Despite continuous reforms, FDI in Nepal is still struggling. Uncover the hidden challenges behind the decline in foreign investment and what Nepal must do to turn the tide.

Imagine you’ve been dreaming of building a house, and you’ve been told that all the materials and tools you need are already lined up and ready. You’re excited, but when it’s time to actually start building, you realize that a lot of the promised resources are nowhere to be found. That’s kind of what Nepal is going through right now with its economic goals.

Nepal has set a pretty ambitious target: to become a middle-income country by 2026. To hit that goal, the country needs tons of investment from outside its borders. This is what we call Foreign Direct Investment, or FDI. FDI is basically money that comes from foreign countries to build businesses or projects in Nepal, like setting up factories, investing in technology, or opening new companies.

But here's the problem: FDI has been dropping like crazy. In just six years, Nepal’s FDI has dropped by a huge 70%. In 2019, foreign investors put in $185 million. By 2024, that number dropped to just $57 million. That’s a big decline, and it’s raising some serious concerns about whether Nepal will be able to meet its economic goals.

It’s kind of like having a pile of building materials but not enough to actually get the construction going. And despite the government trying to make Nepal more attractive to investors, this drop in FDI shows that something isn't working. So, why is this happening?

The FDI Crisis: Understanding the Numbers

Let’s dive into the numbers a bit more. In 2019, Nepal saw $185 million in FDI come in. Not bad, right? But by 2024, that number had dropped to $57 million. That’s a 70% decline in just six years! Imagine if you had a business and suddenly your investments dropped that much, it would be a big red flag for the future.

Now, here’s the thing: Even though Nepal is getting less FDI each year, the total amount of foreign investment in the country (called FDI stock) has actually gone up. Basically, FDI stock is just the total value of all the foreign investments that have already been made in Nepal over the years. In 2024, the FDI stock was $8.28 billion, way up from just $72 million back in 2000.

So, on the surface, that sounds like good news, right? Not really. While the total amount of investment in the country is growing, the problem is that Nepal isn’t getting enough new investments every year. It’s like having a savings account that keeps growing but not having a steady flow of new income coming in. The money in Nepal is fine, but to really grow, the country needs fresh investments coming in regularly.

It might sound a bit confusing, but the bottom line is: Nepal’s not in bad shape with the investments already here, but for real growth, the country needs a steady stream of new investments. So, why isn’t that happening, especially with all the changes and investment summits the government has made to attract more foreign money? Let’s take a closer look.

Nepal’s Bold Moves to Attract FDI

Nepal has made some bold moves to try and attract more foreign money into the country. But while the changes sound good, the reality is that the amount of foreign investment still isn’t where it needs to be. Let’s take a look at what Nepal has done to try to get more FDI in Nepal and why it’s still a tough road ahead.

1. Investment Summits: Making Noise on the Global Stage

One of Nepal’s main strategies for attracting foreign investors has been through its Investment Summits. These are big events designed to show off Nepal’s potential and connect foreign investors with local opportunities.

• 2017 Summit: This was Nepal’s first real push to get investors interested. It raised some eyebrows, but it was really just the beginning of the journey.
• 2019 Summit: By the second summit, things really started to heat up. It wasn’t just about networking anymore, it was about getting serious commitments. The summit brought in Rs. 37.80 billion in FDI pledges in Nepal, which is a big deal!
• 2024 Summit: The latest summit in 2024 was by far the most exciting. Over 1,000 participants showed up, and 50+ speakers discussed everything from energy to tourism and technology. The big difference this time? The private sector worked alongside the government to organize it, making the whole thing feel more professional and collaborative. The result? Rs. 61.78 billion in FDI commitments, the second-largest amount ever pledged for Nepal.

While these summits are great at getting people excited and generating promises, the challenge is turning those commitments into real investments that actually benefit the economy. There’s still a gap between the pledges made at the summits and the actual money that arrives in Nepal.

