Nepal’s annual Gross Domestic Product (GDP) is approximately USD36.3 billion, and trade totaling USD15.9 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 coupled with a fresh bout of political instability 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 2.9% 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 agreement includes an additional contribution of USD130 million from the GoN. Following years of delay, Nepal’s parliament ratified the Compact on February 27, 2022, and attention has now turned to implementation, expected to begin in August 2023. 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 recovering from the downturn due to the pandemic.
Nepal offers opportunities for investors willing to accept the inherent risks and unpredictability of doing business in the country and who 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, including the following reported by the business community:
- 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 20 million (USD154,000), and the government’s monopoly over certain sectors of the economy (such as electricity transmission and petroleum distribution), undermine foreign investment in Nepal. Political uncertainty is a continuing challenge for foreign (as well as domestic) investors. Nepal’s ruling parties have spent much of their energy over the last years on internal political power struggles instead of governance. While fresh elections in November 2022, and a new government has raised hopes for political stability, this is not guaranteed. Political instability often engenders policy stagnation and uncertainty.
- 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 impede, hinder, and frustrate foreign investors. Elements of 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.
- Millions of Nepalis seek employment overseas, creating a talent drain, especially among educated youth.
- 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.
- 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 can create business risk, although this problem, once common, has diminished in recent years.
- The potential 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 this threat too has diminished in recent years (the country’s most prominent insurgent group—led by Netra Bikram Chand, also known as Biplav—agreed in March 2021, to enter peaceful politics, for example.)
|TI Corruption Perceptions Index||2022||110 of 180||http://www.transparency.org/research/cpi/overview|
|Global Innovation Index||2022||111 of 132||https://www.globalinnovationindex.org/analysis-indicator|
|U.S. FDI in partner country ($M USD, historical stock positions)||2021||N/A||https://apps.bea.gov/international/factsheet/|
|World Bank GNI per capita||2021||USD 1,220||http://data.worldbank.org/indicator/NY.GNP.PCAP.CD|