, alcohol and cosmetics. Nepal has already signed BIPPA (Bilateral Investment Promotion and Protection Agreement) with seven countries (India, France, Germany, Britain, Mauritius, Qatar, and Finland). In 2016, US provided Nepal with special trade preferences by providing duty free access up to 66 types of garment items (which also includes certain carpets, headgears, shawls, scarves and travel goods).

Nepal has been in vital need of foreign investment despite the fact that, since 1960’s Nepal has been fertile ground for Official Development Assistance (ODA). The milieu behind such prosperous development of ODA ——niche Nepal’s volatile geopolitical structure, semi-feudal or semi capitalist nature and also huge exchange rate of Nepalese with US dollar.  From the long way, most of the ruling elites of Kathmandu had itself lobbied aggressively for western access to Nepal, making Nepal dependent on foreign aid. Indeed, a senior official from the Government of Nepal (GoN) says, ODA has penetrated so deadly that, today GoN even cannot even afford stationary materials for the government offices, let us forget about any development project that it solely handles. From the top to bottom, foreign aid has subjugated the entire functionality of the government system. The common difference between FDI and ODA is —–ODA inbuilt the parasite natured economies whereas FDI inbuilt independent economies via GDP growth.

Theoretically, questions might arise on what is required for the FDI inflows. There are three aspects in it: economic conditions (markets, resource and competitiveness), Host country policies (macro, private and Trade & Industry policies) and Multi-National companies’ strategy (risk perception, integration transfer and local sourcing).  According to the World Bank flagship report, ‘Doing Business 2016’, Singapore tops the ‘’Ease of Doing Business’ index among 189 nations surveyed. Nepal ranks on the 99th position in the index and Eretria is at the bottom (189).  This data is a complete set of methodology, which underscore those three aspects. The economy needs both regulatory and efficiency mechanism and these are the backbone of any economy to survive flourish and develop from simple to complex form. Likewise, in the Western world, Denmark stands excellent in regulations and efficient system, followed by the null Red-Tapism and SMART technology.  For example, to buy/sell or transfer property, if it involves tedious procedures consuming many days and cost, then there arises issues of efficiency of government offices. This will give rise to corruption which will definitely counter the regulatory framework of the country. Nepal shares similar phenomena. Until now, Nepal’s central leadership authority, high tariff rate on exporting with fewer exporting zones and special economic zones, political instability, fewer presence of foreign banks & insurance in Nepal, international banking cards and so on has made Nepal inefficient in accessing foreign investment.  The bilateral and multilateral deals with China and India always lack political consensus and childish diplomatic exercise from Nepalese side. Nepal shares a significant amount of trade with India and because of its landlocked nature, easy access to seaports for Nepal has always been difficult. This is probably due to the zero coordination with the Nepalese and Indian government staffs mechanism.  In this case, the UN Convention on Transit Trade of Landlocked States clearly explains the provision to have adequate transit facilities for a landlocked country in promoting International Trade. But, this has been practiced very rarely in the case for Nepal. The delivery of goods to and from Nepal via Indian ports, is time consuming and goes through many customs procedures, affecting on the development of foreign manufacturing industries’ establishment in Nepal.

Nepal’s entry to the World Trade Organization (WTO) in 2004 is an opening gate to the globalized economic world. However, in such competitive market game of WTO, Nepal has been lagging behind it. Despite the fact that international business environment runs on the competitive, corporate friendly politics, the World Bank report and Western influence; trespassing all of these factors for Nepal is very difficult. This is probably due to Nepal’s poor engagement in regional groupings. Although, Nepal is already the member of the South Asian Preferential Trading Agreement (SAPTA), the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) and even Asian Infrastructure Investment Bank (AIIB), there is still a long road to go for Nepal.

Nepal entered into the age of liberalization during 1990’s but GoN adopted mixed economic policies (free market as well as state controlled). GoN is struggling to keep perfect balance of the market oriented economy and the state owned economy. International business has a habit of grown under the fledging free market policy. And, free market here in Nepal is somehow a controversial issue. The basic rule to start a business and start investing in other countries in this capitalist age is free market.  So, let us start sealing our loopholes on FDI inflows’ complications to Nepal via reviewing on this basic theoretical nature of market, so then only Nepal’s semi-feudal economic system will go under evolution.

Graphics: The Kathmandu Post

Note: This article was previously published in https://glocalkhabar.com/featured/fdi-inflows-in-nepal/

By Saurav Raj Pant

The writer is a founder of Garjan-Nepal. He regularly contributes to NGO Forum on ADB Bankwatch Magazine and is an international relations enthusiast.