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Bangladesh

Executive Summary

Bangladesh is the most densely populated non-city-state country in the world, with the eighth largest population (over 165 million) within a territory the size of Iowa. Bangladesh is situated in the northeastern corner of the Indian subcontinent, sharing a 4,100 km border with India and a 247-kilometer border with Burma. With sustained economic growth over the past decade, a large, young, and hard-working workforce, strategic location between the large South and Southeast Asian markets, and vibrant private sector, Bangladesh will likely continue to attract increasing investment, despite severe economic headwinds created by the global outbreak of COVID-19.

Buoyed by a young workforce and a growing consumer base, Bangladesh has enjoyed consistent annual GDP growth of more than six percent over the past decade, with the exception of the COVID-induced economic slowdown in 2020. Much of this growth continues to be driven by the ready-made garment (RMG) industry, which exported $35.81 billion of apparel products in fiscal year (FY) 2021, second only to China, and continued remittance inflows, reaching a record $24.77 billion in FY 2021. (Note: The Bangladeshi fiscal year is from July 1 to June 30; fiscal year 2021 ended on June 30, 2021.) The country’s RMG exports increased more than 30 percent year-over-year in FY 2021 as the global demand for apparel products accelerated after the COVID shock.

The Government of Bangladesh (GOB) actively seeks foreign investment. Sectors with active investments from overseas include agribusiness, garment/textiles, leather/leather goods, light manufacturing, power and energy, electronics, light engineering, information and communications technology (ICT), plastic, healthcare, medical equipment, pharmaceutical, ship building, and infrastructure. The GOB offers a range of investment incentives under its industrial policy and export-oriented growth strategy with few formal distinctions between foreign and domestic private investors.

Bangladesh’s Foreign Direct Investment (FDI) stock was $20.87 billion through the end of September 2021, with the United States being the top investing country with $4.1 billion in accumulated investments. Bangladesh received $2.56 billion FDI in 2020, according to data from the United Nations Conference on Trade and Development (UNCTAD). The rate of FDI inflows was only 0.77 percent of GDP, one of the lowest of rates in Asia.

Bangladesh has made gradual progress in reducing some constraints on investment, including taking steps to better ensure reliable electricity, but inadequate infrastructure, limited financing instruments, bureaucratic delays, lax enforcement of labor laws, and corruption continue to hinder foreign investment. Government efforts to improve the business environment in recent years show promise but implementation has yet to materialize. Slow adoption of alternative dispute resolution mechanisms and sluggish judicial processes impede the enforcement of contracts and the resolution of business disputes.

As a traditionally moderate, secular, peaceful, and stable country, Bangladesh experienced a decrease in terrorist activity in recent years, accompanied by an increase in terrorism-related investigations and arrests following the Holey Artisan Bakery terrorist attack in 2016. A December 2018 national election marred by irregularities, violence, and intimidation consolidated the power of Prime Minister Sheikh Hasina and her ruling party, the Awami League. This allowed the government to adopt legislation and policies diminishing space for the political opposition, undermining judicial independence, and threatening freedom of the media and NGOs. Bangladesh continues to host one of the world’s largest refugee populations. According to UN High Commission for Refugees, more than 923,000 Rohingya from Burma were in Bangladesh as of February 2022. This humanitarian crisis will likely require notable financial and political support until a return to Burma in a voluntary and sustainable manner is possible. International retail brands selling Bangladesh-made products and the international community continue to press the Government of Bangladesh to meaningfully address worker rights and factory safety problems in Bangladesh. With unprecedented support from the international community and the private sector, the Bangladesh garment sector has made significant progress on fire and structural safety. Critical work remains on safeguarding workers’ rights to freely associate and bargain collectively, including in Export Processing Zones (EPZs).

The Bangladeshi government has limited resources devoted to intellectual property rights (IPR) protection and counterfeit goods are readily available in Bangladesh. Government policies in the ICT sector are still under development. Current policies grant the government broad powers to intervene in that sector.

Capital markets in Bangladesh are still developing, and the financial sector is still highly dependent on banks.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2021 147 of 180 http://www.transparency.org/research/cpi/overview
Global Innovation Index 2021 116 of 129 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2020 USD 723 https://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2020 USD 2,030 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

3. Legal Regime

4. Industrial Policies

5. Protection of Property Rights

6. Financial Sector

8. Responsible Business Conduct

The business community is increasingly aware of and engaged in responsible business conduct (RBC) activities with multinational firms leading the way. While many firms in Bangladesh fall short on RBC activities and instead often focus on philanthropic giving, some of the leading local conglomerates have begun to incorporate increasingly rigorous environmental and safety standards in their workplaces. U.S. companies present in Bangladesh maintain diverse RBC activities. Consumers in Bangladesh are generally less aware of RBC, and consumers and shareholders exert little pressure on companies to engage in RBC activities.

While many international firms are aware of OECD guidelines and international best practices concerning RBC, many local firms have limited familiarity with international standards. There are currently two RBC NGOs active in Bangladesh:

  • CSR Bangladesh:
  • CSR Centre Bangladesh:

Along with the Bangladesh Enterprise Institute, the CSR Centre is the joint focal point for the United Nations Global Compact (UNGC) and its corporate social responsibility principles in Bangladesh. The UN Global Compact is the world’s largest corporate citizenship and sustainability initiative. The Centre is a member of a regional RBC platform called the South Asian Network on Sustainability and Responsibility, with members including Bangladesh, Afghanistan, India, Nepal, and Pakistan.

While several NGOs have proposed National Corporate Social Responsibility Guidelines, the government has yet to adopt any such standards for RBC. As a result, the government encourages enterprises to follow generally accepted RBC principles but does not mandate any specific guidelines.

Bangladesh has natural resources, but it has not joined the Extractive Industries Transparency Initiative (EITI). The country does not adhere to the Voluntary Principles on Security and Human Rights.

9. Corruption

Corruption remains a serious impediment to investment and economic growth in Bangladesh. While the government has established legislation to combat bribery, embezzlement, and other forms of corruption, enforcement is inconsistent. The Anti-Corruption Commission (ACC) is the main institutional anti-corruption watchdog. With amendments to the Money Laundering Prevention Act, the ACC is no longer the sole authority to probe money-laundering offenses. Although it still has primary authority for bribery and corruption, other agencies will now investigate related offenses, including:

  • The Bangladesh Police (Criminal Investigation Department) – Most predicate offenses.
  • The National Board of Revenue – VAT, taxation, and customs offenses.
  • The Department of Narcotics Control – drug related offenses.

The current Awami League-led government has publicly underscored its commitment to fighting corruption and reaffirmed the need for a strong ACC, but opposition parties claim the ACC is used by the government to harass political opponents. Efforts to ease public procurement rules and a recent constitutional amendment diminishing the independence of the ACC may undermine institutional safeguards against corruption. Bangladesh is a party to the UN Anticorruption Convention but has not joined the OECD Convention on Combating Bribery of Public Officials. Corruption is common in public procurement, tax and customs collection, and among regulatory authorities. Corruption, including bribery, raises the costs and risks of doing business. By some estimates, off-the-record payments by firms may result in an annual reduction of two to three percent of GDP. Corruption has a corrosive impact on the broader business climate market and opportunities for U.S. companies in Bangladesh. It also deters investment, stifles economic growth and development, distorts prices, and undermines the rule of law.

10. Political and Security Environment

Prime Minister Hasina’s ruling Awami League party won 289 parliamentary seats out of 300 in a December 30, 2018 election marred by wide-spread vote-rigging, ballot-box stuffing and intimidation. Intimidation, harassment, and violence during the pre-election period made it difficult for many opposition candidates and their supporters to meet, hold rallies, and/or campaign freely. The clashes between rival political parties and general strikes that previously characterized the political environment in Bangladesh have become far less frequent in the wake of the Awami League’s increasing dominance and crackdown on dissent. Many civil society groups have expressed concern about the trend toward a one-party state and the marginalization of all political opposition groups.

Americans are advised to exercise increased caution due to crime and terrorism when traveling to Bangladesh. Travel in some areas have higher risks. For further information, see the State Department’s travel website for the  Worldwide Caution Travel Advisories, and  Bangladesh Country Specific Information.

