What is FDI?
Foreign Direct Investment (FDI) involves the process of making investment by the person of one economy to the registered entity of another entity with the motive of earning profits by forming long term relationship and exercising control over that particular entity. Foreign investors are attracted towards the country by various factors such as economy, availability of manpower, cheaper labour forces, easier tax and legal compliances. Foreign investment and investors need to be handled carefully to maintain trust which reflects the overall business environment of the country in the world business areana. Political and legal stability influences the injection and repatriation of foreign direct investment in the country.
Understanding Role of FDI in Nepal’s Economy
Nepal has a short history of foreign direct investment in Nepal which started after the adoption of FDI promotion strategy in 1992 which was supported by the Sixth Five-year plan (1980-1985) formed by National Planning commission of Nepal. Safe landing of ten year long Maoist insurgency in 21st November 2006 by signing Comprehensive Peace Accord between Government of Nepal and Moaist led to a ray of hope for better business environment in Nepal. Many commercial laws and regulations were formed and amended to lift the spirit of the business and to attract the foreign investment during that period.
Investment Board Nepal (IBN) was established through the Investment Board Act, 2011 and was reconstituted by introducing the Private Public Partnership and Investment Act (PPPIA) in 2019. The IBN is responsible for approving investment of NPR 6 billion or above for infrastructure development and provides hand holding facilities to investors in Nepal.
Recent FDI Statistics and Trends in Nepal
As per the survey report on Foreign Direct Investment in Nepal (2022-23), Nepal has attracted Rs 295 billion of foreign investment at the end of 2022/23 increasing by 11.8% compared to the previous year. This report further mentions that investors have much interest in the industrial sector contributing 59.7 percent of the total foreign investment in Nepal.
Countries Leading Foreign Investment in Nepal
Foreign investors from 58 countries are actively participated in the Nepalese economy. Investors from India, China, United States and European countries are the leading contributors for FDI in Nepal.
Top Sectors Attracting FDI in Nepal
Nepal is a country with more prospective as it is located between the two largest economy of the world. Different countries are committing and investing FDI in Nepal. The different sectors attracting FDI in Nepal are as follows:
Hydropower and Energy Projects
Nepal has abundance water resources with feasibility of hydro-electricity which can be exported to India, China and Bangladesh where energy sources has high demand due to rapid industrialization. Nepal has reached agreements with India and Bangladesh for hydropower trade.
Tourism and Hospitality Industry
Nepal has many mountains above 8,000 meter in the Mahabharat range, including Mount Everest and Mount Kanchanjunga, which can attract millions of tourist every year. Nepal is rich in culture, traditions as well as different climatic conditions. This opens the scope for hotels, resorts and adventurous sports in Nepal.
Manufacturing and Agriculture Sectors
Almost 60% of the total population of Nepal is engaged directly or indirectly in agriculture. Nepal is also rich in herbs. Commercialization of agriculture is being practiced by youths which is increasing productivity. So, we can establish agro and herbal manufacturing industries and export the finished goods to third world countries.
Emerging Technology and Startup Ecosystem
As per the data of government of Nepal. 76.2% population of Nepal is literate. This means that Nepal is an educated country. Nowadays, youths are interested in technology related startups and are in mission to create Nepal as an outsourcing hub and generate foreign currencies.
FDI Policy
The keys FDI policies and laws which regulates the foreign direct investment in Nepal are explained below:
Foreign Investment and Technology Transfer Act (FITTA), 2019
This act has been authenticated by the President of Nepal on 27th March 2019 (2075.12.13). The objective of this act is to amend and consolidate the prevailing Nepal laws relating to foreign investment and technology transfer in order to make national economy competitive, strong and employment-oriented through mobilization to the maximum extent of the available means and resources for economic prosperity of the country, and to achieve sustainable economic growth through industrialization while creating investment friendly environment to attract foreign capital, technology and investment in the sectors of import substitution, export promotion, through increase in productivity, and of infrastructure development and production of goods or services.
Industrial Enterprise Act (IEA), 2020
This act has been authenticated by the President of Nepal on 11th February 2020. The objective of this act is to amend and consolidate the prevailing laws relating to industrial enterprises in order to build a dynamic and robust economy by making an easy, predictable and effective management of the industrial sector while focusing, respectively, on import substitutions and export promotions, through mobilization of the resources available in the country, to the maximum extent, to enhance the production of industrial goods or services and employment opportunities by making the industrial environment of the country investment friendly and competitive.
Public-Private Partnership and Investment Act, 2019
This act has been authenticated by the President of Nepal on 27th March 2019. The objective of this act is to contribute to economic prosperity of the country through investment even by native or foreign private sector in infrastructure construction and services sectors; to manage the projects to be conducted in public private partnership; and to consolidate and amend to the legal provisions relating to investment.
Double Taxation Avoidance Agreements (DTAAs)
Nepal has entered into Double Taxation Avoidance Agreements (DTAAs) with various countries to prevent tax evasion and promote trade and investment abroad. A DTAA is anincome-tax treaty between two nations that avoids double taxation of income—once in Nepal and once in the country of residence of the investor along with restricted withholding tax on dividends, interest, and royalties. Nepal has operational DTAAs with countries like India, China, the United Kingdom, South Korea, Norway, Mauritius, Sri Lanka, Thailand, Pakistan, and Qatar as of 2024. These treaties provide different tax advantages, including reduced withholding taxes, tax relief on certain business revenues, and tax incentives for foreign investors, thusmaking Nepal moreattractive as an investment hub.
Role of the Department of Industry and Other Regulatory Bodies
Foreign Direct Investment (FDI) is regulated by different governmental bodies in Nepal. The regulation is carried out in order to ensure that the national laws and economic policies of foreign investors are fully complied with. The key regulatory bodies for FDI in Nepal are:
Department of Industry (DoI)
DOI is operated under the Ministry of Industry, Commerce, and Supplies (MoICS). It acts as the primary agency for FDI approvals by approving foreign investment in small and medium-scale industries in Nepal. It grants business visas for foreign investors for the operation of business.
Investment Board Nepal (IBN)
IBN is Operated under the Office of the Prime Minister and Council of Ministers. It approves and facilitates large-scale foreign investment (investment above NPR 6 billion or strategic projects) and reviews infrastructure and national priority projects.
Nepal Rastra Bank (NRB)
NRB is responsible for all the regulations related to financial transactions of FDI. It approves inflows and repatriation of foreign currency in the foreign investment. Inflows occurs during the injection of capital whereas repatriation occurs during the transfer of profit or sales of foreign investment.
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