After years of volatility and political disruption, reform efforts have led foreign investment to climb in the Himalayan nation of Nepal. 

Headline foreign direct investment (FDI) inflows to Nepal reached a record $161m in 2018, having grown more than four-fold since 2013, according to UN figures.

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Despite historically attracting less foreign investment than its neighbours, Nepal – which has a population of 30 million people – posted the highest growth in FDI inflows across the whole of south Asia during the six-year period.

However, as the coronavirus continues to cause global economic turbulence, the Nepali government’s stated aim to become a middle income country by 2030 looks likely to stall.

Political stability

In the wake of a devastating earthquake, Nepal’s parliament passed a landmark new constitution in September 2015, ending decades of upheaval and armed conflict that had hampered the Himalayan country’s economic development. 

Since January 2015, foreign investors have announced 31 greenfield projects in Nepal, more than double the number of announced projects in the previous five years, according to FT-owned greenfield investment tracker fDi Markets.

The 2017 election, in which a single coalition won a comfortable majority, has created political stability and bolstered Nepal’s FDI attraction efforts, says Nagesh Kumar, director of the UN’s Economic and Social Commission for Asia and the Pacific (Escap).

“The government of Nepal has taken steps to improve the investment climate with a number of initiatives to streamline the regulations,” he adds, citing the establishment of a public private partnership (PPP) policy in 2015 and the electricity regulatory commission in 2017.

The passing of the foreign investment and technology transfer act in 2019 aimed to consolidate these regulatory efforts further.

“These new initiatives facilitated the flow of resources to Nepal for harnessing its hydroelectric resources which have been estimated at 85GW,” says Mr Kumar, who claims the PPP policy in particular helped facilitate investment in hydropower projects.

Chinese influence

While India has historically been the chief source of FDI in Nepal, China has become a larger contributor in recent years.

In May 2017, Nepal signed up to China’s Belt and Road Initiative, paving the way for investment from its giant northern neighbour.

Chinese contractor Gezhouba has taken on large-scale hydropower projects, while other Chinese companies have been active in the communications and building materials sectors.

China Mobile and Huawei Technologies recently built a 5G base station at 6,500m on Mount Everest, the world’s tallest mountain and one of Nepal’s most popular tourist destinations.

China-based Huaxin Cement – which announced $140m of investment in a joint-venture with the Investment Board of Nepal in 2015 – has continued to develop its cement factory and supporting infrastructure despite coronavirus lockdowns.

Strength sectors

Nepal's financial services sector has attracted eight greenfield project announcements since 2015, making it the most active sector, according to fDi Markets.

US-based insurer MetLife has had a presence in Nepal since 2001 and announced plans to open a new branch in the Nepalese city of Birendranagar in February this year. Across the country, MetLife has 32 offices, 149 full-time employees and an 8000-strong agency workforce. 

“Nepal continues to offer an exciting FDI landscape for the insurance sector,” says Nirmal Shrestha, vice president and general manager at MetLife Nepal.

Mr Shreshta claims rising incomes and low insurance penetration in Nepal has helped its life insurance market grow by an average of about 47% annually over the last three years

Despite Covid-19 dampening the Nepali economy this year, the country’s relatively low and rapidly expanding internet and smartphone penetration makes it an attractive prospect for investors, says Mr Shrestha.

“Digitally savvy companies that are able to capture this opportunity will reap benefits, particularly companies which are able to service Nepal’s large rural populations,” he adds.

Australia-based commercial broker Acuity Funding, which set up an outsourcing operation in the Nepali capital Kathmandu in April 2019, is another optimistic foreign investor.

“Cost efficiencies are a major positive when setting up an outsourcing operation in Nepal,” says Ranjit Thambyrajah, managing director at Acuity Funding, adding that Nepali values of “education, loyalty and progression” add to the appeal. 

Economic reforms

Despite the success of the country’s reform efforts, concerns persist among investors about Nepal’s technological readiness, efficiency in the labour market and higher education and training.

“Government policy is the major obstacle for setting up business as a foreigner in Nepal,” says Mr Thambyrajah, who claims the $500,000 minimum threshold for foreign investment in Nepal is “quite significant” for the south Asian region.

Binod Chaudhary, chairman Nepal’s only multinational, the Chaudhary Group, and member of the opposition Nepali Congress party, stresses the need to restructure the Nepali economy and prioritise investments.

“The government has to play a more important and decisive role in areas they are mandated – to improve social and physical infrastructure, pushing liquidity into the market, making capital more inexpensive and the cost of production more efficient,” he adds.

Beyond government priorities and policy, Nepal, which remains one of the poorest countries in Asia, also faces structural issues. 

“Infrastructure deficits, landlocked mountainous terrain, and the small size of Nepal’s domestic market remain key challenges for foreign investors,” adds Mr Kumar.

However, Nepal’s membership of the south Asian free trade agreement (SAFTA), which gives it preferential access to markets with a combined population of about 1.3 billion people, provides an opportunity for future export-oriented investment.

Covid-19 adjustment

Along with the support of a $29m financing agreement from the World Bank, Nepal has managed the coronavirus pandemic reasonably well, recording less than 4,000 cases and 14 deaths as of mid-June, according to John Hopkins data.

However, global disruption and lockdowns have had a severe effect on tourism and remittances, which form a significant part of the Nepali economy.

Remittances sent by overseas Nepali workers account for more than 25% of GDP and are likely to be affected by the economic downturn in major markets such as India and the Middle East, which host many Nepali workers.

Nepal’s tourism sector, which accounted for 6.7% of the Himalayan country’s GDP and 6.9% of total employment in 2019 according to the World Travel and Tourism Council, will have to adjust to plummeting visitor numbers.

Binod Chaudhary’s son Rahul manages the Chaudhary Group’s hotel arm. He says that many countries, including Nepal, will have to reassess their travel and tourism strategies and “rely on their internal markets to a great extent for at least the next two years”.

Rahul Chaudhary says that the group’s hotels in Nepal have been focused on attracting guests from neighboring markets such as India and China.

Despite the IMF disbursing $214m in emergency financing to Nepal in May to address the fallout from the pandemic, the immediate economic outlook for Nepal and the whole of south Asia is bleak. In a country famous for its mountains, maintaining the FDI momentum Nepal has built up since 2015 into the new decade may prove another tricky peak for the government to climb.