NEPAL’S FDI POLICY – A NEED FOR REVISION
Bikendra Shamsher Thapa
With the collapse of the Panchayat Regime in 1990, the Government of Nepal adopted the liberal market led economic policy. Major reforms initiated in the 1990-96 period are as follows:
(a) Except on gold and silver, full convertibility of the Nepali Rupee on current accounts was introduced
(b) All quantitative restrictions and import licenses were removed
(c) Tariff structure was rationalized
(d) Investment incentives were extended
(e) A new Foreign Investment and Technology Act was promulgated, in 1991, that sought to provide national treatment to foreign investors
(f) The process of liberalization of the financial sector-- that had actually begun in 1985-- was further liberalized with new foreign joint venture banks, national and regional commercial and development banks entering the market coupled with a liberal policy towards entry of financial intermediaries, cooperative banks and insurance companies
(g) Nepal Rastra Bank removed provision for banks to have to invest in treasury bills thus freeing banks' deposits for investments by the private sector
(h) Actions were being taken in earnest to simplify the tax administration by moving to a VAT regime
As a result of these actions, GDP grew from 4.8% per year on average during 1985-1991 to 5.2% during 1992-96. Private sector investment accelerated remarkably from 4.7% annual average growth during 1985-1991 to 13.2% during 1992-96.
A highly favorable treaty of trade was signed with India in 1996 that provided free access of Nepalese Manufactured products. All these measures made positive impact in the Nepalese economy. Hence, many joint venture and/or Foreign Direct Investment (FDI), especially Indian Investment, were attracted into Nepal in manufacturing sector whose main market was targeted to India. But the revision of treaty in 2002 put several restrictions as follows:
(i) Articles to be exported to India from Nepal should be wholly manufactured from Nepalese materials or Indian materials or Nepalese & Indian materials.
(ii) If the article is produced from third country materials, then the total value of materials, parts or produce originating in third country should not exceed 70 % of the ex-factory price of the article to be exported to India.
(iii) India also has fixed the quota to some of the items which has restricted in the volume of export. Quota fixed to some of the items was very low compared to the capacity installed by the industries.
These changes in the Nepal-India Trade treaty caused sudden set back in the volume of export to India causing closure of many industries whose market was targeted mainly to India.
At present, FDI is lowest in Nepal even among other landlocked countries. Although the rules governing foreign investment are liberal in principle, they are ambiguous and less friendly in practice. There is duplication of institutions responsible for investment approval, investment incentives, trade facilitation, export promotion, investment promotion etc. The number of such institutions should be reduced to one or two only. The slow pace of FDI in Nepal is attributed mainly due to the following;
(i) The labor law is excessively pro-labor.
(ii) The tax administration is complex and the implementation is slow and negative.
(iii) Exchanging system and fund remitting is not so encouraging.
(iv) The Government listens but no actions are taken.
(v) Infrastructure facility is poor.
The institutional setting for economic growth needs to be improved aggressively to disinvest government investments in profit-oriented business activities; guarantee property rights; undo government regulations; implementing a dynamic marketing and mobilization strategy for FDI through actively pursuing economic diplomacy in a coordinated, sustained inter-ministerial manner, and formalizing the informal sector's role in the market economy at the national and local levels to deepen and broaden the entrepreneurial spirit and enterprise growth.
Existing foreign investors find the investment climate extremely unfriendly. They feel they are unwanted and uncared for, especially during insurgency and violence. Some feel highly insulted by the utter neglect on part of the Government. Although they pay taxes in Nepal, they are treated unequally and placed in the same category as tourists. The critical bottleneck faced by foreign investors is the attitudinal problem amongst bureaucrats who are not genuinely open to foreign investment. They believe wrongly that Nepal will lose its independence or the bureaucrats lose status and power in society. Nepal, lying between India and China, is highly attractive place for foreign investors. Thus, number of licenses issued for foreign investment is rising steadily during last one and half decade. However, due to many of the above reasons, most of the approved FDI projects were either delayed, or some still did not implement the project or some licenses were even cancelled.
