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A Foreign Investment Dilemma of Nepal : One Step Forward Two Steps Backward

A Foreign Investment Dilemma of Nepal : One Step Forward Two Steps Backward

It is a welcome development that Government of Nepal has proposed bills for betterment concerning foreign private-public partnership, anti-dumping, copy-rights protection and countervailing. Any reform in foreign direct investment laws must also first take into consideration of economic conditions confronting nation. In this, foreign direct investment law falls short of expectations for there is a list of areas prohibited for foreign investment and sets lower limits on foreign investment amount. The bill appears primarily focused on inflow of foreign currency instead of spurring domestic employment through investments. In general, this is restrictive rather than open for new opportunities for private foreign direct investments in small and medium enterprises which re the core of Nepal’s economic dilemma, and a myth.  

Foreign investment generally refers to two components. One being bilateral foreign assistance received through multilateral and bilateral agreements between the governments and institutions.  The second one being the private foreign direct investment received through international investors. In the context of Nepal, Government should focus financing of large infrastructure development projects through bilateral and multi-lateral programs whereas private foreign investors should also be encouraged for investments in small and medium size enterprises which helps generate wider economic activities across local markets, including opportunities for export market and thereby creating domestic employment for Nepali.

Nepal is currently facing serious problem of rising trade deficit with India, for imports are rising disproportionately while exports have plummeted rapidly in recent years. Imports of food items is mounting, and petroleum products have increased much more than ever before. This is leading to a situation of economic emergency crises as the nation has become food import dependent. Government’s policy, thus, should first encourage all investors, both non-Nepali as well as Nepali without prejudice, to freely invest in all economic sectors including in small and medium enterprises. This would help generate domestic employment, contribute towards better balance of payments and create a sense of economic security of this nation.

Nepal faces several challenges in foreign direct investments landscape that stretches between prevailing negative perceptions about foreign direct investment mind-set and enormous challenges confronting the nation with inadequate developed physical infrastructures, connectivity, supply of energy and water, efficient cross-border trade and no easy access to export markets. Transportation cost is probably one of the highest in Asia is a serious constraint.

Large industrial enterprises would require large market access, opportunities and a vibrant consumer base. Nepal has neither of these. These elements become hindrances to expanding industrial base and heavily weighs in foreign private investor’s decision-making process. Unfortunately, Nepal falters in these areas and has so far failed to address these challenges and unable to attracting large-scale foreign investments of significance. This implies Nepal is not a highly favorable destination for large industrial establishments. Nepal must thus adapt liberal laws much better opportunities than countries in Asia if it wishes to be an attractive foreign investment destination. If Nepal continues to adopt protectionist legislations including in small and medium size enterprise foreign direct investment is unlikely come by. And, Nepal may continue to face food insecurity for it is heavily dependent on imports. Nepali consumers will pay heavy price, face with limiting choices and pay higher taxes on rising prices of imported goods with low income resulting in higher costs of living without improvement in quality of life.

Recently government has proposed important bills related to foreign investments for approval by the parliament.  But, the foreign direct investment bill is not much different than the current acts for it is only specific to foreign investment in large industry/enterprise with more than six arab rupees (or US$500 million equivalent) while introducing no substantive changes to promote foreign direct investment environment for small and medium size enterprises that would promote investment in small and medium enterprises which could have largely addressed country’s economic insecurity and import dependence.

A cursory view of the bills proposed in the parliament and if compared with the proposal shared with the government by the Nepal Policy Institute (or NPI), an independent Nepali think-tank, reveals following shortcomings in foreign direct investment policy strategy.

  1. NPI proposes that non-Nepali national, Nepali diaspora and people of Nepali-origin should be allowed 100% ownership in economic enterprises, while welcoming investments in all economic sectors. This is not explicit in the government proposal. The bill is open only for Non-Resident Nepali and not to other Nepali origin people;

 

  1. Government proposal concerns with foreign investment of Rs 6 Arab (US$500 million) or above through Investment Board of Nepal. But it is silent on below this amount. Investment below US$500 million is presumably reserved to Nepali nationals. This is the same in current act and there is no change. As per NPI, foreign investment amounts up to one and half crore rupees (or US$150,000) is reserved to Nepali but if enterprise involves transfer of technology this threshold is reduced to one crore rupees (or US$100,000) and must directly employ twenty Nepalese;

