south asia watch on trade, economics and environment

Making Nepal FDI-ready in the time of COVID-19

Kshitiz Dahal

COVID-19 pandemic has made external financing such as the ones from the foreign direct investment (FDI) even more necessary for economic development. However, the unfavourable scenario created by the pandemic that has diminished investor's confidence makes attracting FDI a daunting task, even more so for least developed countries like Nepal.

In recent times, Nepal has made major strides towards reforming its foreign investment regime. The reforms include simplifying the entry mechanism for foreign investors, widening the scope of repatriations and improving the repatriation process, and providing better protection to the investments. Still, there are 2 causes of concern as well, particularly the presence of cumbersome bureaucratic procedure, a more restrictive FDI regime for small and medium sized foreign investments, and inefficient institutions, which make Nepal a less attractive investment destination. Against this background, this article assesses the regulatory and institutional framework currently in place in Nepal to gain insight on whether these are conducive to attracting FDIs considering the new economic reality brought by the COVID-19 pandemic.

FDI inflows in Nepal have historically been low and erratic despite Nepal adopting ‘Foreign Investment and One-window Policy, 1992’ and implementing ‘Foreign Investment and Technology Transfer Act (FITTA), 1992’ to promote FDI for building a dynamic economy. Acknowledging the need to reform its FDI policy and regulations, the government of Nepal introduced a new foreign investment policy in 2015 and a new legislation in 2019—FITTA 2019. The new legislation simplified procedures, clarified ambiguities, and addressed foreign investor’s issues that were believed to be posing significant hurdles to foreign investors.

First of all, FITTA 2019 simplified the FDI entry system to a certain extent. Until the formulation of FITTA 2019, the mandate of approving foreign investment fell to three different government agencies. FITTA 2019 reduced some complexity by giving the approval mandate to only two agencies—Department of Industry (DoI) for investment up to NPR 6 billion and investment over more than that required approval from the Investment Board of Nepal (IBN). FITTA 2019 also made it mandatory for the investment approval agencies to furnish its decision within seven days of application (FITTA 1992 did not specify any deadline) and required the agency to issue an explanation for rejection (which was not the case before), thus giving clarity to the approval process.

Another improvement was regarding the repatriation of foreign investment and associated incomes. FITTA 2019 expanded the scope of items that would qualify for repatriation by including “compensation from expropriation as well as from indemnity or compensation received as a result of the final resolution of a dispute.” Similarly, while previously there was no time limit for approval of repatriation, FITTA 2019 specifies that the request for repatriation be approved by the approval authority (DoI/IBN) within 15 days of the date of receipt of application. Furthermore, FITTA 2019 also made improvements in the treatment and protection of foreign investment by granting national treatment to foreign investors and by assuring protection against both direct and indirect expropriation.

However, despite these reforms, FITTA still lags behind the international standards, hurting Nepal’s image as a lucrative investment destination. Facilitating investors will be more essential now as the pandemic is expected to dry up investment in the coming years. For instance, United Nations Commission on Trade and Development (UNCTAD) has estimated that the pandemic could result in cuts in global investment by up to 40 percent during 2020-21 (see Report for more information). The signs of these are already visible in Nepal as reports suggest FDI inflows in Nepal dwindled after the coronavirus outbreak in China.

Quick approval of foreign investment, ease in bringing in the investment, protection of investment, simplified and timely repatriations, and hassle-free administrations underpin a competitive FDI regime. While FITTA 2019 has brought about improvements towards creating a competitive FDI regime, the improvements are somewhat inadequate, more so in the context of current global FDI outlook. For instance, approval mechanism is still cumbersome compared to international best practices. Nepal’s current foreign approval mechanism, which requires prior approval from DoI/IBN and a further application to the Nepal Rastra Bank (NRB), is criticized as being unnecessary and excessive since sensitive sectors are already prohibited through a negative list.

Similarly, foreign investors still require multiple approval requirements for foreign exchange facilities and repatriation payments—approval from investment approval agency and NRB, making the whole process unpredictable and full of delays. Likewise, the lack of dispute settlement mechanism between the investor and the State and absence of some foreign investment protection mechanism commonly accorded by international best practices could discourage potential investors. Furthermore, Nepal lacks a central body for investment administration as multiple approvals are required from IBN/DoI and NRB to bring in the foreign investment.

Most important reforms in Nepal’s FDI regime will entail simplifying the process for bringing in the foreign investment and for repatriations, as these have been the major concerns of foreign investors. Besides 3 introducing regulatory reforms, a fully functional one stop service center, as provisioned in FITTA 2019, could also be an important step in simplifying FDI entry and other administrations for foreign investors. Some improvements in investment protection such as through provisioning a dispute settlement mechanism, in par with international standards, between foreign investors and the State, will enhance investors’ confidence. Furthermore, downward revision of minimum FDI threshold (approximately US$ 414,800 per investor, at present) might also be needed to increase FDI inflows. Moreover, institutions that administer foreign investment need to be capacitated to ensure that the regulatory reforms are implemented and foreign investors receive a hassle-free service. Pending these reforms, diminished FDI inflows will be another addition to economic woes plaguing the country during the difficult times of COVID-19.

Mr. Dahal is Research Officer at SAWTEE. Views are personal. This was published in SAWTEE’s eNewsletter Trade, Climate Change and Development Monitor, Volume 17, Issue 6, June 2020.