In the first two months of the current fiscal year (2023/24), Nepal saw a decline in Foreign Direct Investment (FDI) commitments, amounting to NPR 12.98 billion, an 11.20% decrease compared to NPR 14.62 billion pledged during the same period last fiscal year. This drop in investment commitments raises concerns about Nepal’s ability to attract and retain foreign investors, a crucial component of economic development.

A Closer Look at the Numbers

During the first month of Shrawan (mid-July to mid-August), FDI commitments reached NPR 9.15 billion. However, the following month of Bhadra (mid-August to mid-September) saw a sharp decline, with only NPR 3.83 billion committed. Comparatively, in the corresponding months of the previous fiscal year, the commitments stood at NPR 11.93 billion in Shrawan and NPR 2.69 billion in Bhadra. These figures indicate a fluctuating interest from foreign investors, which, if continued, could hinder Nepal’s economic growth targets.

Although FDI commitments throughout the previous fiscal year reached NPR 54.87 billion, only NPR 8.46 billion was actually invested. This significant gap between committed and actual investments highlights a persistent issue in Nepal's FDI landscape.

Factors Affecting Low FDI Inflows

One of the primary reasons behind the disparity between FDI commitments and actual inflows is the absence of a policy mandating that all pledged funds must be realized within a given timeframe. As pointed out by various stakeholders, the government permits foreign investors to bring in their capital in phases or installments, which leads to delays in investment realization.

Additionally, there is no assurance that all committed funds will materialize, especially when investors face hurdles such as bureaucratic red tape, regulatory uncertainty, and infrastructure bottlenecks.

Government’s Efforts to Revitalize FDI

To combat the declining FDI trend, the government has implemented more flexible policies. Last Baisakh (mid-April to mid-May), during the third investment summit, Nepal introduced an automatic route for foreign investment approvals. This system allows both domestic and foreign investments in industries with a total capital of up to NPR 500 million without requiring individual government approval.

The IT sector, in particular, has been a focal point for easing investment regulations. The removal of the minimum investment ceiling in the IT industry aims to attract smaller, high-potential investments. However, despite the promise, the full implementation of this policy is still pending.

The Current Landscape and Future Outlook

While FDI commitments continue to show potential, the actual inflows tell a different story. Last fiscal year, Nepal saw gross FDI inflows of NPR 19.21 billion. However, when accounting for NPR 650.87 million in old investments that left the country, the net FDI inflows were NPR 18.56 billion. This discrepancy between gross and net inflows signals the need for further reforms in the investment process to ensure a more stable and favorable environment for foreign investors.

Moreover, the government has already begun reviewing the minimum FDI limits in sectors such as IT, with a view to possibly removing them entirely. Although the automatic route for IT-based investments has seen the ceiling abolished, it remains to be seen if this policy change will lead to a tangible increase in FDI.

Conclusion

The decline in FDI commitments in the first two months of the current fiscal year reflects underlying challenges in Nepal’s investment landscape. While the government has taken steps to introduce more flexible policies, such as lowering the FDI ceiling and creating automatic approval routes, further reforms are essential to close the gap between commitments and actual inflows. To ensure sustained economic growth and global competitiveness, Nepal must continue to focus on policy reform, infrastructure development, and improving the ease of doing business for foreign investors.

Nepal’s future as an attractive investment destination will depend on its ability to implement and enforce investor-friendly policies, and ensure that committed foreign funds translate into real investments that can drive growth and development. 

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