There is a demand for clean and green energy around the world and Nepal has a huge potential to produce hydroelectricity, among other industries. However, Nepal is heavily dependent on external financing for tapping or optimal utilization of its potential. While efforts are being made to tackle the rising economic issues, the results have not been satisfactory. The present paper seeks to study the policies that Nepal has put in place and the challenges that it is facing in enabling a conducive environment for investment to bring about all round economic growth and development.
In a lap of breathtaking Himalayas, flowing with rivers resting in plains of Terrai lies a paradise of the world, ‘Nepal’. It is a small landlocked country located between two rising rivals and conflicting powers of Asia, China, and India. Over the years, Nepal has been exploring its strategic location to fit in the geopolitical dynamics of the world. However, Nepal being a developing nation do not necessarily have wide ranging geopolitical aspirations, but the country’s focus would be to forge ahead and achieve developmental goals for their people and simultaneously working on strengthening democracy. In the light of the same sometimes the development process becomes more geopolitical than geopolitics itself. Countries like Nepal face a double-edged sword in geopolitics without any second doubt. There are definite hindrances for Nepal to attract investments: geographic locations being the main, in the meantime Nepal must advance their relations with the neighbor countries and beyond.
Nepal has been making the right policy decisions considering its tempestuous and unpredictable geopolitical surroundings. There is substantial influence of India due to the foundation laid between both the countries with the Indo-Nepalese friendship treaty of 1950. The influence becomes more relevant due to political connections, open border regime and trade dependency. Similarly, Nepal’s foreign strategy is predominantly conditioned by fear psychoses of geopolitics which has impaired country’s ability to take benefits from geopolitics. Nepal’s geo location, proximity with its adjacent neighbors India and China and being within the geostrategic frontier of three very powerful nation of the global politics, India, China, and the USA has its geopolitical credence while the same domain is threatening with the challenges to Nepal’s National Security.
How Nepal can Deal with Economic Problems
In today’s interest driven world a globally participant nation cannot evolve in a vacuum, thereby, selective alignment for its own advancement would serve the country’s interest. Unfortunately, Nepal has been the victim of heavy economic loans and aids. It becomes a dilemma in comprehending whether an aid or loan package is a security strategy of the donors.
Firstly, Nepal is required to encourage collaboration with those allies who do not bring political baggage. More desirable results and less politicization can be generated with the cooperation with multinational organizations like the Asian Development Bank (ADB) and the World Bank, along with other regional initiatives including the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC).
The global pandemic COVID-19 has triggered multiple challenges for Nepal like any other economy of the world. There has been adepletion in Nepal’s foreign reserves, along with an acute remittance flow. Therefore, Nepal’s focus should inevitably be on economic recovery. In terms of specific investment opportunities, there are significant sectors that depicts promise in Nepal.
About 36% of Nepal’s national GDP can be attributed to Agriculture. Despite the large contribution from this sector, it has been facing issues of its own, such as low productivity rates, considering the lack of infrastructure and investment. The Government of Nepal, in January 2021, introduced a provision within the Foreign Investment and Technology Act 2019 (FITTA), wherein they authorized the foreign investment in key agriculture activities. This amendment can result in Nepal creating environment for production and export of significant quantity of agricultural products.
Another promising sector which can garnered investments in Nepal is ‘Tourism’. Nepal is blessed with wide range of world-famous Himalayas and serene silence of natural resources with undeniably rich culture and religious heritage. The beauty and serenity of the natural environment creates unique and valuable investment opportunities for those seeking to capitalize eco-tourism and sustainable development. Despite of shutdown of borders and air transportation during global pandemic COVID-19, the tourism sector of Nepalwitnessed investment worth NPR.3.36 billion (US dollars 38 million).
Albeit many would demonstrate that global pandemic COVID-19 and the consequences arising out of war between Ukraine-Russia were responsible for the mediocre economic performance of Nepal but despite of Nepal hosting multiple investment summits since 2017, Nepal was struggling with its economy and especially in the field of foreign investments. The major reason for low performance in foreign investments is due to political leadership of Nepal. It has floundered in providing political direction to the institutions and execution of the policies. In line with the hindrances in smooth entrance of FDI in Nepal following issues has been identified:
- Despite sufficient laws and regulations formulation where FITTA has been a historical law introducing multi-facet of FDI and establishment of One Stop Service Centre under the same Act, there is involvement of multiple agencies approving FDI. It ends up making the FDI approval process long drawn out and economically exorbitant. Digital systems have been made available, but the government officers still rely on the hard copies. Also, it is witnessed that many ministries are involved in single government authority and bring out independent reports which gives difficult time to identify the nodal ministry of the sector.
- The tax system of Nepal is complex which makes it difficult for foreign investors to comply with tax requirements. There is lack of coordination between different government agencies involved in tax administration which further discourages foreign investor to invest in Nepal.
- There is difficulty in acquiring land to configure both industrial and infrastructure projects. Locals’ distrust for administration due to mediocre execution records and in the absence of an aggregable compensation framework for the inhabitants affected by the projects becomes a disappointing factor for interested investors.
- Another important factor is tax haven nations, where a significant amount of Nepal’s foreign investment originates from. Famous Nepali personalities tend to illegally transfer illicit money to such tax havens, thereafter, bringing back the same money within the investment capital.
- Small number of investments are being received by the manufacturing sectors, considering the presence of lower production costs in Nepal’s neighboring nations. Often, nations prefer utilizing Nepal as a market, more than as an investment destination. Unfortunately, EU and the USA having a duty-free access to the manufacturing products of Nepal, has beenunsuccessful in appealing the external investors to invest more in Nepal’s manufacturing sectors.