2. Automatic Route System: Speeding Things Up

In 2023, Nepal introduced the Automatic Route System, which is designed to make things easier for foreign investors. Before this, getting approval to invest in Nepal could take forever, with lots of paperwork and back-and-forth. But now, investors can get approval for investments up to Rs. 500 million (about USD 3.7 million) in just 24 hours; thanks to an online application system called the One-Door Portal.

This system covers several key sectors:

• Energy (wind, solar, biomass)
• Agriculture and Forestry (fruit processing, tea and coffee)
• Manufacturing
• IT services (with no minimum investment limit)
• Infrastructure (things like parking facilities)
• Tourism
• Service sectors (everything from hotels to consulting)

For the 2023/24 fiscal year, 274 projects were approved using the automatic route. That’s a huge jump from just 22 projects the year before, showing that the system is definitely helping speed things up. But here’s the catch: the system mostly attracts smaller projects. The total money that 274 projects brought in was merely Rs. 3.20 billion.The bigger challenge is figuring out how to bring in the big, long-term investments that are needed to truly grow the economy.

3. Removal of Minimum Investment Limits for IT

In 2024, Nepal took another major step by removing the minimum investment limit for IT companies. Before, investors needed to put in at least Rs. 50 million to start an IT business in Nepal. Now, there’s no minimum. Any IT company, big or small, can get started in Nepal.

This is a big win for startups and small businesses, especially in the tech world, where smaller investments can lead to big rewards. The hope is that this will bring in more tech entrepreneurs and make Nepal a more attractive place for global IT companies. The question now is whether this will create sustained growth or just bring in smaller projects that don’t make a huge economic impact in the long run.

The Real Obstacles: Why FDI in Nepal Isn’t Picking Up Speed

So, why aren’t all these great reforms leading to a flood of FDI in Nepal? The simple truth is that while Nepal has done a lot to attract foreign investors, there are still a few big challenges that need to be solved before FDI really takes off. Let’s break it down:

1. Big Pledges, Thin Disbursements

Here’s the problem: While the Investment Summits generate big commitments, like the Rs. 61.78 billion from 2024, only a small percentage of those promises actually turn into real investments. In fact, only about 13–35% of the pledges made at these summits actually result in money coming into Nepal.

Even with the automatic route, most of the projects approved are small-scale (under Rs. 500 million) or in IT outsourcing, which doesn’t have the long-term impact that Nepal needs. These smaller projects are great, but they don’t create the kinds of high-paying jobs or boost the economy on a large scale. The real challenge for Nepal is how to bring in the big investments that will make a real difference in the economy.

2. Constantly Changing Policies 

When it comes to attracting FDI in Nepal, the policy landscape can feel like a bit of a puzzle. Imagine trying to navigate a system where the rules keep changing, and you’re left wondering which direction to go next. That’s exactly what foreign investors are facing in Nepal. Let’s look at a few of those:

a. Taxation on Royalty 

Take taxation on royalties and technical service fees, for example. The law says there’s a 15% withholding tax on these payments, but it’s not always clear whether they should be treated as regular business expenses or as dividends. And when they’re taxed like dividends, it can feel like a double whammy for investors, adding an unnecessary burden that leaves them scratching their heads.

b.  Foreign Investment and Technology Transfer Act (FITTA)

Then there’s the Foreign Investment and Technology Transfer Act (FITTA). In its original form and even after the updates, it still requires investors to jump through several hoops to get approvals, depending on the size of their investment. Think of it like having to ask for permission from different bosses at each level of your company, even when you just want to get a simple task done. Compared to the more streamlined processes in neighboring countries, this just adds to the frustration.

c. The ‘Negative List’

But wait, it gets more confusing. Nepal has a “negative list” of sectors where FDI is either restricted or completely banned. These include areas like consultancy services and retail trading, which makes sense for some industries, but not when it means blocking out expertise in areas that could really help Nepal grow. The rigidity of the list, without room for flexibility, can turn away potential investors who could make a real impact.

