Peeling the pickle
After a long period of pursuing a policy of isolation, Nepal embraced outward-oriented development policies around the mid-80s. The Industrial Policy and Industrial Enterprise Act, promulgated in 1987 by the Panchayat Government of Nepal, were the first baby steps taken to attract foreign direct investment (FDI) to Nepal. This act was a landmark as it provided a legal framework with an objective of facilitating FDI in both large and medium scale ventures in every industry except environment and defense-related ones. After the overthrow of the Panchayat system in the 1990s, the new democratic government promulgated the Foreign Investment and Technology Transfer Act of 1992 under the Congress government, which opened up foreign investment in all sectors except defense, cigarettes, bidis (a form of cheap cigarettes), and alcohol, allowing 100 percent ownership for foreigners. The tax holiday period was also extended to 10 years. Such acts were vital because they allowed 100 percent repatriation of equity, dividends, and the payment of principal and interest on foreign loans in convertible currencies.
The Government reemphasised the importance of FDI and technology transfer in the development process in the early 1990s and introduced the Foreign Investment and One-Window Policy as well as the Foreign Investment and Technology Transfer Act (FITTA) of 1992, and established the Investment Promotion Board. In addition, a Foreign Investment Promotion Committee was set up to simplify procedures for attracting foreign investment, with applications to be processed within 30 days. A One-Window Committee was also set up at the Department of Industries (DOI) to provide institutional facilities and services under one roof. However, it failed to provide such services and was subsequently criticised for having too many procedures and lack of interest from bureaucrats who were ambivalent regarding FDI.
The Act of 1992 was amended in 1997, which dissolved the policy of providing a tax holiday for foreign investment projects. Furthermore, domestic oriented ventures have to pay either corporate tax of 20 percent (quite significant) and export oriented ventures have the option of either paying corporate tax at the rate of 0.5 percent of export value or 8 percent of total profit. Furthermore, a 5 percent tax was introduced on profits remitted by foreign firms in the 1990/2000 budget announcement. Even though the government argued that these policy mechanisms were important for the balance of payment, such
policies were at odds with the government policies to promote FDI and hardly practiced by countries seeking investments.
The Government made several amendments to FITTA through the Finance Act of 2001 and other progress has been made such as membership of WTO, SAFTA, and BIMSTEC. The Government has also introduced the Non-resident Nepalese Act to attract FDI. Yet despite these various efforts, FDI remains very low because Nepal has actually withdrawn some of its incentives provided after 1992. For example, the Government
used to provide reinvestment allowance in the form of deductions from taxable income of up to 40 percent of investment in expansion or modernisation, but this was withdrawn in 2002.
Thus, a revision on the law of investment and tax, and finding sectors for foreign investment will remain a vital aspect of attracting foreign investors. How are those areas selected where foreigners can invest and cannot invest? Are all areas credible? For example, a foreigner cannot invest in tourist lodging, alcohol, and agriculture. Is this a sensible thing to do? They also cannot invest in consulting services such as Management, Accounting, Engineering and Legal Services. This keeping multinationals such as Mckinsey & Company out of the country; thus limiting the options of a qualified workforce to NGO/INGOs for competitive wages. Policymakers need to ponder if this is limiting employment opportunities and economic growth.
Much debate and research is needed to find optimum ways of opening certain sectors and keeping the sensitive ones out. Much can be learned from countries such as conflict-rid Cambodia which is perhaps the most open economy amongst the world’s 50 least developed countries. Cambodia has been hugely successful in attracting investment in the garment and tourism sectors. In 2010 only, the total number of tourists that came to Cambodia was 1.15 million, and this year it is forecasted to reach about 2.85 million, thus providing revenue of almost $2 billion. Similarly, Ghana was an African front-runner in the mid-1990s. In January 1993, the military government gave way to the Fourth Republic after presidential and parliamentary elections in late 1992. Since then, the government has pledged to create “a golden age” for business through private sector development, regional integration and good governance. Even though Nepal is still politically instable, which presents a major hindrance for FDI, lessons can be drawn from Ghana and Cambodia on how it achieved economic growth via FDI. Their somewhat common political trajectory with Nepal and their level of development at the time they opened up their economy can provide valuable lessons to policymakers and the private sector in Nepal.
Posted on: 2011-12-01 10:01
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