Foreign Investment and Technology Transfer Act (FITTA) – 1992 & Industrial Enterprises Act (IEA) - 1992 are the two most important acts for the promotion of industries in Nepal. They are highly encouraging acts for attracting FDI or joint venture investments in Nepal. Foreign investors are equally treated as local investors and the same act prevail regarding incentives and facilities to foreign investors.
Any foreign national is granted 6 months non-tourist visa if he or she wants to conduct some survey, study or research with the objective of making investment in Nepal. After that if he or she invests or establishes an industry, then the investor along with his dependant family is granted with business visa until their investments are retained.
Similarly if a foreign investor at a time makes an investment of US $ 100,000, a residential visa is given to him and his dependant family.
All these are highly encouraging statements. However in actual practice, the investors have to face various problems from time to time.
Transaction costs can and should be reduced as a matter of priority to uplift the competitiveness of the Nepalese economy and to improve the investment climate. There is lack of complete communication to foreign investors. That is why Nepal Rastra Bank is not getting the necessary information regarding amount of foreign investment brought into the country by FDIs and this has created the problem when they want to repatriate the profit/dividend. Thus it is quite important that all the foreign investors are adequately briefed on this aspect of FDI.
The prevailing legal provision fully guarantees that foreign investors will be provided necessary foreign exchange for repatriating profit as well as any disinvestment proceeds out of the country. In this connection one issue which has been found to be raised is: Can Nepal afford to provide such guarantee in case of large power sector projects? Some mega size projects could easily and significantly erode the total foreign exchange holding of the country. Another issue which deserves attention is: Can foreign investors undertake external commercial borrowings or not? As all FDIs come under the Nepal’s rules and regulations, they are not automatically permitted to undertake such borrowings. They have to seek the permission of the Central Bank, which expects these undertakings to borrow from local banks. But if the amount is too big, local banks do not have that capacity.
Foreign invested projects will demand a lot of skilled manpower. Nepali labours are highly laborious and honest, but they are mostly unskilled. Thus, the Government should actively involve in human resources development by providing them vocational, technical, scientific and entrepreneurial education through formal and informal modalities.
The remittance from manpower has kept the economy afloat even at this time of instability, insurgency and terrorism. Thus, foreign employment remittance needs to be further promoted and supplemented by providing credit in rural areas to manpower at low interest rate. Currently they are charged with high interest rate by the rural landlords. Once they start earning, their savings can be attracted in various sectors.
The Government has accorded priority to bring foreign investment into the country in its Budget for the current fiscal year as well. The Budget has mentioned that Nepalese embassies will be mobilized for economic co-operation, tourism promotion, trade expansion and diversification, promotion of foreign employment and promotion of foreign investment and a legal provision will be made stipulating certain conditions to make the foreign investment open for those industries which transfer technology from Nepal, establish an auxiliary subsidiary company abroad by the Nepalese holding company under operation as a public limited company in Nepal, and the mutual fund investing in portfolios instruments of foreign capital market. Furthermore, it has said that a provision will be made to attract foreign investors to build hospitals, universities, infrastructure for new international airport, large scale hydro-powers like West Seti, Arun III, Upper Karnali, etc. However, the Government should bring favorable FDI policy and create an environment to attract maximum number of FDIs. It should also fulfill both voluntary and mandatory commitments made during accession to WTO. FDI should be opened for Service, Infrastructure, Manufacturing (including mining based industries), Agriculture and Construction sector. Dividend tax and taxes on export should be waived and custom duty and income tax should be reduced further. A high level Board of Investment along with its own secretariat should be created which should act as One Stop Office for FDI. Lastly, an effective bureaucratic system should be established so that one window system becomes highly effective.
(References: Implementation Evaluation of FDI Policy in Nepal by Madhukar Rana & Stalin Pradhan and Investment Guide to Nepal by UNCTAD & ICC)
