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Thu, April 25, 2024

The Dismal Reality Of Business Investment

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In 34 years since the restoration of democracy in 1990, Nepal has witnessed frequent government changes; 30 governments were formed in this period and not a single prime minister served a five-year tenure. Not only coalitions but intra-party conflicts have been responsible for repeated destabilisation.

Ever since Nepal adopted mixed electoral system comprising of FPtP (First-Past-the-Post) and proportional representation following the People’s Movement of 2008, it has become increasingly difficult for a single party to garner majority in the House of Representatives (Lower House) which elects the Prime Minister. Subsequent hung parliaments have given rise to coalition governments which by nature have been unstable.

Forming and toppling government is now a common phenomenon for the country and this has jeopardised development work, government service delivery, policy reforms and implementation, and lowered investor confidence among other issues.

The 2023 Investment Climate Statement of the US Department of State, which was unveiled recently states, “Despite considerable potential - particularly in the energy, tourism, information and communication technology (ICT), infrastructure and agriculture sectors - political instability, widespread corruption, cumbersome bureaucracy, and inconsistent implementation of laws and regulations have deterred potential investment. While the Government of Nepal (GoN) publicly states its keenness to attract foreign investment, this has yet to translate into meaningful practice.” This publicly available propagation regarding Nepal’s investment climate by the world’s largest economy is a definite deterrent for foreign investment in Nepal.

“It is a pity that there is nothing actionable to change the status quo quashing all the concerns from the international community and investors regarding the country’s investment climate,” said Rameshore Prasad Khanal, Former Finance Secretary. Nepal has no compelling message to give among international investors to pursue the FDI route, he added. 

This apart, political uncertainty is now increasingly challenging the confidence of domestic investors. Nepal’s ruling parties have hardly paid attention to improve governance, introduce reforms, work for institutional strengthening, procedural facilitation, infrastructure development to create a sound ecosystem for investment. Political instability often engenders policy stagnation and uncertainty which leads to less room for the private sector to grow.

“Unfortunately, Nepal has nothing to celebrate in any sector because the country doesn’t have a vibrant private sector,” Manish Jha, a parliamentarian representing the Rastriya Swatantra Party said. He added, “As a result, the country is sorely lacking a production base. The lack of employment and vibrant infrastructure in the country is causing rampant brain drain and youth migration, now especially among educated youth.”

Foreign Direct Investment to country’s GDP ratio is merely 0.4%, the lowest in the South Asian Region. There has been no large investment coming into the country in the last five years.

Babacar S Faye, Resident Representative of International Finance Corporation to Nepal opines that Nepal should seriously ponder upon why investors are choosing Sri Lanka, Maldives or Bangladesh in this region instead of Nepal.

He further said that Nepal must develop a conducive atmosphere for investment that may come in different forms including equity or loan that may be availed from innovative financing solutions including syndicated loan, climate finance or offshore investment bonds.

Nepal’s parliament is also seen to be in no rush to endorse the investment bill which has the potential to create significant impact in Nepal’s trade and investment; specifically, the AML/CFT Bill which was tabled in the parliament in February this year.

In the meantime, Nepal has undergone the review process of the Asia Pacific Group (APG) on Money Laundering which is a Financial Action Task Force (FATF) regional inter-governmental body, narrowly escaping the grey list. FATF has granted a one-year extension to revise laws and combat money laundering that will end in mid-July 2024.

Recalling the rigoristic exercises of policy, legal, administrative and institutional, procedural reforms during the 1990s, Mahesh Acharya, a Former Finance Minister and one of the initiators of liberalisation in Nepal stated, “Reform is the continuation of tasks of strengthening investment ecosystem to make it robust for achieving the desired outcomes. The current tokenism or piecemeal approach cannot deliver tangible results.” 

Experts suggest that with digital being the way forward, Nepal could build a strong base for investment in ICT businesses however the government is taking baby steps in this direction. ICT firms are seen to be setting up their operations outside the country, shared Suman Maharjan, Director of Operations at Fusemachines. He pointed to the lack of an enabling environment for companies like his to grow. Lack of policy consistency, inconsistent tax incentives, and lack of adequate and skilled human resources along with stringent criteria for availing foreign exchange facilities are forcing companies like his to relocate from Nepal.

“Policymakers have to change their mindset and develop capacity of envisioning the importance of ICT because lack of readiness for leveraging technology to deliver efficient public services hinders us from competing with rest of the world,” he stated.

Political instability has intensified rent seeking, corruption, revenge and misconduct, scams, donation drives, exploitation from politically connected groups and created an environment where rule of law seems to be amiss. The private sector in recent times has faced allegations and corruption charges from government mechanisms and the constitutional anti-corruption bodies for irregularities that have actually occurred from the government decision where the private sector doesn’t have any role in making decisions. 

Ethical business norms, values and standards are constantly compromised due to the strong nexus between certain politicians, business individuals and groups and the bureaucracy killing competency and healthy competition.

The public looks on in frustration as the nexus between politicians and business people strengthens wherein politicians are accumulating wealth and business people are buying into political opportunities or entering politics by pleasing party leaders.

Faris H Hadad-Zervos, Country Director for Nepal, Maldives and Sri Lanka of the World Bank Group has said, “There should be something actionable to spread out the message that Nepal is open for business which we don’t see happening.”

The International Monetary Fund (IMF) in a recently held third review of the Extended Credit Facility Arrangement for Nepal (which is providing the country with access to $52.25 million) sought commitment of the government for structural reform focusing on three major areas: 

  • maintaining overall fiscal discipline and enhancing quality of fiscal spending
  • advancing reforms in governance, banking regulations and overall business climate by lowering cost of doing business and removing barriers of FDI
  • strengthening anti-corruption institutions for corruption control

Political leadership and governance especially in the current volatile economy should be focused on ensuring stability and livelihoods of people. Instead, it acts as a barrier to progress on all fronts. Accountability and transparency are empty words that leadership uses in forums and speeches, while the reality is that every day thousands of youths leave the country to look for work and create a future that is worthy of their dreams, reality is that businesses struggle to survive and many are sitting on timelines that may see themselves closed; reality is also the burden of debt is growing heavier as the country continues to experiment with empty speeches and little action, reality is the people are going out of work and inflation continues to grow, reality is that Nepal needs to wake up to its reality.

Trend of FDI inflow in last 5 years

Fiscal Year     FDI inflow
2022-23 Rs 5.96 billion
2021-22  Rs 18.56 billion
2020-21 Rs 19.51 billion
2019-20     Rs 19.48 billion
2018-19     Rs 13.07 billion

(Source: Nepal Rastra Bank)

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MARCH 2024

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