Even when Nepal introduces progressive policies, like the One-Door Policy meant to streamline approvals, they don’t always live up to the hype. Investors still find themselves having to deal with multiple agencies, which defeats the purpose of a single point of contact. The whole process ends up feeling more like a game of phone tag than a smooth system for foreign investment.

d. Cumbersome Payment Approval Process for Foreign Service Providers

One big problem Nepal faces while doing business is its payment regulations to foreign service providers. There are a lot of bureaucratic hoops that make it harder for businesses to send payments and get things moving smoothly. For example: here’s how it works if a business in Nepal is making a payment to service provider in India:

• If payments to foreign service providers exceed INR 3,000,000, you need approval from both the regulatory body of the concerned business and Nepal Rastra Bank (NRB).
• Payments up to INR 3,000,000 need the recommendation from the regulatory body only. NRB tried to simplify the process. 

But then the concerned stakeholders still play by the earlier rules. For example: the Department of Industry, the regulatory body in case of many industries, issues the recommendation letter in the name of the Nepal Rastra Bank. And if you take that letter to a commercial bank, the bank shrugs off saying the letter should be addressed to it and not the central bank. And if you go back to the Department of Industry, it simply says that it cannot issue a letter directly to the commercial bank and only the central bank can do so. So, eventually, you end up applying for approval from the Nepal Rastra Bank even though it may have removed the requirements. A lack of communication or coordination or just literal interpretation of the regulations, at the end, the business suffers even to make a simple payment for the services that are necessary to keep it running. This delays the payment and many times leads to disputes and even contract termination because the foreign service providers are highly professional and strict with the payment terms.

3. Getting Capital In and Out of Nepal

When foreign investors want to take their money out of Nepal, they face a lot of hurdles. They need approval from Nepal Rastra Bank, they need to provide audited accounts, and they need to get tax clearance. On top of that, dividends that are sent back to their home countries are still subject to a 5% withholding tax, making it harder to bring capital in and out of Nepal easily.

This foreign-exchange complexity makes Nepal less appealing to foreign investors, who generally prefer smoother processes for moving money around.

4. Taxation: A System That Raises More Questions Than Answers

Nepal’s tax system is another big issue. Investors often face confusion and inconsistency with VAT refunds, export incentives, and local tax surcharges. These inconsistencies eat into profits and make it harder for investors to plan effectively. The royalty-as-dividend tax and unexpected local taxes also raise concerns for foreign companies, making it seem like doing business in Nepal is more trouble than it’s worth.

5. Political Instability: A Wild Ride for Foreign Investors

Finally, there’s the issue of political instability. Nepal’s political situation is known for its frequent changes in government, which can delay important projects like land leases or power agreements. This uncertainty makes it hard for foreign investors to commit to long-term projects when they can’t predict what will happen in the next election or government change.

Beyond Policies: Structural Barriers to FDI in Nepal

Now that we’ve looked at the issues preventing FDI in Nepal from growing, it’s time to look at some of the deeper, structural barriers that are still holding the country back from attracting the level of investment it needs to thrive. These barriers aren’t always about policy changes, they’re about long-standing problems that need to be addressed at their core.

1. Lack of Large-Scale Investments

Most of the FDI in Nepal coming in right now is for small projects. While small businesses and IT outsourcing firms are important, Nepal needs large-scale investments in sectors like energy, infrastructure, and tourism to truly make a difference in the economy. These big projects are what create thousands of jobs, bring in massive capital, and help build the country’s infrastructure. But so far, Nepal hasn’t quite figured out how to attract these types of high-impact investments.

2. Competing for Attention: Nepal vs. Its Neighbors

Nepal isn’t the only country vying for foreign money. India, Bangladesh, and other countries in the region are doing their best to attract foreign investors, too. They have larger markets, better infrastructure, and sometimes even more incentives for investors. This makes it harder for Nepal to stand out as the go-to destination for FDI in South Asia.

