Last fiscal year, ending July 15, FDI commitments in Nepal fell 77%. In April 2015, the Kathmandu valley suffered a massive earthquake that, together with aftershocks, killed more than 8000 people and damaged some 800,000 homes and buildings.

This natural disaster was followed by a manmade one. Responding angrily to the passing of Nepal’s new constitution in September 2015, Nepal’s Madheshi minority group (irked by redrawing of voter district boundaries) imposed a five-month trade blockade with Nepal’s southern neighbour, India, which accounts for 65% of the landlocked country’s imports and 67% of its exports.

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The blockade led to fuel shortages, high inflation and scarcity of most goods, including the cement needed to rebuild Nepal’s quake-hit homes. The economy showed sluggish year-on-year growth of 0.7%.

India has traditionally been Nepal’s main source of FDI, accounting for 36.7% of the Rs353.9bn ($3.3bn) in FDI commitments over the past three decades. China, Nepal’s neighbour to the mountainous north, comes second, accounting for 13.7% of the total.

In fiscal year 2015/16, out of 245 proposed projects worth Rs15.7bn (down 77% year-on-year), China accounted for 79 projects worth Rs3.7bn, while India had 18 projects worth Rs2.3bn. Chinese investments in Nepal tend to be small-scale, such as restaurants, shops and organic farms, but have branched out in recent years to include larger-scale projects such as telecommunication tower construction, cement and hydro-electric power.  

Hydro is one of Nepal’s most attractive sectors for FDI. The country has an estimated 40,000MW in commercially viable hydro-electric power reserves, while current production is about 800MW. Only 40% of the population has access to electricity, so local demand is huge.

The government has encouraged banks to lend to hydro plants, but most of these projects are small, and FDI is restricted by the many challenges facing all FDI in Nepal, the greatest being political instability. 

“You need a more determined effort to go out and reform the energy sector in order to generate investments,” said Damir Cosic, the World Bank’s country economist in Nepal. “But it’s hard to have a vision when your average government lifespan is a year.”

Nepal has been going through a political transition for the past two decades, from Hindu kingdom to democratic federation, and the process continues.