11. Labor Policies and Practices

Bangladesh’s comparative advantage in cheap labor for manufacturing is partially offset by lower productivity due to poor skills development, inefficient management, pervasive corruption, and inadequate infrastructure.  According to the 2016-2017 Labor Force Survey, 85 percent of the Bangladeshi labor force is employed in the informal economy.  Bangladeshi workers have a strong reputation for hard work, entrepreneurial spirit, and a positive and optimistic attitude.  With an average age of 26 years, the country boasts one of the largest and youngest labor forces in the world.  However, training is not well aligned with labor demand. Bangladesh’s labor laws specify acceptable employment conditions, working hours, minimum wage levels, leave policies, health and sanitary conditions, and compensation for injured workers.  Freedom of association and the right to join unions are guaranteed in the constitution.  In practice, however, compliance and enforcement of labor laws are weak, and companies frequently discourage or prevent formation of worker-led labor unions, preferring pro-factory management unions. In a notable exception to the national labor law, Export Processing Zones (EPZs) do not allow trade unions and heavily restrict other labor activity normally permitted under the broader Bangladesh Labor Act. The EPZ labor law does allow worker welfare associations, to which 74 percent of workers belong, according to the government.

Since two back-to-back tragedies killed over 1,250 workers – the Tazreen Fashions fire in 2012 and the Rana Plaza collapse in 2013 – Bangladesh made significant progress in garment factory fire and structural safety remediation, thanks mostly to two Western brand-led initiatives, the Alliance for Bangladesh Worker Safety (Alliance), comprised of North American brands, and the Accord on Fire and Building Safety in Bangladesh (Accord), which was formed by European brands. Major accidents and workplace deaths in the garment sector dropped precipitously as a result – only four workers died in 2021.  Monitoring and remediation of RMG factories exporting to non-Western countries was overseen by the government, with assistance from the International Labor Organization (ILO) under the National Initiative.  By 2021, fewer than half the factories under the National Initiative had completed initial remediation of safety issues, and both the Alliance and Accord had closed their Bangladesh operations.  North American brands continued to monitor manufacturers’ safety maintenance and training through a new organization, Nirapon. The Accord, under High Court order, transitioned its staff and operations to the newly formed RMG Sustainability Council (RSC), overseen by a board consisting of manufacturers, brands, and worker representatives.  The government has announced plans to form an Industrial Safety Unit to oversee factory safety in National Initiative garment factories as well as all manufacturing. On July 8, 2021, a devastating fire at the Hashem Foods Factory Ltd took the lives of 54 workers including 19 children. In the wake of the fire on July 15, the Prime Minister’s Office announced the formation of a 24-member national committee led by the Bangladesh Investment Development Authority (BIDA) and headed by the Prime Minister’s Private Sector Advisor Salman Rahman. The committee prioritized 32 industrial sectors considering their propensity for and likelihood of accidents. BIDA announced in December 2021 it would produce a sector-wide report after analyzing the inspection data and will take steps to enforce workplace safety compliance in the non-export sectors.

The U.S. government suspended Bangladesh’s access to the U.S. Generalized System of Preferences (GSP) over labor rights violations following a six-year formal review conducted by the U.S. Trade Representative. The decision, announced in 2013 in the months following the Rana Plaza collapse, was accompanied by a 16-point GSP Action Plan to help start Bangladesh’s path to reinstatement of the trade benefits.  While some progress was made in the intervening years, several key issues have not been adequately addressed.  Despite revisions intended to make Bangladesh more compliant with international labor standards, the Bangladesh Labor Act (BLA) and EPZ Labor Act (ELA) still restrict the freedom of association and formation of unions and maintain separate administrative systems for workers inside and outside of export processing zones.

Under the current BLA, legally registered unions are entitled to submit charters of demands and bargain collectively with employers, but this has rarely occurred in practice.  The government counts nearly 1,000 registered trade unions, but labor leaders estimate there are fewer than 100 active trade unions in the country’s dominant sector, RMG, and only 30 to 40 are capable enough to negotiate with owners.  The law provides criminal penalties for conducting unfair labor practices such as retaliation against union members for exercising their legal rights, but charges are rarely brought against employers and the labor courts have a large backlog of cases.  Labor organizations reported most workers did not exercise their rights to form unions, attend meetings, or bargain collectively due to fear of reprisal.  From January to December 2021, a total of 6 workers died and 163 were injured due to police interference and about 137 of them belonged to the garment sector.  The garment sector is reeling from the skilled labor crisis and missing opportunities to secure new orders from eager buyers coming to Bangladesh to procure garments after COVID-19-related factory closures in Vietnam, Cambodia, and Burma.  The local apparel industry has long courted buyers who historically have sourced from other countries to buy from Bangladesh producers.  However, in 2020, at the peak of Covid-19, Bangladesh apparel industries furloughed around 357,000 workers; following lockdown restrictions, the sector re-hired just a handful of the workers.  Some of those furloughed returned to their villages and others switched to new professions.  Industry groups are focusing on developing automation technologies and processes to boost productivity and increase production capacity.

The labor law differentiates between layoffs and terminations; no severance is paid if a worker is fired for misconduct.  In the case of downsizing or “retrenchment,” workers must be notified and paid 30 days’ wages for each year of service.  The law requires factories and establishments to notify Bangladesh’s Department of Inspection for Factories and Establishments a week prior to temporarily laying off workers due to a shortage of work or material.  Laid off workers are entitled to their full housing allowance.  For the first 45 days, they are also entitled to half their basic wages, then 25 percent thereafter.  Workers who were employed for less than one year are not eligible for compensation during a layoff.  However, the press and trade unions report employers not only fail to pay workers their severance or benefits, but also their regular wages.  In 2021 alone, workers and organizers staged 172 labor protests in the garment sector over back wages, factory layoffs, and demands to reopen closed factories.  No unemployment insurance or other social safety net programs exist, although the government had begun discussing how to establish them with the help of development partners and brands.  In early 2022, the Government of Bangladesh announced a universal pension scheme from fiscal year (FY) 2022-23.

The government does not consistently and effectively enforce applicable labor laws.  For example, the law establishes mechanisms for conciliation, arbitration, and dispute resolution by a labor court and workers in a collective bargaining union have the right to strike in the event of a failure to reach a settlement.  In practice, few strikers followed the cumbersome and time-consuming legal requirements for settlements and strikes or walkouts often occur spontaneously.  The government was partnered with the ILO to introduce a dispute settlement system within its Department of Labor.

The BLA guarantees workers the right to conduct lawful strikes, but with many limitations.  For example, the government may prohibit a strike deemed to pose a “serious hardship to the community” and may terminate any strike lasting more than 30 days.  The BLA also prohibits strikes at factories in the first three years of commercial production, and at factories controlled by foreign investors.

The U.S. government funds efforts to improve occupational safety and health alongside labor rights in the readymade garment sector in partnership with other international partners, civil society, businesses, and the Bangladeshi government.  The United States works with other governments and the International Labor Organization (ILO) to discuss and assist with additional labor reforms needed to fully comply with international labor conventions.  In early 2021, the government submitted a draft action plan to the EU and ILO describing how it planned to bring its laws and practices into compliance with international labor standards over time.  In February 2022, the government submitted the progress report to ILO and the report will be discussed in the ILO Governing Body on March 21.  The U.S. government is closely monitoring the development and implementation of the plan to ensure it sufficiently addresses long-standing recommendations.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical Source* USG or international statistical source USG or International Source of Data:  BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount  
Host Country Gross Domestic Product (GDP) ($M USD) 2020-21 $354,242 2020 $323,057 www.worldbank.org/en/country
Foreign Direct Investment Host Country Statistical Source* USG or international statistical source USG or international Source of data:  BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2020-21 $4055 2020 $723 BEA data available at https://apps.bea.gov/international/factsheet/
Host country’s FDI in the United States ($M USD, stock positions) N/A N/A 2020 $2 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data
Total inbound stock of FDI as % host GDP 2020-21 5.71% 2020 6.01% UNCTAD data available at

https://unctad.org/topic/investment/world-investment-report

*Host Country Source:  Bangladesh Bank, Bangladesh Bureau of Statistics

Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data (December 2020)
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward $18,439 100% Total Outward $314 100%
The United States $3,823 20.7% United Kingdom $88 28.0%
The United Kingdom $2,140 11.6% China, P.R. Mainland $49 15.6%
The Netherlands $1,608 8.7% India $47 15.0%
Singapore $1,504 8.2% Nepal $47 15.0%
China, P.R. Mainland $986 5.3% United Arab Emirates $39 12.4%
“0” reflects amounts rounded to +/- USD 500,000.

