The basic fundamental in having a bilateral investment agreement is to establish the terms and conditions for private investment by the nationals and companies of one state in another state, which is normally termed as foreign direct investment (FDI). Besides, the distinctive feature of BIT is that they allow for an alternative dispute resolution mechanism whenever the right of an investor is violated—s/he can take opt for international arbitration. So, in that sense, such a mechanism provides assurances to the potential investor in the host country and, at the same time, makes the investment regime more stable, predictable, transparent, fair and equitable.
A fresh debate has been opened in Nepal following the signing of Bilateral Investment Promotion and Protection Agreement (BIPPA) between Nepal and India on October 21, 2011. Strong voices of opposition have come from some quarters against the agreement. The skeptics argue that the agreement goes against the interest of Nepali people and the national economy will be dominated by Indian interests. That is not the case. Here’s why.
India has remained the single-largest trading partner of Nepal at most of the times of our history. The revision done in the treaty of trade in 1996 has given a big push for increasing the export trade of Nepal in the Indian market. Following this, there was a seven-fold increment in export of Nepali products between 1997 and 2002. However, the momentum was lost after the revision of the treaty in 2002. The pace of export growth between 2002 and 2007 was around 10 percent and it was more or less stunted after 2007.
The figure of 2010-11 reveals that there is huge trade deficit as the ratio of export and import in bilateral trade with India has crossed 1:6 and is becoming unsustainable. India ranks first among all countries bringing in FDI into Nepal but the volume of investment in absolute terms is not substantial. Thus, creating a condition for facilitation of FDI is a major challenge for Nepal in order to enhance the supply-side capacity.
FDI is a much touted subject among developing countries with them adopting various policy measures to attract external finance, skill and technology to complement the national economy. It is apparent that the flow of investment can be facilitated by making the investment regime stable, predictable and transparent and BITs serve this purpose. It is natural for Nepal as a least developed and landlocked country to adopt measures for facilitation of FDI through domestic policy measures and signing of BIPPAs. Such agreements were signed with France, UK, Mauritius, Germany and Finland and the current agreement with India is the sixth. Further agreements will follow soon with some other countries. The objective of these agreements is to make Nepal an investment destination in South Asia. The Industrial Policy of 2010 of Nepal has endorsed FDI as a policy instrument for increasing industrial output and, at the same time, mentioned the establishment of an Industrial Investment Protection Fund for covering non-business and non-commercial risks.
There are some basic tenets that constitute the content of BIT. That includes declaration or the preamble outlining the development objectives, definition of investment, provisions on national and most favored nation treatment, expropriation, repatriation, subrogation and settlement of disputes. These parameters are accepted as common themes of any BIT around the world. The Nepal-India agreement is also construed within those parameters. The development objective of the agreement is to encourage the reciprocal promotion and protection of investment that is essential to stimulate private sector initiative and increase prosperity in both countries.
In view of increasing trade imbalances with India, it is but natural to seek more Indian investment that leverages export trade with the production of additional goods and services. Thus, there is growing demand for large investments for increasing the economies of scale, skilled human resources and new technologies that would enhance the competitiveness of Nepali trade. However, the debates on the agreement are perplexing as they are just an outcome of individual interpretation of various articles of the agreement without considering the linkages and causal relationship with other articles and the overall objective of the agreement.
The economic policy of autarky and import substitution has been abandoned by Nepal since the beginning of 1990s. Persuasion of open and liberal economic policies has enabled the country to move from an import substitution regime. This shift in the policy enabled the country to become a partner in the global economic interplay albeit in its limited capacity. The membership to the Bretton Wood Institutions, multilateral, regional and bilateral trading arrangement compels us to follow a rule-based system that helps bring stability and predictability in the conduct of trade, investment and financial transaction in the country. The policy space for the national governments is getting narrower due to compliances needed with international rules. This is the ground reality and every country needs to trade off policy freedom with the process of economic integration. Nepal cannot be an exception to this.
The basic objective of entering into BIPPA with India or any other country is to promote industrialization of Nepal, create employment in the manufacturing and services sector, increase government revenue and export trade and reduce trade imbalances that ultimately help promote welfare of the country and the people. Thus, the important task would be exploring ways and means on how the agreement could be put to its best use for promotion of welfare gains in the country. There is a possibility of having similar agreements with some other countries like Qatar and the US in future. Wisdom lies in harnessing the potential benefits from the globalizing pace of Nepali economy by generating complementarities and forging mutually reinforcing economic ties with neighboring countries and others. BITs are instruments to achieve these objectives.
The writer is Secretary at Ministry of Commerce and Supplies. The views are strictly personal.
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