Why do US Firms Invest Less in Nepal?

Published On: May 9, 2024 08:30 AM NPT By: Hari Prasad Shrestha

The interest of the United States of America in Nepal has increased significantly in recent years due to its strategic importance. A new turning in bilateral assistance experienced after the MCC Compact Agreement worth USD 500 Million was signed between Nepal and the USA on 14th September 2017, and later ratified by the parliament of Nepal.  This highest bilateral grant amount from the US government is an indicator of the high probability to open the door for the US private sector to invest in big projects in Nepal as the US investments have been proven to be a major driving force for economic transformation in many countries.

If we go through the history of US investment whether it is in the Asian Tiger economics, Newly Industrializing Countries (NICs) or other developing economies, its role has been highly supportive for those countries. Even though there are political differences with China, the US played an important role in the economic transformation of the Chinese economy through massive investment in manufacturing and technological sectors.

With support of the US investments, the Asian Tiger countries (Singapore, Taiwan, South Korea and Hong Kong) chose to use export-oriented industrialization which was in America’s best interest to import cheap commodities and its motive to gain influence in Asia during the early Cold War days. Besides, the strong  role of the  governments of the Asian Tiger nations, who formulated investment-friendly laws, including measures to control labor unions in order to keep labor costs down and to maximize potential growth also encouraged the US investors. Similarly, the  NICs countries such as Turkey, South Africa, Mexico, China, India, Brazil, Indonesia, the Philippines, Malaysia and Thailand  aimed to export their production to both developed and developing countries with major investment support from the US.

As for the US investment in Nepal, it features among  top 10 foreign investors in Nepal, constituting about 2.9% of the total FDI stock. Currently, the US is one of the important trading partners and major source of foreign currency for Nepal primarily from the export of garments and carpets as well as from tourist incomes.  As of 15 July 2020, Nepal received Rs 13.4 billion FDI from the US, which was invested in 418 different companies and they have generated 18,848 jobs. However, these investments cannot be regarded as satisfactory compared to its investments in other landlocked countries. According to the World Bank, the net flow of foreign direct investment in Nepal in 2017 was 0.79% of its GDP, while India and Bangladesh received FDI 1.54% and 0.86% to their GDP respectively.

To attract foreign direct investment , the Government  of Nepal recently organized the Third Investment Summit  on April 28-29 in Kathmandu which aimed to welcome a large amount of FDI in a number of projects especially in infrastructure projects. According to the Investment Board of Nepal,  investors from 55 countries participated in the conference including considerable numbers from development partners, private  sector and Non Resident Nepali investors totaling around two thousand participants.

Participation of investors from the US was also encouraging. Along with high profile delegates, members from  the US Chamber of Commerce (USCC)  participated in the summit. Prior to the summit, Finance Minister Barshaman Pun visited the USA where he met with high-level authorities and investors and requested them to invest in Nepal.

During the summit, the US investors seemed to be more interested  in information technology, tourism, hydropower, manufacturing and expansion of US chain and franchise companies.  Nepal has set a target to export ten thousand plus megawatts of electricity within ten years and hydropower projects in maximum numbers were showcased  in the summit.  As Nepal is completely dependent on India for export of electricity, if Nepal could streamline and enhance its policies on the sale of hydroelectric power to third countries, there would be tremendous opportunity for investors including the US investors. Due to Nepal’s small domestic market, limited export bases, low level infrastructures and high costs of production, it would be early to expect high growth in large investments in productive sectors other than hydropower projects in Nepal. Moreover, Nepal is among seven in the world, in which 100 percent of electricity is consumed using renewable energy, especially hydro power.

Previously, Nepal had also  organized two investment summits in 2017 and 2019. During the Nepal Investment Summit 2017, the development partners pledged letters of intent totaling USD  13.7 billion, however, the real disbursement was only USD 1.5 billion out of the pledged amount, according to the Investment Board of Nepal. Similarly, in the summit of 2019, there was an investment commitment of USD 15 billion, but projects worth only USD 90 million came under implementation. During the recent investment summit, the government showcased more than 154 projects worth Rs 9 trillion which include private sector, federal, state and local level projects with hydropower projects in highest numbers. Out of the showcased projects, letters of intent were requested for 19 and 9 for market sounding (collecting investor feedback).  Investors have been given 45 days in case of energy projects and 35 days in case of non-energy projects to submit the letter of intent. The much publicized four project agreements, which  were supposed to be signed during the meeting, could not materialize, citing lack of preparedness of the projects.  These include Nepal-China Friendly Industrial Park, 327 MW Upper Marsyangdi-2 Hydropower Project, two 125 MW grid-connected solar projects and Dabur Nepal’s  expansion of its production capacity. However, a considerable number of medium-sized project agreements were signed on many important sectors during the summit and Nepal seems to have succeeded at least to transmit a positive message to the global community as an emerging nation for investment.

But based on previous experiences, the  Government of Nepal still needs to do a  lot of reforms to make a conducive environment for the investors as they still have reservations  on the government's stable investment policy. For example, just before the investment summit, the Department of Revenue Investigation of Nepal filed a case against an American company, Cotiviti Nepal Pvt Ltd, at the High Court on charges of VAT and capital gains tax evasion. Cotiviti Nepal Pvt Ltd exports 100 percent of its IT services to America. However, Nepal's law and international practice exempt exports from VAT. It has been a subject of  big concern for American investors.

Moreover, based on the 2023 Investment Climate Statements released by the US State Department, Nepal still lacks an investment-friendly climate despite considerable potential. The report says that Nepal is an investment destination for those who're willing to accept the inherent risks and unpredictability of doing business in the country and who possess the resilience to invest with a long-term mindset. Further, it states that corruption, laws limiting the operations of foreign banks, lingering challenges in the repatriation of profits, and controlled currency exchange in the country are the major obstacles. The investors are also concerned about the sovereign credit rating of Nepal by an international rating organization, which is a vital parameter to attract the investors and Nepal has not yet done. 

The  ease of doing business in Nepal is still at lower rankings and as a result of severe bureaucratic red tape and lack of a one-door system in prioritized sectors such as hydropower, information technology, investors are facing problems in Nepal. If the government reforms all necessary sectors on a continued basis which are hindrances to attract investment, including ratifications of the ordinance laws by the parliament, it is  expected that the investment from the US would certainly surge in Nepal, in days to come as a positive outcome of  the investment summit.

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