14. Contact for More Information

Economic/Commercial Section
Embassy of the United States of America
Madani Avenue, BaridharaDhaka — 1212
Tel: +880 2 5566-2000
Email: USTC-Dhaka@state.gov 

Maldives

Executive Summary

The Republic of Maldives comprises 1,190 islands in 20 atolls spread over 348 square miles in the Indian Ocean. Tourism is the main source of economic activity for Maldives, directly contributing close to 30 percent of GDP and generating more than 60 percent of foreign currency earnings. The tourism sector experienced impressive growth, from 655,852 arrivals in 2009 to 1.7 million in 2019, before a steep decline in 2020 resulting from the COVID-19 pandemic. Tourism began to recover in late 2020 and reached 1.3 million in 2021. This recovery in tourism will likely continue to drive the economy. Following the COVID-19 outbreak, the government re-emphasized the need to diversify, with a focus on the fisheries and agricultural sectors.

GDP growth averaged six percent during the decade through 2019, lifting Maldives to middle-income country status. Per capita GDP is estimated at USD 6,698 in 2020, the highest in South Asia. However, income inequality and a lack of employment opportunities remain a major concern for Maldivians, especially those in isolated atolls. Following the COVID-19 outbreak, GDP fell 33.5% percent in 2020. With the tourism industry’s recovery, GDP grew 31.6 percent in 2021.

Maldives is a multi-party constitutional democracy, but the transition from long-time autocracy to democracy has been challenging. Maldives’ parliament ratified a new constitution in 2008 that provided for the first multi-party presidential elections. In 2018, Ibrahim Mohamed Solih of the Maldivian Democratic Party was elected president, running on a platform of economic and political reforms and transparency, following former President Abdulla Yameen whose term in office was marked by corruption, systemic limitations on the independence of parliament and the judiciary, and restrictions on freedom of speech, press, and association. The MDP also won a super majority (65 out of 87) seats in parliamentary elections in April 2019, the first single-party majority in Maldives since 2008. President Solih pledged to restore democratic institutions and the freedom of the press, re-establish the justice system, and protect fundamental rights. Corruption across all sectors, including tourism, was a significant issue under the previous government and remains a concern.

Serious concerns also remain about a small number of violent Maldivian extremists who advocate for attacks against secular Maldivians and may be involved with transnational terrorist groups. In February 2020, attackers stabbed three foreign nationals – two Chinese and one Australian – in several locations in Hulhumalé. ISIS claimed responsibility for an April arson incident on Mahibadhoo Island in Alifu Dhaalu atoll that destroyed eight sea vessels, including one police boat, according to ISIS’ online newsletter al-Naba. There were no injuries or fatalities. Speaker of Parliament and former President Mohamed Nasheed was nearly killed in a May 6, 2021, IED attack motivated by religious extremism. Nasheed sustained life threatening injuries and several members of his security and bystanders were also injured. Nine individuals have been charged in connection with the attack, with one already convicted.

Large scale infrastructure construction in recent years contributed to economic growth but has resulted in a significant rise in debt. The Maldives’ debt-to-GDP ratio increased from 58.5 percent in 2018 to an estimated 61.8 percent in 2019 according to the World Bank (WB); this further increased to 138 percent in 2020 according to the Ministry of Finance (MoF), an increase driven by a sharp drop-off in government revenue.

Maldives welcomes foreign investment, although the ambiguity of codified law and competition from politically influential local businesses act as deterrents. U.S. investment in Maldives has been limited and focused on the tourism sector, particularly hotel franchising and air transportation. In 2021, construction, transportation, fisheries, and renewable energy also benefited from increased FDI.

On December 28, 2020, Maldives submitted an updated Nationally Determined Contribution (NDC) which includes an enhanced ambition of 26 percent decrease in emissions and carbon neutrality by 2030, conditioned on receiving financial, technological, and technical support.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2021 85 of 175 http://www.transparency.org/
research/cpi/overview
Global Innovation Index 2021 N/A https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2020 N/A https://apps.bea.gov/international/
factsheet/
World Bank GNI per capita 2020 $6,490 https://data.worldbank.org/indicator/
NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

3. Legal Regime

4. Industrial Policies

5. Protection of Property Rights

6. Financial Sector

8. Responsible Business Conduct

There is limited but growing awareness of responsible business conduct (RBC) or corporate social responsibility (CSR) among the business elite and tourism resort owners.  All new government leases for tourism resorts contain CSR requirements and individual resorts often implement their own RBC programs.  However, the government does not have a consistent policy or national action plan to promote responsible business conduct. As of March 2022, the Ministry of Economic Development is in the final stages of drafting an Industrial Relations bill and an Occupational Health and Safety bill. Both bills are scheduled to be submitted to Parliament during the first session of 2022.

Several workers’ organizations monitor and advocate for RBC regarding workers’ rights, the most active of which is the Tourism Employees Association of the Maldives (TEAM). Further, many NGOs advocate for RBC in environment-related issues. Civil society organizations (CSOs) often work together to campaign for the introduction of new laws such as an Industrial Relations Law and an Occupational Health and Safety Law. These CSOs can function without harassment from the government, though COVID-related restrictions during the pandemic made conducting their activities difficult.

9. Corruption

Maldives made significant progress in its efforts to increase its transparency, jumping from 130 out of 180 countries in the Transparency International Corruption Perception index in 2019 to 75th in 2020. Its score increased from 29 out of 100 to 43 out of 100, surpassing that of regional competitors like Sri Lanka, India, and Pakistan. In 2021, Maldives fell ten spots in the rankings and saw its score fall to 40. Still, corruption practices exist at all levels of society, threatening inclusive and sustainable economic growth.

The Solih administration has publicly pledged to tackle widespread corruption and judicial reform.  As part of President Solih’s first 100 business day agenda, he established a Presidential Commission on Corruption and Asset Recovery to investigate corruption cases originating between February 2012 and November 2018.  As of March 2022, the commission had not issued a report of its findings.  Additional measures towards increased transparency include requiring public financial disclosures for cabinet members, political appointees, and all members of parliament. On December 15, 2021, the Parliament voted to dismiss all members of the Anti-Corruption Commission (ACC) following a performance audit, which found that more than 16,000 cases were still pending.

Maldives law provides criminal penalties for corruption by officials, but enforcement is weak.  The law on prevention and punishment of corruption (2000) defines bribery and improper pecuniary advantage and prescribes punishments.  The law also outlines procedures for the confiscation of property and funds obtained through the included offenses.  Penalties range from six months to 10 years banishment, or jail terms.  According to non-governmental organizations, a narrow definition of corruption in the law, and the lack of a provision to investigate and prosecute illicit enrichment, limited the Anti-Corruption Commission’s work.

Maldives acceded to the United Nations Convention against Corruption in March 2007, and under the 2008 Constitution, an independent Anti-Corruption Commission was established in December 2008.  The responsibilities of the Commission include inquiring into and investigating all allegations of corruption by government officials; recommending further inquiries and investigations by other investigatory bodies; and recommending prosecution of alleged offenses to the prosecutor general, where warranted.  The Commission does not have a mandate to investigate cases of corruption of government officials by the private sector.

Maldives is a party to the UN Anticorruption Convention.  Maldives is not a party to the OECD Convention on Combatting Bribery.

A number of domestic human rights groups generally operated without government restriction, investigating and publishing their findings on human rights cases.  Government officials, however, often have not been cooperative or responsive to their views.  Upon assumption of office, President Solih’s administration pledged to submit a new NGO bill that would increase protections for non-government organizations. The bill completed parliamentary debate and is undergoing committee review as of March 2022.

10. Political and Security Environment

Maldives is a multi-party constitutional democracy, but the transition from long term autocracy to democracy has been challenging.  Maldives gained its independence from Britain in 1965.  For the first 40 years of independence, Maldives was run by President Ibrahim Nasir and then President Maumoon Abdul Gayoom, who was elected to six successive terms by single-party referenda.  August 2003 demonstrations forced Gayoom to begin a democratic reform process, leading to the legalization of political parties in 2005, a new constitution in August 2008, and the first multiparty presidential elections later that year, through which Mohamed Nasheed was elected president.

In February 2012 Nasheed resigned under disputed circumstances. President Abdulla Yameen’s tenure, beginning in 2013, was marked by corruption, systemic limitations on the independence of parliament and the judiciary, and restrictions on freedom of speech, press, and association.  Yameen’s tenure was also characterized by increased reliance on PRC-financing for large scale infrastructure projects, which were decided largely under non-transparent circumstances and procedures. External debt rose rapidly during his tenure.