 

  1. NPI proposes that foreign investments, irrespective of investment amounts, should be approved by the Investment Board of Nepal under one window at the Investment Board of Nepal and must be approved within seven (7) working days. NPI also proposes there should no bureaucratic steps in processing papers once it is approved by the Investment Board of Nepal;

 

  1. NPI proposes that former Nepali citizens and Nepal-origin individual wo may have lost their Nepali citizenships (because some countries do not allow dual citizenships) should have the same investment rights as that of a Nepali citizen. This is not in the government proposal;

 

  1. NPI propose that Nepal-born former Nepali national could own 5,000 square meters of urban land and four (4) hectares of rural land for the sole purpose of business/enterprise purposes. This is not in the government proposal;

 

  1. All investments, foreign or national, must comply with environmental standards. This is not addressed by the government proposal;

 

  1. No investment will be expropriated or confiscated by administrative purpose and political measures in the operation of foreign owned enterprises. There is ambiguity in this in the government proposal;

 

  1. NPI proposes that investor should be allowed to repatriate foreign currency investment, profit from investment, principal of any loan obtained during business operations without going through Nepal Rastra Bank. This authority should be delegated to commercial banks. But the government proposal is bureaucratically restrictive and requires to be processed through commercial banks to Nepal Rastra Bank. This is a restrictive procedure (not regulatory) and it should be simplified and delegated to commercial banks because all banks in Nepal operate under the rules and regulations of Nepal Rastra Bank. This is not in the government proposal;

 

  1. Commercial banks are only allowed to handle “Scow Agreement”. Commercial banks should be given broad roles in handling with foreign investments once foreign currency account is established with commercial banks for the purpose of businesses. It is not in the government proposal;

 

  1. NPI proposal is that dispute settlement can also be conducted outside Nepal, like Switzerland, Singapore or United Kingdom (government could decide where it wants to). There is no reform in this in the government proposal;

 

  1. NPI proposes that transfer of foreign technology should be part of capital contribution to enterprise. This is vague in the government proposal;

 

  1. NPI proposes that machineries, equipment, plant and advanced technology required for establishment and smooth running of enterprise/industry should be exempted from import taxes and customs duties. This is not included in the government proposal;

 

  1. NPI proposes that enterprises with foreign owned capital and parties to business co-operation contracts should have the right to autonomy in conducting business/enterprise in accordance with the objectives stipulated in contracts and in investment license permit. Government proposal is silent and unclear in this;

 

  1. NPI proposed that investor should be allowed to freely chose its employees and should not be imposed to hire Nepali at senior positions without due considerations of business interests. Government proposal in this is not encouraging. Foreign investor should have full freedom to choose its employee without preconditions;

 

  1. NPI proposes that investor with foreign owned capital should be allowed to deal foreign currency for business purposes directly from commercial banks. This should not be restrictive and commercial bank’s role is limited in the government proposal;

 

  1. NPI suggests that provincial government should, in cooperation with Investment Board of Nepal, be allowed to deal with foreign private investment in small and medium size enterprises. This is not in the government proposal;

 

  1. NPI proposes that non-Nepali investor and his/her family should be issued a minimum period of one-year “investor visa” with multiple entry/exit and will not be required to be registered with police as foreigner living in the country. Government proposal is rather restrictive in visa regime for both investor and family members and there is no “Investor Visa” program;

 

  1. Finally, NPI proposes mandating additional roles to the National Planning Commission making this institution more effective in monitoring implementation of national economic development policy priorities and investment on all economic projects. Government bureaucracy is consistently appearing weak in systematic project monitoring of implementation. NPI observes that there is no effective monitoring mechanism of foreign investment projects leading to higher tax burden to Nepali tax payers. In the absence of regular monitoring of implementation nearly all government-financed projects over-run project deadlines resulting in cost escalation contributing to widespread corruption. A strong monitoring of implementation is urgently required to restore public confidence. There is no government proposal on how to improve this shortcoming in this area and thus avoid corruption.

Kedar Neupane

8 March 2019

 

(Kedar Neupane, President of We for Nepal, is a former UNHCR international official, retired after three decades of service in countries of Africa, Asia, the Middle-East, and Europe. He is also Advisor to the NRNA Switzerland. Contact email - This email address is being protected from spambots. You need JavaScript enabled to view it. )