The U.S. Department of State’s Investment Climate Statements provide information on the business climates of more than 170 economies and are prepared by economic officers stationed in embassies and posts around the world. They analyze a variety of economies that are or could be markets for U.S. businesses.
Topics include Openness to Investment, Legal and Regulatory systems, Dispute Resolution, Intellectual Property Rights, Transparency, Performance Requirements, State-Owned Enterprises, Responsible Business Conduct, and Corruption.
These statements highlight persistent barriers to further U.S. investment. Addressing these barriers would expand high-quality, private sector-led investment in infrastructure, further women’s economic empowerment, and facilitate a healthy business environment for the digital economy.
Executive Summary
With an annual Gross Domestic Product (GDP) of about USD 24.9 billion, and total trade of USD 12.9 billion, Nepal is a small contributor to the global economy. Despite considerable potential, particularly in the agriculture, tourism, energy, IT, and infrastructure sectors, widespread corruption, cumbersome bureaucracy, and weak implementation of laws and regulations have generally kept investors at bay. Historically, few American companies have invested in Nepal, in part due to a perception that the country’s small size, cumbersome bureaucracy, and political instability created too much risk for investors. The current government, which holds a 2/3 majority in parliament, recently pushed through several pieces of legislation, including the Foreign Investment and Technology Transfer Act (FITTA), intended to attract increased foreign investment. However, as drafted, these pieces of legislation maintain various institutional and procedural impediments to smooth businesses practices which are expected to dissuade all but the most risk-tolerant investors. Proof of their impacts will be determined in large part through the content of their implementing regulations and actual implementation.
In 2017, the Millennium Challenge Corporation (MCC) signed a USD 500 million Compact with the GON that will focus on the electricity transmission and road maintenance sectors. The GON has agreed to contribute an additional USD 130 million for these Compact programs. The MCC Compact should present opportunities for international firms, although tenders are not expected until 2019.
Nepal’s location between India and China – two of the world’s largest markets and fastest growing economies – could present opportunities for foreign investors, particularly in light of market access preferences which Nepali-made products enjoy in India. In addition to a strategic market location, Nepal also possesses natural resources that have significant commercial potential.
Hydroelectric power – of which Nepal has an estimated 40,000 megawatts (MW) of commercially-viable potential – could be a major source of income and help meet South Asia’s growing energy needs.
Other sectors offering potential investment opportunities include agriculture, tourism, the IT sector, and infrastructure.
In addition, the recently passed FITTA, the Industrial Enterprise Act, the Special Economic Zone Act, a revised Labor Act, and a new Intellectual Property Rights policy are modest steps towards improving the investment climate.
Nepal offers opportunities for investors willing to accept inherent risks and the unpredictability of doing business in the country. While Nepal has established some investment-friendly laws and regulations, significant investment barriers remain.
Corruption, laws limiting the operation of foreign banks, limitations on the repatriation of profits, limited currency exchange facilities, and the government’s monopoly over certain sectors of the economy, such as electricity transmission and petroleum distribution, undermine foreign investment in Nepal.
Millions of Nepalis seek employment overseas, creating a drain on an already poorly trained workforce.
The proliferation of politicized trade unions – each typically affiliated with a political party – cartels, and syndicates masked as associations that actively try to prevent new players from entering the market, and unpredictable general strikes also create business risks.
Immigration laws and visa policies for foreign investors can be cumbersome and obstructive. These regulations are exacerbated by an inefficient government bureaucracy, a relatively high turnover rate of civil servants and government officials, and occasionally overt corruption.
Political uncertainty has been another challenge for foreign investors in Nepal, although new constitutional provisions, and the super-majority government in office should ease that for the near term. Nepal’s southern Terai, home to half the country’s population, saw protests as well as a prolonged blockage of Nepal’s border with India in 2015-16. Although tensions have subsided in the Terai, protests could erupt again if the government does not meet the demands of political parties in this region.
Government restrictions on the media and non-governmental organizations in practice and increasingly through laws and regulations highlight a tendency toward intervention. This has also manifested in politicized actions against, or giving preference to, individual companies such as through shop closures when the GON determines that prices charged are too high, or in the adoption of poorly-informed ad hoc regulations regarding operations, prices, and procedures.
The persistent and pervasive use of intimidation, extortion, and violence – including the use of improvised explosive devices – by insurgent groups has added a degree of insecurity targeting domestic political leaders, GON entities, and businesses.
Nepal’s geography also presents challenges. The country’s mountainous terrain and poor infrastructure increase the cost of transportation of raw materials as well as finished goods. The nearest seaport is in Kolkata, India, about 900 kilometers from Kathmandu.
To access the ICS, visit the U.S. Department of Department of State’s Investment Climate Statement website.