A great benefit of attracting FDI is that it is not attached with any conditionality as are foreign-aided projects. Moreover, the final say on FDI-funded projects rests with the government.
The importance of FDI in Nepal can be best explained with the analysis of the key economic indicators. In fiscal year 2007/08, trade deficit to GDP was 19.1 percent (export to GDP was 7.5 percent while import to GDP was 26.6 percent). In such a scenario, positive current account balance and balance of payment along with satisfactory foreign currency reserves were mostly due to the remittance flowing from abroad, which was 17.4 percent of GDP. However, remittance from abroad is not a sustainable solution to bail out any economy from a crisis. At most, it can be a stopgap arrangement for the time being. The current budget (2009/10) also shows heavy dependence on foreign grant (19.92 percent) and loan (7.54 percent) along with domestic borrowing (10.81 percent) to cover total expenditure. The former two sources are not in full control of the government and excessive domestic borrowing without prudent measures is supposed to produce adverse impact in private sector investment, which is already suffering from many other problems.
In such a scenario of resource constraint, FDI can be a good option to generate employment and increase economic activities in the country. India and China have become the new havens for FDI given their liberal policy environment and huge market potential. The recent high economic growth of these countries is greatly attributed, among other things, to FDI. In the early 1990s, with the restoration of multiparty democracy, Nepal also aggressively pursued the policy of economic liberalization with due emphasis on FDI and achieved higher growth rate as well. Investment in Nepal became more attractive to foreign investors as policies, acts and regulations were made more liberal. However, with political instability, Maoist insurgency and ensuing poor law and order situation, the momentum that we had gained got affected.
With the restructuring of the state and emphasis being given to the creation of a modern, prosperous and just Nepal, it is high time to think about attracting more FDI as a part and parcel of our economic diplomacy. A great benefit of attracting FDI is that it is not attached with any conditionality as are foreign-aided projects. Moreover, the final say on FDI-funded projects rests with the government. The government creates an environment for investment within the country and if the concerned investors find it appropriate to invest, then they make investments remaining within the ambit of the prevailing rules and regulations of the country. In that sense, FDI maintains the policy sovereignty of the concerned states.
However, in Nepal, it is felt that the flow of FDI is still quite low in comparison to other developing countries given the huge potential of adjoining markets, favorable climate, cheap labor, vast natural resources, etc. Even when compared to other South Asian countries, Nepal does not have the best regulatory procedures, investment facilities and infrastructure. Policy inconsistency, poor monitoring mechanism, ineffectiveness of institutional arrangements, lack of promotional measures, adequate infrastructure and skilled manpower and bureaucratic hassles are some of the major impediments to the flow of FDI.
Investment Guide to Nepal has explained the reasons behind the slow flow of FDI to Nepal. They include, among other things, the Nepali labor law, which is excessively pro-labor, complex tax administration, slow and negative implementation, discouraging exchange system and poor infrastructure facilities, etc.
In order to increase the volume of FDI, the government of Nepal needs to create investment-friendly environment in the country. For this, policy consistency in FDI-related acts, rules, regulations and directives, etc is required along with providing better incentives to the investors. Due to deteriorating law and order situation in the country and increasing unrest in the industries, even domestic industries are facing tough challenges to continue. The country has already witnessed labor disputes especially over minimum wage and other trade union rights in the recent past. It is bound to produce negative impact for FDI flow in the country. Its adverse impact is already visible with some of the FDI-funded projects being closed down or transferred to other places. After all, investors all over the world want maximum benefits from their investment.
The Nepali market is very small for big investment with per capita consumption being extremely low. Hence, any foreign investor will surely eye the adjoining big markets of India and China to invest their money. Hence, effective economic diplomacy needs to be pursued so as to guarantee smooth and unhindered world markets for Nepali products, especially among the immediate neighbors. Lessons should be learned from the abolition of quota system in the US markets for Nepali readymade garments and its subsequent adverse impact on the entire garment industry of Nepal. Similarly, the issue of child labor also needs to be sorted out on time.
In recent times, it has been felt that the reason behind the tremendous surge in FDI to India and China was, among other things, the investment of Indians residing abroad. These are the people who work as unofficial ambassadors to their respective countries. They can influence the opinion of foreign investors by setting a trend themselves. However, it is not the case with Nepal, though Nepali expatriates are also time and again pledging with the concerned authorities to create conducive environment for investment in their mother country. Some progress has certainly been achieved in this sector; however, it is not sufficient.
Last but not the least, political consensus on the need for FDI along with a commitment by all concerned stakeholders to make it a success is the need of the day. After all, in developing countries like ours, more than anything else, it is politics that prevails over economics.
(Writer is with Ministry of Labor and Transport Management.)
bishal2u@hotmail.com
Related story
Take holistic measures to boost FDI in Nepal
