Investment commitments are falling as a virus, messy politics deter investors

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Potential investors pulled out of Nepal in the past fiscal year when Covid-19 ruined travel plans and a tumultuous political season set in.

According to the Ministry of Industry, commitments for foreign direct investment fell by 14.81 percent to 32.20 billion rupees in the 2020-21 fiscal year ended in mid-July.

The investment commitments are in 183 different projects and services. In the previous fiscal year 2019-20, Nepal received investment commitments worth 37.80 billion rupees for 223 programs.

Jiblal Bhusal, director general of the Ministry of Industry, said investment pledges had fallen because the coronavirus prevented travel and potential financiers could not visit Nepal to pursue their investment plans.

A combination of the spill-over effect of the first lockdown, which began in March 2020, and the second lockdown, which began in April 2021, put investors in a “wait and see” situation, Bhusal said. “Despite the difficult situation, commitments for foreign investments were good in the last financial year,” he said.

But he added that there was still uncertainty. “The emerging variants of Covid-19 can affect foreign investments in Nepal.”

Officials said the two-fold dissolution of the House of Commons upset national politics and unsettled the five-year-old constitution.

After months of political disputes, the Nepalese Congress Chairman Sher Bahadur Deuba was appointed Prime Minister on July 13 by order of the Supreme Court under Article 76 (5) of the Constitution, which ended the political dispute.

On Sunday, Deuba won a vote of confidence, 165 members of the House of Representatives voted for him.

China tops the list of foreign investors in Nepal with investment commitments worth 22.50 billion rupees in the past fiscal year. But it was lower than in previous years. In fiscal year 2019-20, the northern neighbor’s investment commitments totaled 25.65 billion rupees for 174 different projects.

The investment commitments of the southern neighbor India fell 72 percent to 906 million rupees in the last fiscal year. The funding commitments relate to nine projects. In the past fiscal year, investment commitments from India totaled Rs.323 billion for 16 different projects.

According to official figures, the number will skyrocket in the current fiscal year as Nepal recently signed a pact with the Indian state-owned company Satluj Jal Vidyut Nigam to develop the 679-megawatt Lower Arun hydropower plant in eastern Nepal.

The $ 1.3 billion project, which is the largest foreign investment project according to 2017 cost estimates, is located in the Sankhuwasabha and Bhojpur districts.

This is the second mega-project that the southern neighbor has carried out after the 900-megawatt Arun-3 hydropower project, valued at $ 1.04 billion, on the Arun River.

Broken down by sector, according to the ministry, Nepal received the highest investment commitments of 18.31 billion rupees in the tourism sector.

The investment commitments relate to 101 tourism projects and almost all of them came from China. There were also 19 foreign investment commitments totaling Rs.286 billion in manufacturing and 41 pledges totaling Rs 5.98 billion in services.

“Foreign investments in a landlocked country like Nepal are comparatively low compared to other countries with access to the sea, since the investment costs are lower there,” said Bhusal. “Potential investors compare the investment opportunities in China and India with the incentives in Nepal, and our country obviously lacks attractive offers.”

The one-window policy must take effect and the Nepal Investment Board must also become more proactive, he added.

According to a new regulation enacted under the Foreign Investment and Technology Transfer Act, foreign investors in Nepal are required to bring in 70 percent of their planned investments before going into business and the remainder in the next two years.

Foreign direct investment is one of the main sources of bridging the funding gap, but Nepal is among the lowest-investment countries in recent years, according to the World Bank’s Systematic Country Diagnostic Report published in February last year.

According to the multilateral finance agency, foreign direct investment has averaged just 0.2 percent of gross domestic product over the past decade, which is among the lowest in the world.

Foreign direct investment is critical to accessing new technology, business practices and markets. In recent years, the capital inflow into the country has seen an upward trend, but it is still lagging behind most South Asian countries.

To facilitate foreign direct investment in Nepal, the central bank introduced the Nepal Rastra Bank Foreign Investment and Loan Management Bylaw 2021, which exempted foreign investors from obtaining their prior authorization to send or remit foreign currency to Nepal after receiving the approval of the Sanction for foreign investment received body, said Bhusal.

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