Foreign Direct Investment in Nepal Essay

Foreign Direct Investment (FDI) in Nepal: Trends and Prospects Introduction FDI is a cross-border investment in which a resident in one economy (the direct investor) acquires a lasting interest in an enterprise in another economy (the direct investment enterprise). By convention, a direct investment is established when the direct investor has acquired 10 percent or more of the ordinary shares or voting power of an enterprise abroad. FDI may involve the creation of a new establishment or investment, joint ventures, or the acquisition of an existing enterprise abroad (cross-border mergers and acquisitions).

A direct investment comprises not only the initial transaction establishing the investment relationship between the direct investor and the direct investment enterprise, but also all subsequent transactions between investors and affiliated enterprises. Once established, increases in FDI can take the form of injections of additional equity capital, the reinvestment of earnings not distributed as dividends and intercompany debt, such as the extension of suppliers’ credits or loans. Nepal and Foreign Investment

With the expectation to supplement domestic private investment through foreign capital flows, transfer of technology, enhancement in management skills and productivity and to get into the global market, the Government of Nepal (GON) has created a competitive and investment friendly environment. It provides attractive incentives and facilities to the foreign investors. It does not levy income tax on dividends, export earning and interest earned on foreign loan. There is an exemption of tax, duty and fee on the products, machinery, equipment, tools and raw materials used by an export industry.

FDI flows to Nepal during 1980s were very low but it showed a distinct acceleration during the 1990s averaging Rs. 1564. 39 million per annum during 1990-2000. FDI peaked in 1997 at Rs. 2395. 54 million while the fiscal year 1999/2000 actually had the lowest annual total of Rs. 1417. 61 million. The unprecedented rise was primarily due to Nepal’s more liberal trade policies, which comprised of tariff rate reductions, the introduction of a duty drawback scheme, the adoption of a current account convertibility system and liberalization of the exchange rate regime.

A reversal in the rising trend took place from the beginning of the 2000s. Nepal received an FDI of Rs. 2. 88 billion in the fiscal year 2006/07 which increased to Rs. 9. 81 billion in 2007/08 as an outcome of housing boom and newly explored hydro potentials. Most of the FDI in Nepal is Greenfield-type investment rather than acquisition. The agricultural sector received eleven foreign investment projects in 2007/08. The tourism sector lured the maximum number of FDI projects, 67 during the year, whereas the manufacturing sector saw 51 FDI projects registered during the year.

Likewise, Nepal received FDI commitment from investors across 39 countries in 2007/08. Indian investors topped the list with maximum FDI of Rs. 4. 55 billion. An FDI of Rs. 2. 92 billion was received from South Korean investors while China, with an FDI of Rs. 448 million, was the third largest investment generator for Nepal during the year followed by United Arab Emirates with an FDI of Rs. 403 million. Prospects of FDI in Nepal Agriculture, hydropower and tourism are the areas with the most potential for FDI.

Besides, a variety of manufacturing activities and information-technology-based services already have some foreign investment in Nepal, with the ready-made-garments industry being the most prominent. The prospects of FDI in various sectors are as follows: * Manufacturing sector: It is one of the largest sectors for FDI. As per the data of 2007/08, there are 51 manufacturing related foreign direct investment projects in Nepal. Manufacturing sector can be categorized into different sectors such as energy, construction, mineral and service. Hydropower: Nepal has a potential of producing hydro power of about 83,000 MW. But, till now, Nepal has not been able to exploit much of its potentiality and the people in Nepal still face severe power shortages. In order to harness and develop hydropower, private sectors are involved to carry out small and medium sized hydro power projects. Similarly, the government is encouraging private foreign investment in this sector. * Tourism sector: Tourism also avails high scope for foreign investment opportunities. Nepal has natural sceneries and cultural heritages and is considered the “Garden of the world”.

Tourist lodging, motel, hotel, restaurant, resort, travel agency, skiing, gliding, water rafting, cable car complex, pony-trekking, trekking, hot air ballooning, para-sailing, golf course, polo, and horse riding are the main tourism attractions viable for FDI. * Agriculture: As of 2008, there are eleven projects under agriculture and forestry. Medicinal and aromatic herbs; flower and vegetable seeds; floriculture and sericulture; processing of spices, coffee; fruits and dairy products; vegetable and mushroom farming and tea comes under this sector.

There is an untapped potential in agriculture and bringing FDI to this sector can beneficial for the investor as well as the country. * Other sectors: Areas such as computer software development and electronic industries also carry high possibilities of foreign investment. Recommendations With a poor GDP growth rate over decades, it is high time that the GON came up with measures that bolster the GDP growth of the country. FDI could play a crucial role for supplying capital and technical know-how’s, and enhancing employment prospects for Nepali workers.

So, the GON needs to formulate a definite FDI strategy as part of its proactive role in economic diplomacy. First and foremost, the GON needs to gain the confidence of foreign investors to attract them to Nepal. Independence of operations of private enterprises in the country is one of the most important factor that foreign investors take into consideration before deciding whether to conduct business in the country or not.