In September 2018, Solih won his campaign for president running on a platform of economic and political reforms and transparency.  His party, the MDP, then won a super majority (65 out of 87) seats in parliamentary elections in April 2019, the first single-party majority since the advent of multi-party democracy.  President Solih pledged to restore democratic institutions and the freedom of the press, re-establish the justice system, and protect fundamental rights.

There is a global threat from terrorism to U.S. citizens and interests.  Attacks could be indiscriminate, including in places visited by foreigners and “soft targets” such as restaurants, hotels, recreational events, resorts, beaches, maritime facilities, and aircraft.  Concerns have increased about a small number of potentially violent Maldivian extremists who advocate for attacks against secular Maldivians and are involved with transnational terrorist groups.  For more information, travelers may consult the 2020 Country Reports on Terrorism at https://www.state.gov/reports/country-reports-on-terrorism-2020/maldives/.

U.S. citizens traveling to Maldives should be aware of violent attacks and threats made against local media, political parties, and civil society.  In the past there have been killings and violent attacks against secular bloggers and activists. For more information, travelers may consult the State Department’s 2020 Human Rights Report at https://www.state.gov/reports/2020-country-reports-on-human-rights-practices/maldives/ and https://travel.state.gov/content/travel/en/international-travel/International-Travel-Country-Information-Pages/Maldives.html.

Maldives has a history of political protests. Some of these protests have involved use of anti-Western rhetoric. There are no reports of unrest or demonstrations on the resort islands or at the main Velana International Airport.  Travelers should not engage in political activity in Maldives. Visitors should exercise caution, particularly at night, and should steer clear of demonstrations and spontaneous gatherings.  Those who encounter demonstrations or large crowds should avoid confrontation, remain calm, and depart the area quickly.  While traveling in Maldives, travelers should refer to news sources, check the U.S. Mission to Maldives website and https://travel.state.gov/content/travel/en/international-travel/International-Travel-Country-Information-Pages/Maldives.html for possible security updates, and remain aware of their surroundings at all times.

The U.S. Mission to Maldives is based in Colombo, Sri Lanka. There are no U.S. diplomatic personnel resident in Maldives, constraining the U.S. government’s ability to provide services to U.S. citizens in an emergency.  Many tourist resorts are several hours’ distance from Malé by boat, necessitating lengthy response times by authorities in case of medical or criminal emergencies. For more information, visit https://travel.state.gov/content/travel/en/international-travel/International-Travel-Country-Information-Pages/Maldives.html.

11. Labor Policies and Practices

Expatriate labor is allowed into Maldives to meet shortages.  Maldives Immigration reported approximately 200,000 registered expatriate workers in the country in 2019, mostly in tourism, construction, and personal services.  The government reported 63,000 unregistered expatriate migrant workers, but non-governmental sources estimate the number is even higher.  During May 2020, President Solih announced that the government would repatriate unregistered Bangladeshi nationals in the Maldives, following which the Ministry of Foreign Affairs, the Ministry of Economic Development and the Bangladeshi High Commission collaboratively began a repatriation exercise, with the assistance from the Bangladeshi government. Close to 9,000 unregistered migrant workers were repatriated under the program as of March 2022.

Notwithstanding the labor shortage, unemployment in Maldives is high, as many youths leaving lower secondary school have few in-country avenues to pursue higher secondary education.  Although resorts may offer employment opportunities, locals are less likely to take advantage of these jobs as resort employment practices require employees to live and work on the island for long stretches of time, away from family.  Religious and cultural reasons also discourage women from seeking employment on distant islands.

The Law on Foreign Investments requires Maldivian nationals to be employed unless employment of foreigners is necessary.  See section on “Performance and Data Localization” for more detail.

The 2008 the Employment Act and a subsequent amendment to the Employment Act recognize workers’ right to strike and establish trade unions; however, current law does not adequately govern the formation of trade unions, collective bargaining, and the right to association.  While the constitution provides for workers’ freedom of association, there is no law protecting it, which is required to allow unions to register and operate without interference and discrimination.  As a matter of practice, workers’ organizations are treated as civil society.

A regulation on strikes requires employees to negotiate with the employer first, and if this is unsuccessful, then the employees must file advance notice prior to a strike.  The Freedom of Peaceful Assembly Act effectively prohibits strikes by workers in the resort sector, the country’s largest money earner.  Employees in the following services are also prohibited from striking: hospitals and health centers, electricity companies, water providers, telecommunications providers, prison guards, and air traffic controllers.

Maldives became a member of the International Labor Organization in 2008 and has ratified the eight core ILO Conventions.  Maldives has not ratified the four priority governance ILO Conventions.  In 2019, the ILO called on the Government to take the necessary measures to eliminate child labor, including through adopting a national policy and a national action plan to combat child labor in the country. In November 2019, President Solih ratified the Child Rights Protection Act, which prohibits child labor. On August 2020, the government published the General Regulations under the Child Rights Protection Act.

14. Contact for More Information

Brian Husar
Political and Economic Officer
U.S. Mission Maldives
Colombo, Sri Lanka
Phone: +94-11-249-8500
Email:  commercialcolombo@state.gov 

Nepal

Executive Summary

Nepal’s annual Gross Domestic Product (GDP) is approximately USD33.7 billion, and trade totaling USD13.6 billion.  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.  The COVID pandemic further slowed reform efforts that might have made Nepal a more attractive investment destination.  Despite these challenges, foreign direct investment (FDI) into the country has been increasing in recent years.  Historically, few American companies have invested in Nepal; and yet the U.S. still features among the top 10 foreign investors in Nepal, constituting about 3% of the total FDI stock.

In 2017, the Millennium Challenge Corporation (MCC) signed a USD500 million Compact with the GoN that will focus on electricity transmission and road maintenance.  The GoN has agreed to contribute an additional USD130 million for these Compact programs.  Following years of delay, the GoN ratified the Compact on February 27 and attention has now turned to implementation. Despite the delay, MCC ratification showed that the GoN is committed to honoring its international commitments.

Nepal’s location between India and China presents opportunities for foreign investors.  Nepal also possesses natural resources that have significant commercial potential.

  • Hydropower – Nepal has an estimated 40,000 megawatts (MW) of commercially-viable hydropower electricity generation potential, which could become a major source of income through electricity exports.
  • Other sectors offering potential investment opportunities include agriculture, tourism, the ICT sector, and infrastructure. The tourism sector is slowly recovering from the downturn due to the pandemic.

Nepal offers opportunities for investors willing to accept inherent risks and the unpredictability of doing business in the country and possess the resilience to invest with a long-term mindset.  While Nepal has established some investment-friendly laws and regulations in recent years, significant barriers to investment remain.

  • Corruption, laws limiting the operations of foreign banks, lingering challenges in the repatriation of profits, controlled currency exchange facilities, prohibition of FDI in certain sectors as well as a minimum foreign investment threshold of NPR 50 million (USD415,000), and the government’s monopoly over certain sectors of the economy (such as electricity transmission and petroleum distribution), undermine foreign investment in Nepal.
  • Millions of Nepalis seek employment overseas, creating a talent drain, especially among educated youth.
  • A lack of understanding of international business standards and practices among the political and bureaucratic class, and a legal and regulatory regime that is not quite aligned with international practices also hinder, impede and frustrate foreign investors.  Nepal’s tax regime, in particular, may be inconsistent with international practices, and could trip-up foreign investors as has happened in two cases in recent years.
  • Immigration laws and visa policies for foreign workers are cumbersome.  Inefficient government bureaucratic processes, a high rate of turnover among civil servants, and corruption exacerbate the difficulties for foreigners seeking to work in Nepal.
  • Political uncertainty is another continuing challenge for foreign investors.  Nepal’s ruling parties have spent much of their energy over the last years on internal political squabbles instead of governance.
  • Nepal’s geography also presents challenges.  The country’s mountainous terrain, land-locked geography, and poor transportation infrastructure increases costs for raw materials and exports of finished goods.
  • Trade unions – each typically affiliated with parties or even factions within a political party – and unpredictable general strikes create business risk.
  • The persistent use of intimidation, extortion, and violence – including the use of improvised explosive devices – by insurgent groups targeting domestic political leaders, GoN entities, and businesses remains a source of potential instability, although the country’s most prominent insurgent group (led by Netra Bikram Chand, also known as Biplav) agreed in March 2021, to enter peaceful politics, which may reduce this threat.
Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2021 117 of 180 http://www.transparency.org/research/cpi/overview
Global Innovation Index 2021 111 of 132 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2020 N/A https://www.bea.gov/data/economic-accounts/international
World Bank GNI per capita 2020 USD1,190 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

 

1. Openness To, and Restrictions Upon, Foreign Investment

2. Bilateral Investment Agreements and Taxation Treaties

Nepal has Bilateral Investment Agreements in force with four countries:  France (1985), Germany (1988), the United Kingdom (1993), and Finland (2011).  In addition, Nepal has Bilateral Investment Agreement signed (but not in force) with Mauritius (signed 1999).  Another one was signed with India in 2011 but was terminated in 2017.

