The Government of Nepal brought much awaited Foreign Investment Policy at the turn of last year with an objective to fast-track the country’s rather sluggish infrastructure and hydropower development. The policy document, having been endorsed by the cabinet, is now in full force even as the leading structural institutions envisaged by the policy document, particularly those under the purview of the Ministry of Industry, are under reorganization.
Why the new policy is a welcome development has a political background. Fourteen months ago, current government led by Prime Minister Sushil Koirala assumed responsibility amidst a lot of expectations of economic reforms. In response, the government, in partnership with the private sector, initiated key measures to attract potential investors. One highlight of this effort was the National Economic Summit in July 2014, where the key note address was delivered by former Malaysian Prime Minister Mahathir Mohammed.
In the summit, the government had promised one-door policy and one-stop service to the potential investors, and on several occasions that followed, the government committed to industrial security, labour laws that take into account genuine concerns of the trade unions as well as the investors, transfer of tax-deducted profits in convertible currency to the investors’ home country; and so on.
Well, the government delivers on several of these promises through the Foreign Investment Policy 2014. Surprised? You may be in for a surprise because there are several provisions in the new policy which the investors would normally look for in any place they would like to put their money.
If one would ask the two outstanding characteristics or contribution of this policy, the answers would be: one, the government, after a long wait, indentifies its one-door policy partner in Ministry of Industry’s Industrial Promotion Division which would be very soon restructured under the new arrangement as the Division of Industry and Investment Promotion; and second, it guarantees equal treatment to domestic and foreign investment. Why the first one is a giant leap towards structural reform is because there existed no such thing in the history of Nepal as one-door policy for investors. The policy further strengthens this through the designation of the Department of Industry as the one-stop investment service center.
Nepal’s path to economic liberalization started way back in 1990s, together with India, Sri Lanka and Bangladesh in the region. Over these two and half decades, Indian economy has been constantly cruising towards becoming one of the biggest economies of the world; Bangladeshi resilience to a hostile political climate has surprised many pundits of economics by regularly hitting the mark of 7% growth rate; and Sri Lanka boasts one of the most stable and pro-poor economic systems as reflected in its constantly improving Human Development Index, a rare sight in South Asia.
Nepal, however, fell behind at the advent of Maoist armed insurgency in 1996 at a time when a six-year old democracy, despite its own limitations, had started returning 6% economic growth. In the following years, consecutive governments of Nepal devoted time and resource fighting the self-defeating internal conflict.
Investment, jobs and growth fell to the bottom of the priority list.The context and environment of investment changed in the meantime. The one-door policy introduced in the new guideline, therefore, can be easily said something that came better late than never.
Now, to the second point. Nepal’s private sector is relatively narrow.The entire private sector in the policy level is represented and controlled by a few large business houses, seeking protectionism and favorable policies to suit their specific needs. Of course, the country has produced Forbes billionaires and richer business people. But economists ironically point out to the need of “privatizing the private sector first” to allow Nepal’s open market to do the business. The new investment policy’s promise of equal treatment to both the
domestic and the foreign investment, therefore, comes as a “big statement”.
Besides these two “big” items, the new investment policy recognizes hydropower, transport infrastructure, tourism and mining as the five
priority areas for foreign investment. Although the policy seems to intend fixing a ceiling of minimum investment to scale up larger
inflow of funds, it abstains from talking up the numbers. A minimum ceiling would probably deprive many small investors from the services that a foreign investment is accorded in the current scenario.
The policy would do a great service to the investment if it clearly stated the threshold with an assurance whether the minimum ceiling would apply in case of the investments existing at the time of the introduction of new policy. Preference to the larger investor would not be prudent at the cost of small and medium ones because largest number of jobs in the world is created by the latter kind.
The new policy hits other positive notes too. The promise of industrial security force on demand, legal action against the enforced
closure of industries, and call for investors to operate from Special Economic Zones are the major ones. All this optimism aside, however, the most basic question to promote business in Nepal lies in the larger political picture that goes beyond this policy’s capacity and jurisdiction to address.
The policy is great. But the search of investors in Nepal today is political stability. They want a democratic social order standing on the promised new constitution, which fixes the rules of the game for all, and where nobody has an excuse to stretch democratic rights to the extent of denigrating the founder of an industry or a business that provides jobs to several people. This social order is more decently termed the Rule of Law and this is what the investors look for in Nepal. No policy will ever attract investment without this fundamental policy framework.