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.
|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.
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 firstname.lastname@example.org.
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
|Host Country Statistical source*||USG or international statistical source||USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other|
|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
|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%|
|China, P.R.: Mainland||USD262||16%||N/A|
|West Indies (St. Kitts & Nevis)||USD129||8%||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
U.S. Embassy Kathmandu
+977 1 423 4192
U.S. Embassy Kathmandu
+977 1 423 4469