Making Federal Nepal Investment-Ready

April 10, 2019

By Ashray Pande

The recently concluded Nepal Investment Summit 2019, convened by the government of Nepal in March in Kathmandu, has moved the country’s new economic agenda to center stage. The event, which drew industry leaders, senior government officials, and foreign delegates from over 40 countries, showcased a lineup of planned infrastructure projects and investment opportunities worth more than USD 24 billion. It was a watershed moment for Nepal’s first elected federal government as it seeks to redefine state and private-sector relations and promote the nation as an attractive investment destination.

Post-earthquake reconstruction of sites like the ancient reservoir in Patan, Nepal, is being fueled by a booming economy. Photo: Corey O’Hara / Shutterstock.com

“Prosperous Nepal, Happy Nepalis” has been the government’s campaign slogan since it assumed office in 2018, finally appearing to deliver on the 2015 constitution’s promise of political stability. This long-awaited stability is now allowing the country to focus on the national economic agenda after years of conflict and political impasse and the contentious process of drafting the constitution.

Postconflict Nepal has made significant gains in poverty reduction, averaging 4 percent annual GDP growth over the last five years, including a dip after the earthquake and then a resurgence as investor confidence, fueled by successful elections and post-reconstruction infrastructure investments, boosted the growth rate to 7 percent in 2017. FY18 results are expected to show 6 percent growth, and a target of 7–8 percent seems within reach.

Although foreign remittances, accounting for some 28 percent of GDP, have insulated Nepal from macroeconomic shocks, they have also led to dependency and consumption-driven growth that has hindered competitiveness, as reflected in the declining export sector and low rates of investment despite a high national savings rate. If Nepal wants to graduate to middle-income status by 2030, higher rates of productivity and investment will be needed.

The summit signals the unanimous recognition that economic growth is important. Pro-investment legislation in advance of the summit, including the Public-Private Partnership Act, the Special Economic Zone Act, and the Foreign Technology and Transfer Act, will streamline regulatory clearances and increase the ease of doing business to attract domestic and foreign direct investment. While the federal government has taken the lead, economic decentralization has been an important part of restructuring under the new constitution, and coordinated efforts by a consortium of subnational actors that includes provincial and local governments will be equally important to attract investment.

A busy market in Kathmandu. Photo: aiyoshi597 / Shutterstock.com

On the heels of the summit, Nepal is entering a phase of “competitive federalism,” with provincial governments vying independently for funds and investments. The devolution of economic roles and responsibilities under the new federal structure is changing old power relations, and subnational governments now have the flexibility to adjust their own expenditures and manage the business climate within their jurisdictions. Recent declarations by Province 2 proposing 20-year tax exemptions, one-stop business registration, and improved access to water and energy services are intended to signal an investment-ready environment. Sudarpaschim Province plans to establish a Provincial Investment Board that will approve and fast-track projects with capital investment above a certain threshold. It is only a matter of time before other subnational governments join the competition, with policies and incentives to attract investment to their own development corridors.

While this competition among subnational governments has many benefits, it could also leave them vulnerable to exploitation by reducing their individual bargaining power. This newly competitive environment will require stronger economic governance and improved regulation to avert a potential race to the bottom. Federal institutions like the National Natural Resource Fiscal Commission (NNFRC) will be called upon to regulate competition while maintaining an environment that is conducive to private-sector investment and sustainable economic growth.The new NNFRC commissioners have recently been sworn in, marking the inauguration of this critical agency of fiscal federalism. The commission has a long road ahead and will need to quickly establish clear rules of engagement between regional governments and private-sector partners. Critical issues like confusion over the tax jurisdictions of different tiers of government need immediate attention from the NNFRC, but they also present an opportunity to revamp tax policies to incentivize investment.

A woman roasts corn over a charcoal fire in Kathmandu. Nepal’s economy is growing rapidly, but unequally. Photo: Corey O’Hara / Shutterstock.com

As Nepal works towards an advanced manufacturing and service sector, human capital will be as important as physical infrastructure, and workforce development must be a priority. Corruption still looms large, and the government will also have to address this issue to attract quality investments and improve project efficiency. The advent of federalism is a unique opportunity to create the conditions for private-sector growth, investment, job creation, and economic restructuring that will eventually transform Nepal from an agricultural to a manufacturing and service economy. This moment is a chance to rethink fundamental institutions and, in the process, to develop a deeper understanding of how communities and businesses in Nepal can thrive.

Ashray Pande is a senior program officer in The Asia Foundation’s Local Governance Program in Nepal. He can be reached at [email protected]. The views and opinions expressed here are those of the author, not those of The Asia Foundation.

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