Nepal has a free trade agreement with India, the Indo-Nepal Treaty of Trade, signed in 2002.  Nepal is a member of the South Asian Free Trade Area (SAFTA) along with Bangladesh, Bhutan, India, Pakistan, Sri Lanka, and the Maldives.

Nepal is also a member of the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) Free Trade Area, along with Bhutan, Myanmar, Sri Lanka, Bangladesh, India, and Thailand.

Nepal does not have a bilateral investment treaty or free trade agreement with the United States, but has a Trade and Investment Framework Agreement (TIFA). Nepal has “Double Tax Avoidance” treaties with China, India, Mauritius, Sri Lanka, Pakistan, South Korea, Thailand, Austria, Norway, and Qatar.  The United States Embassy in Nepal (Post) is not aware of any recent or upcoming changes to the taxation regime.  Nepal’s shift to a federalist structure, however, means that there will be new tax policies at the local and provincial levels.

How consistent Nepal’s tax regime is with international standards is questionable.  In 2019, a Malaysian company, Axiata (owner of NCell, the largest private telecom company in Nepal), was made to pay $450 million for alleged tax evasion over the 2016 transfer of NCell’s ownership from its previous owners, Swedish firm Telia Sonera.  The Supreme Court’s verdict on this case has set the precedent for placing buyers on the hook for the tax liabilities of the sellers.  Axiata has taken the matter to the International Center for Settlement of Investment Disputes (ICSID), which is still deliberating on the case.    More recently, Bottlers Nepal Ltd (BNL), a subsidiary of the Coca-Cola Company, is similarly embroiled in a tax evasion dispute with the GoN in relation to a 2014 offshore transfer of ownership.  Nepal’s Department of Revenue Investigation (DRI) has taken BNL to court under the Income Tax Act 2002 and the Revenue Leakage (Investigation and Control) Act 1996.  While the final verdict is pending from the ICSID (on Ncell) and BNL’s case has only just entered the local court, the current implication of both these cases is that Nepal’s tax regime—particularly the above two Acts—needs to be carefully considered by foreign investors when buying/selling companies in Nepal to understand their local tax liabilities.

3. Legal Regime

4. Industrial Policies

5. Protection of Property Rights

6. Financial Sector

7. State-Owned Enterprises

There are 36 state-owned enterprises (SOEs) in Nepal, including Nepal Airlines Corporation, Nepal Oil Corporation, and the Nepal Electricity Authority.  Since 1993, Nepal has initiated numerous market policy and regulatory reforms in an effort to open eligible government-controlled sectors to domestic and foreign private investment.  These efforts have had mixed results.  The majority of private investment has been made in manufacturing and tourism—sectors where there is little government involvement and existing state-owned enterprises are not competitive.  Many state-owned sectors are not open for foreign investment.  Information on the annual performance of Nepal’s SOEs’ can be found on this website.  https://mof.gov.np/uploads/document/file/Annual%20Status%20Review%20of%20Public%20Enterprises%202019_20200213054242.pdf.

Corporate governance of SOEs remains a challenge and executive positions have reportedly been filled by people connected to politically appointed government ministers.  Board seats are generally allocated to senior government officials and the SOEs are often required to consult with government officials before making any major business decisions.  A 2011 executive order mandates a competitive and merit-based selection process but has encountered resistance within some ministries.  Third-party market analysts consider most Nepali SOEs to be poorly managed and characterized by excessive government control and political interference.  According to local economic analysts, SOEs are sometimes given preference for government tenders, although official policy states that SOEs and private companies are to compete under the same terms and conditions.

Private enterprises do not have the same access to finance as SOEs.  Private enterprises mostly rely on commercial banks and financial institutions for business and project financing.  SOEs, however, also have access to financing from state-owned banks, development banks, and other state-owned investment vehicles.  Similar concessions or facilities are not granted to private enterprises.  SOEs receive non-market-based advantages, given their proximity to government officials, although these advantages can be hard to quantify.  Some SOEs, such as the Nepal Electricity Authority or the Nepal Oil Corporation have monopolies that prevent foreign competitors from entering those market sectors.

The World Bank in Nepal assesses corporate governance benchmarks (both law and practice) against the OECD Principles of Corporate Governance, focusing on companies listed on the stock market.  Awareness of the importance of corporate governance is growing.  The NRB has introduced higher corporate governance standards for banks and other financial institutions.  Under the OECD Principles of Corporate Governance, the World Bank recommended in 2011 that the GoN strengthen capital market institutions and overhaul the OCR.  Although some reforms were initiated, many were never finalized and no reforms have been instituted at the OCR.

8. Responsible Business Conduct

Awareness of the general international expectations of responsible business conduct (RBC) remains very low in Nepal.  Government rules, policies, and standards related to RBC are mostly limited to environmental issues.  Social and governance issues are poorly promoted and enforced by the government.

Government laws, policies, and rules concerning RBC, including environmental and social standards, are in place.  However, the government agencies and officials responsible for enforcing them have been criticized for failing to fulfill their responsibilities.  The GoN has not drafted a national action plan for RBC and does not factor RBC policies into procurement decisions.  Workers’ organizations and unions are the most vocal entities promoting or monitoring RBC.  Other than the Department of Labor, which works with workers’ organizations and unions, government agencies do not actively encourage foreign and domestic enterprises to follow generally accepted RBC principles.  The ILO is working to promote RBC in the agricultural sector, focusing on the tea, ginger, cardamom, and dairy industries.

The GoN’s efforts to develop and enforce laws for environmental protection, consumer protection, labor rights, and human rights have been sporadic and lacking in efficacy.  Ministries and concerned departments occasionally initiate special campaigns to enforce laws and regulations protecting these rights, but this is not standard practice.  Government agencies often do not enforce these laws, and the minor penalties imposed provide minimal deterrent effect.  Post is not aware of any cases of private sector projects’ effects on human rights.

Various government agencies monitor business entities’ compliance with different standards and codes.  For example, OCR looks after governance issues, the Inland Revenue Department monitors accounting, and the Department of Labor monitors executive compensation standards.  There are no independent NGOs or investment funds focusing on promoting or monitoring RBC, although organizations like Goodweave help promote child labor-free products.

The GoN does not encourage adherence to OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas.  There are virtually no extractive industries in Nepal, other than sand mining in riverbeds and the country does not participate in the Extractive Industries Transparency Initiative.

9. Corruption

Some report that corruption is rampant in Nepal.  In the words of a World Bank official, corruption in Nepal is “endemic, institutionalized, and driven from the top.”  Corruption takes many forms but is pervasive in the awarding of licenses, government procurement, and revenue management.  The primary law used to combat corruption in Nepal is the Prevention of Corruption Act 2002.  This law prohibits corruption, bribery, money laundering, abuse of office, and payments to facilitate services, both in the public and private sector.  According to a report by GAN Integrity, a company that works with businesses to mitigate corporate risk, “implementation and enforcement [of the Prevention of Corruption Act] is inadequate, leaving the levels of corruption in the country unchallenged.”  The report goes on to note that Nepal’s judicial system is “subject to pervasive corruption and executive influence,” that “corruption is rife among low-level [police] officers,” and that “Nepali tax officials are prone to corruption, and some seek positions in the sector specifically for personal enrichment.”  The full report is available at:  https://www.ganintegrity.com/portal/country-profiles/nepal.

The CIAA is Nepal’s constitutional body for corruption control.  The 2015 constitution empowers the CIAA to conduct “investigations of any abuse of authority committed through corruption by any person holding public office.”  In practice, CIAA arrests and investigations tend to focus on lower-level government bureaucrats.  According to the 2020 Corruption Perception Index released by Transparency International (TI), Nepal ranked 117th among 180 countries, placing it in the range of “highly corrupt” countries.  In January 2018, local media reported that the CIAA is drafting a bill to replace the Prevention of Corruption Act, with the goal of making the new law compatible with the UN Convention against Corruption that Nepal signed in 2011.  Nepal is not a member of the OEDC Anti-Bribery Convention.