3. Political Instability and Governance Issues

As mentioned earlier, Nepal’s political instability is a major barrier to FDI in Nepal. Frequent changes in government can delay approvals for land leases, power agreements, and other critical infrastructure projects. Foreign investors need to be confident that their projects won’t be put on hold due to political changes, but in Nepal, this uncertainty creates a "wait and see" attitude among investors.

4. Regulatory Hurdles

Even though Nepal has implemented reforms like the One-Door Portal to streamline the approval process, multiple government agencies still don’t always work well together. Investors are often faced with conflicting advice from different departments, which slows down the process and makes it feel more complicated than it should be.

What Needs to Change: Key Areas for Reform

So, how can Nepal fix these issues and finally attract the FDI it so desperately needs? There are a few key areas where reform is urgently needed. Let’s dive into what Nepal can do to turn things around and create a more attractive investment environment.

1. Simplifying the Approval Process: Speed Up the System

One of the most important changes Nepal can make is to simplify the approval process. While the One-Door Portal is a good start, the system still needs to be faster and more efficient. Nepal needs to cut down on the red tape and make sure approvals happen quickly and without unnecessary delays. That means streamlining inter-agency coordination and getting rid of redundant steps in the process.

2. Clear and Consistent Policies: Build Confidence in Investors

Nepal needs to offer predictability and clarity when it comes to its tax policies and investment rules. Investors need to know that the rules won’t change halfway through their projects. This is especially important when it comes to the treatment of royalties and other important business expenses. Clear, consistent rules will help build confidence in FDI in Nepal and encourage more foreign investment.

3. Targeting Larger Investments: Focus on High-Impact Sectors

Nepal needs to focus on attracting large-scale projects that can have a lasting impact on the economy. This means creating incentives for industries like energy, tourism, and infrastructure, sectors where Nepal has a competitive advantage but hasn’t yet attracted the big investments it needs.

4. Strengthening the Legal System: Protecting Investors

Investors want to know that they’re protected. That’s why Nepal needs to strengthen its legal system, especially when it comes to dispute resolution and contract enforcement. A strong, fair, and predictable legal system will give investors the confidence they need to commit to long-term projects in Nepal.

5. Infrastructure: Laying the Foundation for Growth

Nepal needs to upgrade its infrastructure, especially in areas like electricity, roads, and internet access. Without these basics, it’s hard for large-scale businesses to succeed. The government should prioritize infrastructure development, which will make the country a more attractive option for foreign investors.

6. Political Stability: Create a Reliable Business Environment

Finally, political stability is essential. Investors want to know that their projects won’t be delayed or derailed by shifting political winds. Nepal needs to create a more stable political environment where the rules and regulations stay consistent over time. This will help build investor confidence and make Nepal a more reliable place to do business.

Final Thoughts

So, where does Nepal stand with FDI in Nepal now? The country has certainly taken some bold steps to attract foreign investment, from hosting high-profile Investment Summits to introducing the Automatic Route System and removing barriers for the IT sector. These efforts show that Nepal is eager to make itself a better place for foreign investors to do business.

But here’s the reality: While these reforms have generated some excitement and FDI pledges, they’ve fallen short when it comes to turning those promises into real investments that can drive lasting economic growth. There’s a clear disconnect between what gets promised and what actually lands in Nepal. And while some small projects are getting off the ground, the country still struggles to attract the large-scale investments that can transform its economy.

The deeper issue lies in the structural barriers that continue to hold Nepal back. From political instability and slow approval processes to uncertain tax policies and regulatory hurdles, there are several key areas that need fixing before Nepal can truly compete on the global stage for FDI.

But all is not lost. There is a path forward. By simplifying the approval process, offering clear and consistent policies, and improving the country’s infrastructure and legal systems, Nepal can create an environment that attracts the kind of investment it needs to become a middle-income country by 2026.

The next few years will be critical for FDI in Nepal. The country has a chance to make these reforms work, but it needs to follow through with action, not just words. If it does, Nepal could finally realize its potential as a hub for foreign investment and reap the benefits in the form of jobs, economic growth, and improved standards of living for its people.

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