So, the GON should take steps that ensure that the private enterprises are promoted in the country and privatization can be one of the means to do so. The Industrial Enterprise Act 1992 assures that no any business will be nationalized and the government under the policy of privatization is transferring the ownership of public enterprises to private sectors. Secondly, the GON needs to target FDI in country’s competitive products and sectors. It also can focus on those countries with which Nepal can have sustained export and effective buy-back arrangement.

It can open up various sectors and target FDI for services (tourism, health, education, financial services, warehousing and multi-modal transportation, banking, insurance, consulting, legal, and accounting), infrastructure (water, power, roads, tunnel, ropeway, cable cars and airports), manufacturing (including mining and herb based industries), agriculture, construction and other service sector. Third, the dividend tax should be waived and custom duty and income tax should be reduced further to attract FDI into Nepal.

Dividend tax, tariffs and other taxes can be kept lowest in all of South Asia so as to take advantage of lying between two giant economies, India and China. Taxes on export as well as supplementary taxes should be waived. Similarly one window policy which the government has formulated should be duly implemented to ensure ease of doing business. Fourth, the transport sector should be decartelized so as to make the economy competitive and end the public sector monopoly over procurement and supply of POL (petroleum products) products by allowing full participation of the private sector.

Fifth, the GON should establish a separate authority to deal exclusively with Special Economic Zones/Export Promotion Zones investments and to provide one-window service in these locations. Annex-1 | Summary Sheet of Foreign Investment in Nepal – Year-wise | From the beginning to 15th Jan, 2005 | (Rupees in million) | Fiscal | No | Total Project | Total Fixed | Foreign | Employment | Year | | Cost | Cost | Investment | | Upto 15 | 60 | 5440. 00 | 4595. 51 | 466. 84 | 10604 | July 1989 | | | | | | 1989/90 | 30 | 2438. 19 | 2139. 60 | 398. 1 | 9515 | 1990/91 | 23 | 863. 56 | 690. 74 | 406. 28 | 2974 | 1991/92 | 38 | 3508. 17 | 2902. 10 | 597. 84 | 5615 | 1992/93 | 64 | 17886. 22 | 16210. 81 | 3083. 67 | 13873 | 1993/94 | 38 | 3733. 23 | 3175. 66 | 1378. 76 | 4734 | 1994/95 | 19 | 1627. 28 | 1247. 85 | 477. 59 | 2386 | 1995/96 | 47 | 10047. 47 | 9398. 54 | 2219. 86 | 8032 | 1996/97 | 77 | 8559. 25 | 6692. 15 | 2395. 54 | 9347 | 1997/98 | 77 | 5569. 38 | 5142. 32 | 2000. 28 | 4336 | 1998/99 | 50 | 5324. 42 | 4380. 17 | 1666. 42 | 2146 | 1999/2000 | 71 | 2669. 09 | 1910. 24 | 1417. 1 | 4703 | 2000/01 | 96 | 7917. 62 | 6122. 49 | 3102. 56 | 6880 | 2001/02 | 77 | 3318. 53 | 1559. 59 | 1209. 65 | 3731 | 2002/03 | 74 | 4921. 82 | 3608. 25 | 1793. 77 | 3572 | 2003/04 | 77 | 4309. 65 | 3762. 17 | 2755. 40 | 2144 | 2004/05 | 17 | 770. 39 | 476. 52 | 311. 08 | 3432 | up-to 15 | | | | | | Jan TOTAL | | | | | | | 935 | 88904. 27 | 74014. 69 | 25681. 66 | 98024 | Source: Policy paper on Implementation evaluation of Foreign Direct Investment policy in Nepal by Madhukar SJB Rana and Stalin Man Pradhan| ——————————————– 2 ]. Foreign Direct Investment Trends and Statistics, prepared by the Statistics Department of International Monetary Fund, October 28, 2003. [ 3 ]. The data are based on the summary sheet of year-wise foreign investment taken from the policy paper on Implementation evaluation of Foreign Direct Investment policy in Nepal by Madhukar SJB Rana and Stalin Man Pradhan, August 2005. It is shown in annex 1. [ 4 ]. Investment in a manufacturing, office, or other physical company-related structure, or a group of structures in an area where no previous facilities exist.

It is usually offered as an alternative to another form of investment, such as mergers and acquisitions, joint ventures, or licensing agreements. [ 5 ]. FDI commitment in Nepal rises to 5-year high, Business Desk, The Kathmandu Post, Published on 31-07-2008 [ 6 ]. According to the Department of Industry, hydropower lured FDI of Rs. 2. 22 billion in 2007/08. Of the major investment in this sector, a south Korean hydropower company commited to invest Rs. 1. 98 billion to develop a hydro project in Benighat. [ 7 ]. http://www. visitnepal. com