While anti-corruption laws extend to family members of officials and to political parties, there are no laws or regulations that are specifically designed to counter conflict-of-interest in awarding contracts or government procurement.  GoN officials are aware that there should be no conflict of interest when contracts are awarded, but how this is implemented is left to the discretion of the concerned government agency.

The GoN does not require companies to establish codes of conduct.  Post is not aware of private companies that use internal controls, ethics, and compliance programs to detect and prevent bribery of government officials, however, this does not mean that there are no companies that use such programs.  American consulting firm Frost and Sullivan (www.frost.com) maintains an office in Kathmandu and investigates local investment partners for a fee.  NGOs involved in investigating corruption do not receive special protections.

10. Political and Security Environment

In 2017, Nepal successfully held local, provincial, and national elections to fully implement its 2015 constitution.  The Madhesi population in Nepal’s southern Terai belt, together with other traditionally marginalized ethnic and caste groups, believes the constitution is insufficiently inclusive and that its grievances are not being addressed.    Post-election, however, this feeling of disenfranchisement may be somewhat assuaged due to the fact that Madhesi parties achieved a majority in the Province 2 provincial assembly elections.  The Nepal Communist Party (NCP)—formed by the merger of the Communist Party of Nepal (Unified Marxist Leninist (UML)) and the Communist Party of Nepal (Maoist Center)—swept the 2017 elections to form a two-thirds majority government in 2018.  However, internal wrangling within the NCP broke into the open and dominated much of 2020, resulting in Prime Minister KP Sharma Oli dissolving the parliament in December 2020.  Although the parliament was reinstated by the Supreme Court on February 23, 2021, a March 7 Supreme Court ruling broke up the NCP into its original constituents, the Communist Party of Nepal (CPN)-United Marxist Leninist (CPN-UML) and CPN-Maoist Center (CPN-MC) parties.  Eventually, PM Oli was ousted, and a coalition government under Nepali Congress PM Sher Bahadur Deuba is currently in office with the responsibility to hold new elections during 2022.

Criminal violence, sometimes conducted under the guise of political activism, remains a problem.  Bandhs (general strikes) called by political parties and other agitating groups sometimes halt transport and shut down businesses, sometimes nationwide.  However, in the last several years, few bandhs have been successfully carried out in Kathmandu.  Americans and other Westerners are generally not targets of violence.

U.S. citizens who travel to or reside in Nepal are urged to register with the Consular Section of the Embassy by accessing the Department of State’s travel registration site at https://step.state.gov/step,.  The Consular Section  provides updated information on travel and security on the embassy website, http://np.usembassy.gov., and can be reached through the Embassy switchboard at (977) (1) 423-4500, by fax at (977) (1) 400-7281, by email at consktm@state.gov.

U.S. citizens also should consult the Department of State’s Consular Information Sheet for Nepal and Worldwide Caution Public Announcement on the Department of State’s home page at http://travel.state.gov, by calling 1-888-407-4747 toll free in the United States and Canada, or, for callers outside the United States and Canada, by a regular toll line at 1-202-501-4444.  These numbers are available from 8:00 a.m. to 8:00 p.m. Eastern Time, Monday through Friday (except U.S. federal holidays).

Over the last ten years, there have been frequent calls for strikes, particularly in the Terai.  Occasionally, protesters have vandalized or damaged factories and other businesses.  On February 22, 2019, a small improvised explosive device (IED) was placed overnight outside the entrance of NCell, Nepal’s second largest mobile carrier.  One person died and two others were injured.  The Indian-run Arun 3 hydro-power plant has been targeted by IEDs on three occasions and in early-2018 the U.S. Embassy issued a security notice about credible threats of violence targeting the private Chandragiri Hills Cable Car attraction.  Such incidents remain infrequent, but unpredictable.  Demonstrations have on occasion turned violent, although these activities generally are not directed at U.S. citizens or businesses.  Biplav, a splinter Maoist group that threatened or attempted to extort NGOs, businesses, and educational institutions across Nepal in recent years, reached an agreement with the government in March 2021 to give up violence and enter peaceful politics.

11. Labor Policies and Practices

Nepal’s labor force is characterized by an acute lack of skilled workers and an abundance of political party-affiliated unions.  Only a small proportion (14%) of Nepal’s working age population has a secondary or above secondary education.  In Nepal, there is little demand for skilled workers, and prior to the COVID pandemic, thousands of skilled and unskilled Nepalis departed each year to work in foreign countries, primarily Qatar, the United Arab Emirates, Saudi Arabia, Kuwait, South Korea, Japan, and Malaysia.  Thousands more also sought employment in India, which shares an open border with Nepal.  Nepal’s unemployment rate of 11% and high rates of underemployment have provided push factors, but the gap between overseas migrant workers’ and domestic wage rates has made it difficult for Nepal’s agricultural and construction sectors to find enough workers, and many companies import laborers willing to work for lower wages from India.

According to the Central Bureau of Statistics, the country’s literacy rate is 65.9 percent, with the literacy rate for men at 75.1 percent and 57.4 percent for women.  Vocational and technical training are poorly developed, and the national system of higher education is overwhelmed by high enrollment and inadequate resources.  Many secondary school and college graduates are unable to find jobs commensurate with their education levels.  Hiring non-Nepali workers is not, with the exception of India, a viable option as the employment of foreigners is restricted and requires the approval of the Department of Labor.  The Act and Labor Regulations of 2018 limit the number of foreign employees a firm can employ and the length of time foreign employees can remain in Nepal to three years for those with non-specialized skills and five years for those with technical expertise.  These terms are renewable, but only after the employee has departed Nepal for at least one-year, further undermining firm’s ability to retain needed staff based on business needs.

Under Nepali law, it has historically been difficult to dismiss employees.  Labor laws differentiate between layoffs and firing.  In some cases, Nepal’s labor laws have forced companies to retain employees, even after a business has closed.  Workers at state-owned enterprises often receive generous severance packages if they are laid off.  Unemployment insurance does not exist.  Many private enterprises hire workers on a contract basis for jobs that are not temporary in nature as a way to avoid cumbersome labor laws.  In some commercial banks and other businesses, security guards, drivers, and administrative staff jobs are filled by contract workers.  The Industrial Enterprise Act of 2016 and the Labor Act of 2017 both include a “no work, no pay” provision, and the later clarifies processes for hiring and firing employees.  In practice, it remains difficult to fire workers in Nepal and the Labor Act encourages the hiring of Nepali citizens wherever possible.  Some labor union representatives said the new Labor Act 2017 is generally worker friendly.  It is unclear how effectively this law is being enforced.  The new act details requirements for time off, payment, and termination of employees.  It also has some provisions to end discrimination in the workplace.  According to the act, the employer is prohibited from discriminating against any employee based on religion, color, sex, caste and ethnicity, origin, language or belief or any other related basis.  The Labor Act also confirms that employees shall have the right to form a trade union.

By law, labor unions in Nepal are independent of the government and employer.  In practice, however, all labor unions are affiliated with political parties, and have significant influence within the government.  The constitution provides for the freedom to establish and join unions and associations.  It permits restrictions on unions only in cases of subversion, sedition, or similar circumstances.  Labor laws permit strikes, except by employees in essential services such as water supply, electricity, and telecommunications.  Sixty percent of a union’s membership must vote in favor of a strike for it to be legal, though this law is often ignored.  Laws also empower the government to halt a strike or suspend a union’s activities if the union disturbs the peace or adversely affects the nation’s economic interests; in practice, this is rarely done.  Labor unions have staged frequent strikes, often unrelated to working conditions, although they have become less frequent and less effective in recent years.  Political parties will frequently call for national strikes that are observed only in particular regions or that only last for a few hours.  In the past year, Post is not aware of any strike that lasted long enough to pose an investment risk.  The SEZ Act approved in August 2016 prohibits workers from striking in any SEZ.  There are two SEZs that are partially operational, but the GoN hopes to eventually have as many as 15.  However, private sector interest in SEZs has been lukewarm.

