Nepal’s stock of foreign direct investment (FDI) increased moderately in 2019-2020 even as the coronavirus pandemic wreaked havoc around the world, indicating moves to attract capital are taking place, according to a central bank report.
A study by the Nepal Rastra Bank found that the stock of FDI had increased by 8.5% to reach 198.52 billion rupees at the end of the fiscal year 2019-2020, representing 4.7% of the domestic product. raw.
Nepal has gradually made reforms in policies and procedures to promote and facilitate foreign investment inflows, seeing it as an important external source of development finance, according to the report.
Jiblal Bhusal, director general of the Ministry of Industry, said that work on some important foreign direct investment projects, such as Huaxin Cement and Hongshi, and some hydropower projects was being accelerated.
The new regulation of the Foreign Investment and Technology Transfer Act (FITTA) stipulates that investors must bring 25 percent of the pledged investment within one year from the date of registration, 70 percent before the start of operations and the remaining 30 percent over the next two years.
The vaccination program is progressing globally and cases have gradually declined, showing a positive environment for investors with the impact of the pandemic diminishing, Bhusal said.
Gross FDI inflows increased by 18.2% to reach 19.68 billion rupees in 2019-2020. Disinvestment of foreign investments (repatriation of investments) in 2019-2020 remained at 199.8 million rupees, or about 1.0% of gross FDI inflows, according to the report.
The net inflows of foreign direct investment in Nepal increased 49.1% to reach 19.48 billion rupees in 2019-2020. Net FDI inflows were 6.4% in 2010-11.
There is a gap between FDI approval and actual FDI inflows, the central bank’s investigation report showed. FDI approval may indicate planned investment (the approved investment may not take place) or there may be significant lags between approvals and actual investments, according to the report.
In some cases, the realization of the approved investment can be spread over several years, as is generally the case in projects with longer gestation periods, creating a gap between the approval of FDI and the actual inflows. of FDI.
Between 1995-96 and 2019-2020, total net FDI inflows amounted to around 34.1% of total FDI approvals, according to the report.
The gap between approved and actual inflows should be reduced by facilitating the inflow of approved FDI, according to the report. More FDI should be directed to export-oriented industries and import-substitution industries in order to reduce the trade deficit, he added.
“Certainly, there is a gap between approved and actual FDI flows, which is expected to narrow in the coming days,” Bhusal said. It appears that investors submit their foreign investment proposal without carefully studying the provisions, and they also give up halfway after making an investment commitment, he added.
The constant political upheavals in the country and its geographic location, combined with high investment costs, are pushing potential investors to other countries, Bhusal said.
Nepal received foreign investment from 52 different economies in mid-July 2020. In terms of total FDI stock, India ranks first with 62.45 billion rupees, followed by China with 30. 97 billion rupees, Saint Kitts and Nevis with 15 rupees. 27 billion, Ireland with 12.93 billion Rs and Singapore with 12.43 billion Rs.
Over 96 percent of India’s FDI stock is concentrated in three main sectors: manufacturing, mining and quarrying, electricity, gas and water, and financial intermediation.
Meanwhile, over 99% of China’s FDI stock is concentrated in manufacturing (cement plants) and hydropower projects.
The industrial sector represents around 56.0% of the total stock of FDI. Within the industrial sector, manufacturing, mining and quarrying account for 28.3 percent, and the electricity sector accounts for 27.5 percent of total FDI stock.
In terms of stock of foreign direct investment, the manufacturing, mining and quarrying sector has the highest stock of FDI of Rs56.07 billion (28.3% of the total) followed by financial intermediation with Rs54.29 billion, and electricity, gas and water with Rs54. 0.66 billion.
About 43.9% of the total stock of FDI is found in the service sector. In the service sector, financial intermediation represents 27.3% and the hotel and restaurant sector 6.0% of the total stock of FDI.
The power generation sector, particularly the hydropower sector in Nepal, has become a favored sector for FDI in recent years. The latest survey shows that 27.5% of the stock of FDI and 36.4% of the total paid-up capital is in this sector.
The hydropower sector has also attracted other sources of external finance, such as foreign loans, in addition to FDI.
According to the report, the capacity utilization of FDI-based manufacturing firms is constrained by the Covid-19 pandemic while the profitability of FDI firms remained satisfactory during the year under review.
The survey also captures the capacity utilization of manufacturing firms established through FDI. Their capacity utilization stood at around 44.11% in 2019-2020, up from 54.04% a year ago.
According to the report, the total sales of the companies surveyed in 2019-2020 amounted to around Rs.347.73 billion, compared to Rs.381.58 billion a year ago. The average return on equity of surveyed FDI companies was around 15.63% for 2019-2020, down from 16.08% a year ago.
Approvals for the repatriation of dividends by companies with foreign investment equivalent to Rs 12.90 billion were issued in 2019-2020. Dividend repatriation approval was highest in the manufacturing sector followed by the financial sector.
In terms of FDI stock, Bagmati province took the highest share of Rs 120.17 billion (60.5%) while Karnali and Sudurpaschim provinces accounted for Rs 466.4 million (less than 1.0%).
The report indicates that the investment potential of provinces other than Bagmati should be explored and promoted to attract FDI to these provinces.
According to the survey report, paid-in capital and loans increased by 22.6% and 42.7% respectively while reserves decreased by 14.4%. Nepal’s foreign liability in terms of direct investment stood at around Rs198.52 billion as of mid-July 2020.
Paid-up capital is a major component of the FDI stock since it represented 54.4% of the total FDI stock.
In line with the global trend mentioned in the report, the Covid-19 crisis has had a dramatic impact on all types of foreign investment in 2020. Restrictive measures taken around the world in response to the pandemic have resulted in a slowdown in the activity of projects in virgin areas. investments, project finance agreements and cross-border mergers and acquisitions which have led to a significant decline in FDI inflows to the world.
FDI inflows into South Asia increased by 20.9% to reach $ 69.7 billion in 2020. FDI increased by 26.7% in India, the largest recipient of FDI in the sub-region. -region, with inflows of $ 64.1 billion in 2020.
As of mid-July 2020, Nepal’s foreign assets and liabilities amounted to Rs 1,467.76 billion and Rs 1,219.12 billion, respectively. As a result, Nepal’s net international investment position remained positive at Rs 248.67 billion, compared to Rs 188.86 billion a year ago.