Regulatory Framework

As a foreigner interested in investing in Nepal, it is essential to understand the legal and regulatory framework that governs foreign direct investment (FDI) in the country. This article aims to provide an overview of the main laws and policies that affect FDI in Nepal, as well as the challenges and opportunities that investors may face.

The Foreign Investment and Technology Act (FITTA) of 2019 is the main law that regulates FDI in Nepal. It replaced the previous FITTA of 1992 and defines the minimum threshold for foreign investment in Nepal as NPR 50 million (about USD 420,000). Foreign investors are also allowed to borrow from foreign banks and financial institutions with the approval of Nepal Rastra Bank (NRB) and the recommendation of the concerned ministry. Moreover, the law clarifies the procedures for repatriating dividends, profits, earnings, and proceeds from FDI, subject to regulatory approval. A recent revision to FITTA in 2021 requires foreign investors to bring 70% of their proposed investment before starting operations and another 30% within the next two years.

Another important law that affects FDI in Nepal is the Public Private Partnership and Investment Act (PPPIA) of 2019, which applies to both domestic and foreign investors. The law stipulates that investments up to NPR 6 billion (about USD 50 million) need to be approved by the Department of Industry (DoI), while investments above NPR 6 billion need to be approved by the Investment Board of Nepal (IBN). This law also provides incentives and guarantees for investors in various sectors such as infrastructure, energy, tourism, agriculture, and others.

However, it is important to note that the approval of FDI by DoI or IBN does not guarantee that the investment will materialize. The gap between approved FDI and actual inflow of FDI in Nepal is significant. On average, only 57% of approved FDI translates into net FDI inflow (total inflow minus repatriation) over a period of five years. This discrepancy is due to the time lag between approval and implementation of FDI projects.

Despite this, the introduction of FITTA and PPPIA in 2019 has led to some improvements in FDI inflow. The approved FDI increased by 51.3%, and the net FDI inflow increased by 49.2% in the fiscal year 2019/20 compared to the previous fiscal year. Even though the approved FDI was lower in 2019/20 than in 2017/18 by 32.2%, the net FDI inflow was higher by 11.3% for the same period. The revision of FITTA in 2021 may further reduce the gap between approved FDI and actual FDI inflow in Nepal.

The World Bank's Doing Business Index is an annual report that ranks 190 countries based on various indicators such as starting a business, access to credit, contract enforcement, and others. Nepal's overall score on this index has fluctuated over the years, but there was significant improvement in 2020 by 3.57 points. This improvement may be attributed to the revision of FITTA and PPPIA and other laws such as the Special Economic Zone Act in 2019.

The Department of Industry classifies FDI approved by Nepal into six sectors: Agro Forestry, Information Technology (IT), Manufacturing, Service, Energy, and Tourism. Among these sectors, IT has experienced the highest growth rate of 141.23% over a period of five years, followed by Tourism at 32.14%, Agro Forestry at 19.84%, and Service at 4.5%. The Manufacturing sector has experienced a negative growth rate of -7.87% in the same period. Some of the challenges faced by the manufacturing sector include inadequate infrastructure, lack of skilled labor, and limited access to finance.

Another challenge that foreign investors may face in Nepal is the political instability and regulatory uncertainty. Nepal has seen frequent changes in its government and policies, which can create uncertainty for investors. Moreover, the regulatory environment in Nepal can be complex and subject to frequent changes, which can make it difficult for foreign investors to navigate.

Despite these challenges, there are several opportunities for foreign investors in Nepal. The country has vast potential in areas such as hydropower, tourism, agriculture, and information technology. Nepal is rich in natural resources and has significant potential for hydropower generation, which can provide opportunities for foreign investment. The tourism sector is also growing rapidly, driven by the country's scenic beauty and rich cultural heritage.

The agriculture sector in Nepal has significant potential for growth, with opportunities in areas such as organic farming and food processing. Similarly, the information technology sector in Nepal has been growing rapidly, driven by the country's young and educated workforce.

In conclusion, foreign direct investment in Nepal is governed by several laws and policies, including the Foreign Investment and Technology Act and the Public Private Partnership and Investment Act. While there are several challenges that foreign investors may face in Nepal, including political instability and regulatory uncertainty, there are also significant opportunities for investment in areas such as hydropower, tourism, agriculture, and information technology. As Nepal continues to improve its business environment, it has the potential to become a more attractive destination for foreign investment in the years to come.