Total union participation is estimated at about one million, or about 10 percent of the total workforce.  The three largest trade unions are affiliated with political parties.  The Maoist-affiliated All Nepal Trade Union Federation (ANTUF) is the most active and its organizing tactics have led to violent clashes with other trade unions in the past.  The ANTUF and its splinter group, the ANTUF-R, are aggressive in their defense of members and frequently engage in disputes with management.  Labor union agitation is often conducted in violation of valid contracts and existing laws, and unions are rarely held accountable for their actions.

Collective bargaining is only applied in establishing workers’ salaries.  Trade unions, employers, and government representatives actively engage in this practice.  Nepal’s Labor Act, updated in 2017, includes two types of labor dispute resolution mechanisms, one for individual disputes and one for collective disputes for businesses with 10 or more employees.  If a dispute cannot be resolved by the employee and management, the case is forwarded for mediation.  If mediation is unsuccessful, it is settled through arbitration.  For individual disputes, the employee is required to submit an application to the business regarding their claim.  The company’s management should then discuss the claim with the employee in order to settle it within 15 days.  If a claim made by the employee cannot be settled between the employee and the company, the issue may be forwarded to the Department of Labor where discussions shall be held in the presence of Department of Labor officials.  If the employee is not satisfied with the decision made by the Department of Labor, they can appeal to the Labor Court.

The Labor Act is applicable only to companies, private firms, partnerships, cooperatives, associations, or other organizations in operation or established, incorporated, registered, or formed under prevailing laws of Nepal regardless of their objective to earn profit or not.  The Labor Act does not apply to the following entities:  Civil Service, Nepal Army, Nepal Police, Armed Police Force, entities incorporated under other prevailing laws or situated in Special Economic Zones to the extent separate provisions are provided, and working journalists, unless specifically provided in the contract.

Nepal’s enforcement of regulations to monitor labor abuses and health and safety standards is weak.  Operations in small towns and rural areas are rarely monitored.  International labor rights are recognized within domestic law.  No new labor-related laws have been enacted in the past year.

The GoN does not fully meet the minimum standards for the elimination of trafficking in persons, though it is making significant efforts to do so.  The definition of human trafficking under Nepal’s Human Trafficking and Transportation (Control) Act (HTTCA) does not match the definition of human trafficking under international law.  In June 2020, Nepal formally acceded to the Palermo Protocol. Children in Nepal are engaged in child labor, including in the production of bricks, carpets, and embellished textiles, although the GoN claims to be serious about ending child labor.  The Labor Inspectorate’s budget, the number of labor inspectors, and relevant resources and training are all insufficient for effective enforcement of Nepal’s labor laws, including those related to child labor.  The most recent Human Rights Report can be found at:  https://www.state.gov/reports/2020-country-reports-on-human-rights-practices/.  The Department of Labor’s 2018 Findings on the Worst Forms of Child Labor is available at:   https://www.dol.gov/agencies/ilab/resources/reports/child-labor/nepal

Nepal has a modest level of trade with the United States, with USD180 million in bilateral trade in 2020 (down from USD214 million the previous year).  In late 2016, the Nepal Trade Preferences Program – which grants duty free access to certain products made in Nepal – went into effect.  Nepal exported approximately USD2.4 million worth of goods in 2020 under this program (down from USD3.1 million the previous year).  To remain eligible for this program, Nepal must meet certain labor standards.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data:  BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) N/A N/A 2020 USD33.7 www.worldbank.org/en/country
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:  BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2020 USD51.7 N/A https://apps.bea.gov/international/factsheet/
Host country’s FDI in the United States ($M USD, stock positions) 2021 USD 0 2021 USD 0 Not permitted under Nepali law
Total inbound stock of FDI as % host GDP N/A 2020 5% https://unctad.org/topic/investment/world-investment-report

* Source for Host Country Data: Nepal Rastra (central) Bank

Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward USD1,682 100% Total Outward Amount 100%
India USD529 31% N/A
China, P.R.: Mainland USD262 16% N/A
West Indies (St. Kitts & Nevis) USD129 8% N/A
Ireland USD109 7% N/A
Singapore USD105 6% N/A
“0” reflects amounts rounded to +/- USD 500,000.

Nepalis are prohibited from investing abroad as per the Act Restricting Investment Abroad (ARIA), 1964.  Post has heard this Law might be abrogated soon, but as of April 2022, no outward investment is permitted from Nepal.

14. Contact for More Information

Raphael Sambou
Economic/Commercial Officer
U.S. Embassy Kathmandu
+977 1 423 4192
Email:  sambour@state.gov

Abhishek Basnyat
Economic Specialist
U.S. Embassy Kathmandu
+977 1 423 4469
Email:  basnyatap@state.gov

Sri Lanka

Executive Summary

Sri Lanka, a lower middle-income country with a Gross Domestic Product (GDP) per capita of about $3,680 and a population of approximately 22 million, is experiencing an economic crisis stemming from an unsustainable debt load and perennial deficits on both the international balance of payments and the government budget. The island’s strategic location off the southern coast of India along the main east-west Indian Ocean shipping lanes gives Sri Lanka a regional logistical advantage, especially as India does not have deep-water ports comparable to what Sri Lanka offers. Sri Lanka is transitioning from a predominantly rural-based economy to a more urbanized economy focused on manufacturing and services. Sri Lanka’s export economy is dominated by apparel and cash-crop exports, mainly tea, but technology service exports are a significant growth sector.

Prior to the April 21, 2019, Easter Sunday attacks, the tourism industry was rapidly expanding, but the attacks led to a significant decline in tourism that continued into 2020 and 2021 due to COVID-19 and the government’s related decision to close its main international airport for commercial passenger arrivals in March 2020. After reopening to visitors early in 2021, tourism revenue for the year reached $261 million, dropping 61 percent year-over-year (YoY) compared to $682 million in 2020. Migrant labor remittances are a significant source of foreign exchange, which saw an increase in 2020 due to the collapse of informal money transfer systems during the pandemic, despite the job losses to Sri Lankan migrant workers, especially in the Middle East. However, worker remittances saw a decline of 22.7 percent in 2021, largely due to inflationary pressures and the expectation of a future depreciation of the exchange rate, which occurred in March 2022. Remittances totaled $5.4 billion for 2021 in comparison to $7.1 billion in 2020.

The administration of President Gotabaya Rajapaksa, who was elected in November 2019, has attempted to promote pro-business positions, including announcing tax benefits for new investments to attract foreign direct investment (FDI). As outlined in its election manifesto, the Rajapaksa government’s economic goals include positioning Sri Lanka as an export-oriented economic hub at the center of the Indian Ocean (with government control of strategic assets such as Sri Lankan Airlines), improving trade logistics, attracting export-oriented FDI, and boosting firms’ abilities to compete in global markets. However, COVID-19 and the subsequent lockdowns brought new economic challenges, forcing the government to adapt policies to the situation on the ground. In April 2020, the Ministry of Finance restricted imports of luxury and semi-luxury consumer products such as consumer durables, motor vehicles, and the import of certain agricultural products as a means of saving foreign reserves and creating employment in labor intensive agriculture. Further restrictions on goods deemed non-essential were added in March 2022. With the IMF estimating a public debt-to-GDP ratio at 118.9 percent (of which 65.6 percent is foreign debt), Sri Lanka is facing a liquidity crisis that is exacerbated by an increasing trade deficit. Exports have helped buoy Sri Lankas FX reserves, growing 19.9 percent in 2021. However, imports continued to outstrip this growth by a significant margin with an increase of 46.8 percent in 2021. Exports of goods increased by 24.4 percent to $12.5 billion in 2021, up from $10 billion in 2020. Exports of services for the year 2020 amounted to $3 billion, down from $7.5 billion in 2019.

In September 2021, the government committed to cease building new coal-fired power plants and achieve net-zero carbon emissions by 2050 at the United Nations International Energy Forum. Sri Lanka has set a target of achieving 70 percent of all its electricity generation from renewable sources by 2030. However, renewable energy companies accuse the Ceylon Electricity Board of being in arrears to the tune of $60 million (as of May 2022) after not paying for renewable energy supplied to the national grid since August 2021.

FDI in Sri Lanka has largely been concentrated in tourism, real estate, mixed development projects, ports, and telecommunications in recent years. With a growing middle class, investors also see opportunities in franchising, information technology services, and light manufacturing for the domestic market. The Board of Investment (BOI) is the primary government authority responsible for investment, particularly foreign investment, aiming to provide “one-stop” services for foreign investors. The BOI is committed to facilitating FDI and can offer project incentives, arrange utility services, assist in obtaining resident visas for expatriate personnel, and facilitate import and export clearances.

