Foreign Direct Investment (FDI) is critical for countries to develop in today's world as it provides access to capital, technology, and new markets. FDI helps countries improve their infrastructure, increase their competitiveness and create new jobs, leading to economic growth and improved standards of living for citizens. Additionally, FDI allows for the transfer of knowledge and expertise from foreign investors to local businesses and workers, helping to build a skilled workforce and improve overall productivity. Furthermore, FDI creates new trade opportunities, opening up markets for exports and increasing the country's exposure to the global economy.
However, Nepal is facing a significant drop in FDI, with a mere Rs 2.55 billion received in the first half of the current fiscal year. This is a sharp 80 percent decrease compared to the same period last year, when the country received Rs 12.66 billion, according to the statistics maintained by Nepal Rastra Bank (NRB), the country’s central bank. The Nepal government, which has recently adopted a more flexible policy to attract foreign investment by lowering the minimum threshold limit for FDI from Rs 50 million to Rs 20 million, has been unable to reverse this trend. Officials of the Department of Industry (DoI) attribute the decline in FDI to the economic slowdown in many countries and the worsened macroeconomic indicators in Nepal over the past year. Meanwhile, Nepal’s depleted foreign currency reserves and financial instability last year may have also contributed to the drop in investment.
Nepal’s FDI Landscape: Issues and Solutions
The DoI records show that the FDI commitment has also declined, from more than Rs 30 billion during the same period last fiscal year to Rs 17.30 billion this year. The government's recent tightening of business visas for foreign investors, in an effort to prevent fake investment, may have further contributed to the decline in FDI. A report by the NRB published in October last year showed that Nepal's realization of FDI was only one-third of the amount committed by the foreign investors, with Rs 357 billion pledged and only Rs 130 billion actually received by the end of fiscal year 2020/21. This highlights the need for the government to take urgent and effective measures to attract and retain foreign investment.
A very good example of a country that has successfully attracted FDI is Nepal’s northern neighbor - communist China. China has attracted foreign investment through various means, including providing tax incentives and creating special economic zones. By doing so, it has become the world's largest recipient of FDI, attracting nearly USD 190 billion in 2022. Another example is Singapore, which has consistently ranked among the top FDI destinations in the world. Not a democracy, Singapore offers a stable political and economic environment, low taxes, and a highly skilled workforce, which has made it an attractive location for foreign investors.
The Nepali politicians, from time to time, talk about turning the country into another Singapore, without perhaps realizing the secret behind Singapore’s success story which is completed by the huge amount of FDI the country has received over the past several years. Similarly, China has a large and rapidly growing market, which is a major draw for foreign investors. In contrast, Nepal is a very small market but still foreign investors can be lured by the fact that Nepal is situated between two of the largest and fastest growing markets in the world – India and China.
So, the Nepal government has to adopt policies that will help attract FDI. The government surely has to improve the investment climate, including by providing tax incentives, reducing red tape, and streamlining the investment process. Additionally, it must focus on improving the country's infrastructure, such as roads and airports, to make it more attractive to foreign investors. The government should also focus on addressing the issues that have caused the decline in FDI. That warrants improving the country's macroeconomic indicators and increasing foreign currency reserves which would be crucial in restoring investor confidence. Furthermore, the government should take steps to ensure the stability of the financial sector, as this will help to attract long-term investment.
The government should also focus on developing human capital. For that, the investment in education and training programs has to be increased, creating a skilled workforce that is attractive to foreign investors. Also, the government, in partnership with the private sector, should participate in international trade fairs and conferences, utilizing such platforms to promote Nepal as an investment destination. Improving transparency and accountability in the investment process will also contribute to attracting FDI.