The Hydropower Advantage in Nepal
Considering the abundance of water resources, along with having one of the highest per capita hydropower potentials in the world, Nepal has a hydropower advantage in comparison to all other nations. Currently, it has an estimated hydropower potential of 83000 MW, and can attract huge foreign investments. In 2021, foreign investmentswill be worth NPR. 73.5 million (US $ 814,000) was approved by the Investment Board of Nepal, for the construction of hydropower projects. However, despite having such huge hydropower potential, it has only been able to utilize 800 MW.
According to reports, Nepal has been wanting to export its surplus electricity to South Asian countries, like Myanmar and Bangladesh, through the Indian transmission lines. Considering the current hydropower potential in the country, it is also capable of becoming the power hub of Asia. These plans are being executed through the construction of additional cross-border transmission lines with India, wherein it is expected to export a minimum of13,000 MW of electricity by 2027.
The growing conversation and relationship between Nepal and India related to hydropower projects is required to be seen from a geopolitical standpoint as well, considering that Nepal has especiallyshifted multiple projects from Chinese developers to Indian companies. While India has been a major investor for Nepal since the 1950s, the main reason for this move may be attributed to the amended Indian rules related to the Import and Export of electricity in a cross-border scenario. Theeligibility procedure for an Applicant is: “Indian entities may import electricity provided that the generating company is not owned, directly or indirectly by any natural/ legal personality(ies) whose effective control or source of funds or residence of beneficial owner, is situated in/ citizen of a third country with whom India shares land border and that third country does not have a bilateral agreement on power sector cooperation with India.” While this move may be argued to be made specifically for the exclusion of Chinese investments within the Nepal hydropower industry considering that China has been thetopmost investor for Nepal since 2013, however, this move has improved the investments made between India and Nepal within the industry, and the numbers are expected to grow exponentially in the coming years.
Today, Nepal’s economic performance, and the further expansion of its GDP by 5.8% in FY2022, has been mainly supported by the “increased generation of hydroelectricity, improved manufacturing output, expansion in construction activities, and a gradual revival of tourism” according to theAsian Development Bank report in 2022.
The Way Forward
Nepal should focus on simplifying the FDI approval process by strictly digitizing system and by equipping the nodal offices with skilled and efficient manpower. Investors have a difficult time in the repatriation process due to involvement of multiagency. This process needs to be simplified by reducing multi agencies. Ensuring digitization and e-governance process to make it free from corruption. To increase engagement with the potential investor countries by periodically holding business promotion programs. The FDI especially in Information Communication and Technology (ICT) projects tumbles because laws arenot in place for cyber security and Intellectual Property. There are no provisions in FITTA, 2019 for digital FDI, thereby suitable laws and rules for the growing industry like ICT is need of an hour.
Nepal adopted federal system after the Promulgation of Constitution of Nepal, 2015 however clarity related to the roles and responsibility of the federal government for the proper project implementation forms a necessary alluring investment element. Further,healthy macroeconomic indicators and stable government are required to conduct a boost in investor confidence.
To meet the requisite to be able to stand with the countries with advance geopolitics of technology, Nepal should focus on national tech foreign policy, adopt suitable diplomacy policy with respect to technology for promoting Nepal’s tech interest and enhance techno-economic collaboration. Nepal should get better intelligence in prior, particularly concentrating in development of AI and cyber intelligence.
Further, problems arise in the conduct of comprehension and response to economic aids and projects like Millennium Challenge Corporation (MCC), Strategic Partnership Programme (SPP) and Indo-Pacific Strategy (IPS) by the US, or the Belt and Road Initiative (BRI), Global Development Initiative (GDI) and the Global Security Initiative (GSI) by China. Subjects like the US-backed MCC Nepal Compact created danger for Nepal of being a playground for the power rivalries, subsequently building tensions between the USA and China and China and India. Amidst ratifying the MCC, USAID Administrator Samantha Power issued the statement that because of climate change, the USA feel historical responsibility as they are major emitter of carbon and country like Nepal that have very little to contribute to global warming are feeling the effects of that, which gives theUSA a sense of responsibility to make these investments.
In a nutshell, Nepal requires to discard the frame of reference of it being “yam between the two rocks” (India and China) and start its continuous initiative to works towards benefitting from the opportunities given to it. By exploiting the benefitting from the huge market of major powers in the world it must aim forward for seizing the opportunities. Nepal needs to work on one of the pivotal elements i.e., Political stability, this will make a significant impact in attracting foreign investments. Foreign investors look forward to the stability and safe environment and like to avoid the uncertainty which makes it hard for investors to commit to perpetual commitments in any nation.
Nepal shall stop viewing it as small and focus on its enormous potential to play a vital role not just of South Asia but globally. Its high time Nepal starts using its geographical disadvantage to its advantage by widening and deepening its consultation with nations beyond its immediate neighborhood.
The views, thoughts, and opinions expressed in this article belong solely to the authors, and do not necessarily to the employers, organizations, committees or other groups or individuals to which they are affiliated.
About the Authors
Ms. Ashma Rajopadhyaya is an Advocate and Attorney at Law with the Bar Council of Nepal. She is also an LLM Student from Nepal Law Campus, Tribuvan University.
Managing Editor: Naman Anand
Editors-in-Chief: Jhalak Srivastav and Muskaan Singh
Senior Editor: Abeer Tiwari
Associate Editor: Muskaan Aggarwal
Junior Editor: Kanishka Bhukya
Preferred Method of Citation
Ashma Rajopadhyaya, “Investment in Nepal in Light of the Changing Geopolitical Dynamics” (IJPIEL, 1 June 2023)