Sri Lanka’s GDP grew by 3.6 percent according to the International Monetary Fund (IMF) in 2021 and is expected to grow by 3.3 percent in 2022. FDI rose to approximately 0.9 percent of GDP in 2021, higher than the 0.5 percent in 2020 and 0.8 percent in 2019 and half of the 1.8 percent in 2018. The IMF projects a GDP growth of 1.2 percent in 2022.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2021 102 of 180 http://www.transparency.org/research/cpi/overview
Global Innovation Index 2021 95of 132 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2020 USD $165 million https://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2020 USD $3,720 https://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

3. Legal Regime

4. Industrial Policies

5. Protection of Property Rights

6. Financial Sector

7. State-Owned Enterprises

SOEs are active in transport (buses and railways, ports and airport management, airline operations); utilities such as electricity; petroleum imports and refining; water supply; retail; banking; telecommunications; television and radio broadcasting; newspaper publishing; and insurance. Following the end of the civil war in 2009, Sri Lankan armed forces began operating domestic air services, tourist resorts, and farms crowding out some private investment. In total, there are over 400 SOEs of which 55 have been identified by the Sri Lanka Treasury as strategically important, and 345 have been identified as non-commercial.

8. Responsible Business Conduct

The concept of Corporate Social Responsibility (CSR) is more widely recognized among Sri Lankan companies than Responsible Business Conduct (RBC). Leading companies in Sri Lanka actively promote CSR, and some SMEs have also started to promote CSR. CSR Sri Lanka is an apex body initiated by 40 leading companies to foster CSR. The Ceylon Chamber of Commerce actively promotes CSR among its membership. The SEC, together with the Institute of Chartered Accountants of Sri Lanka, published a Code of Best Practices on Corporate Governance in order to establish good corporate governance practices in Sri Lankan capital markets. Separate government agencies are tasked with protecting individuals from adverse business impacts in relation to labor rights, consumer protection, and environmental protections, although the effectiveness of these agencies is questioned by some. The government has not launched an initiative to promote RBC principles, such as the OECD Guidelines for Multinational Enterprises and the United Nations Guiding Principles on Business and Human Rights. The government also does not participate in the Extractive Industries Transparency Initiative (EITI) although Sri Lanka has mineral resources including graphite, mineral sands, and gemstones.

9. Corruption

While Sri Lanka has generally adequate laws and regulations to combat corruption, enforcement is often weak and inconsistent. U.S. firms identify corruption as a major constraint on foreign investment, but generally not a major threat to operating in Sri Lanka once contracts have been established. The business community claims that corruption has the greatest effect on investors in large projects and on those pursuing government procurement contracts. Projects geared toward exports face fewer problems. A Right to Information Act came into effect in February of 2017 which increased government transparency.

The Commission to Investigate Allegations of Bribery or Corruption (CIABOC or Bribery Commission) is the main body responsible for investigating bribery allegations, but it is widely considered ineffective and has reportedly made little progress pursuing cases of national significance. The law states that a public official’s offer or acceptance of a bribe constitutes a criminal offense and carries a maximum sentence of seven years imprisonment and fine. Bribery laws extend to family members of public officials, but political parties are not covered. A bribe by a local company to a foreign official is also not covered by the Bribery Act and the government does not require private companies to establish internal codes of conduct that prohibit bribery of public officials. Thus far, the Bribery Commission has focused on minor cases such as bribes taken by traffic police, wildlife officers, and school principals. These cases reportedly follow a pattern of targeting low-level offenses with prosecutions years after the offense followed by the imposition of sentences not always proportionate to the conduct (i.e., sometimes overly strict, other times overly lenient).

Government procurement regulations contain provisions on conflicts-of-interest in awarding contracts or government procurement. While financial crime investigators have developed a number of cases involving the misappropriation of government funds, these cases have often not moved forward due to lack of political will, political interference, and lack of investigative capacity. Sri Lanka signed and ratified the UN Convention against Corruption in March of 2004 and the UN Convention against Transnational Organized Crime in 2006. Sri Lanka is a signatory to the OECD-ADB Anti-Corruption Regional Plan but has not joined the OECD Anti-Bribery Convention.

10. Political and Security Environment

The government’s military campaign against the Liberation Tigers of Tamil Eelam (LTTE) ended in May 2009 with the defeat of the LTTE. During the civil war, the LTTE had a history of attacks against civilians, although none of the attacks were intentionally directed against U.S. citizens. On April 21, 2019, terrorist attacks targeted several churches and hotels throughout Colombo and in the eastern city of Batticaloa, killing more than 250 people, including over 40 foreigners, five of whom were Americans. In the aftermath of the attacks, the government imposed nationwide curfews and a temporary ban on some social media outlets.

Public opposition to the current government and growing outrage over power, fuel, and food shortages morphed into a largescale protest movement in March 2022. Since then, peaceful protests have been noted nearly every day both in Colombo and across the country, including an ongoing encampment in central Colombo next to the Presidential Secretariat. As public concern grows, some protests have turned violence due to clashes with pro-government protesters or security forces, such as a confrontation between protesters and police on April 19 in a city about 100 km from Colombo. In addition, protesters have surrounded and entered (or attempted to enter) the residences and offices of MPs and officials, and police have sometimes used tear gas and water cannons to disperse protesters. The worst violence occurred on May 9, when attacks by pro-government supporters on two major protest sites in Colombo triggered a wave of retaliatory violence in which anti-government protesters set fire to or vandalized approximately 100 homes and other properties around the country belonging to or affiliated with government MPs and officials. Violence continued into the next day, with busses and cars burned on the streets and dozens of people seriously injured. Declaring a state of emergency, the government worked with the military to restore order to the streets. While subsequent protests have mostly been peaceful, the situation remains volatile and ongoing shortages of essentials and power cuts continue to cause distress.

11. Labor Policies and Practices

Both local and international businesses have cited labor shortages as a major problem in Sri Lanka. In 2020, 8.1 million Sri Lankans were employed: 46 percent in services, 27 percent in industry and 26 percent in agriculture. Approximately 70 percent of the employed are in the informal sector. The government sector also employs over 1.4 million people.

Sri Lanka’s labor laws afford many employee protections. Many investors consider this legal framework somewhat rigid, making it difficult for companies to reduce their workforce even when market conditions warrant doing so. The cost of dismissing an employee in Sri Lanka is calculated based upon a percentage of wages averaged over 54 salary weeks, one of the highest in the world. There is no unemployment insurance or social safety net for laid off workers.

Labor is available at relatively low cost, though higher than in other South Asian countries. Sri Lanka’s labor force is largely literate (particularly in local languages), although weak in certain technical skills and English. The average worker has eight years of schooling, and two-thirds of the labor force is male. The government has initiated educational reforms to better prepare students for the labor market, including revamping technical and vocational education and training. While the number of students pursuing computer, accounting, business skills, and English language training programs is increasing, the demand for these skills still outpaces supply with many top graduates seeking employment outside of the country.

Youth are increasingly uninterested in labor-intensive manual jobs, and the construction, plantation, apparel, and other manufacturing industries report a severe shortage of workers. The garment industry reports up to a 40 percent staff turnover rate. Lack of labor mobility in the North and East is also a problem, with workers reluctant to leave their families and villages for employment elsewhere

A significant proportion of the unemployed seek “white collar” employment, often preferring stable government jobs. Most sectors seeking employees offer manual or semi-skilled jobs or require technical or professional skills such as management, marketing, information technology, accountancy and finance, and English language proficiency. Investors often struggle to find employees with the requisite skills, a situation particularly noticeable as the tourism industry opens new hotels.

Many service sector companies rely on Sri Lankan engineers, researchers, technicians, and analysts to deliver high-quality, high-precision products and retention is reasonably good in the information technology sector. Foreign and local companies report a strong worker commitment to excellence in Sri Lanka, with rapid adaptation to quality standards.

Women face workforce restrictions such as caps on overtime work, limits on nighttime shifts and restrictions from certain jobs. In 2021 the labor market was characterized by high female unemployment and low female labor force participation: an estimated 55 percent of public sector employees were men and 45 percent women while 70 percent of employees outside the public sector were men and only 30 percent women.

14. Contact for More Information

Luis Salas
Economic Officer
U.S. Embassy Colombo, Sri Lanka
Phone: +94-11-249-8500
Email: commercialcolombo@state.gov 

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