Foreign Direct Investment in Nepal: A Closer Look at the Decline

Foreign Direct Investment in Nepal: A Closer Look at the Decline
Credit goes to POST FILE PHOTO

In the first 11 months of the fiscal year ending mid-June, Nepal witnessed a significant decline in foreign direct investment (FDI) pledges. The drop, amounting to 25.70 percent year-on-year, has raised concerns among economists and industry experts. They attribute this steep fall to policy instability, bureaucratic hassles, and the economic slowdown.

The Current State of FDI in Nepal

According to the Department of Industry, Nepal received FDI pledges worth Rs34.74 billion for 274 projects during the review period. This figure is a stark contrast to the Rs46.76 billion worth of investment promises made during the same period in the last fiscal year. The projects slated to be launched with the promised capital are expected to create 14,613 jobs.

The Impact of Global and Local Factors

Shankar Singh Dhami, director at the Foreign Investment and Technology Transfer Section at the Industry Department, suggests that the decline in FDI could be due to the global economic slowdown caused by the Covid-19 pandemic and the subsequent Russian invasion of Ukraine. He also points out that investors might be hesitant to bring capital into a market experiencing a slowdown.

Local factors also play a significant role in the decline. High interest rates and political instability have been identified as the main reasons for the drop in FDI over the past two years. The crisis in the external sector, such as balance of payments and foreign exchange reserve, did not present a favorable outlook about Nepal for investors.

The Gap Between FDI Commitment and Realisation

The gap between FDI commitment and realisation has been widening. According to Nepal Rastra Bank, net foreign direct investment declined from Rs16.65 billion in the first 10 months of the last fiscal year to Rs4.36 billion in the same period of this fiscal year. This trend indicates a decline in both FDI pledges and actual investments over the past few years.

The Need for Improvement

Experts suggest that the government needs to improve the business environment in the country to attract more foreign investments. Despite government assurances of an improved business environment, investors still face hassles with regard to land, transmission line, and company registration and approval from the local level, among other problems.