The recorded realization of Foreign Direct Investment (FDI) in Nepal remains disproportionately low compared to the committed amounts, highlighting a significant gap between investor commitments and actual investments. This disconnect necessitates a comprehensive review of existing policies and the introduction of targeted reforms to bridge this gap and enhance FDI realization.
To maximize FDI inflows, all stakeholders must contribute within their respective capacities. Creating a favorable investment environment in Nepal requires a focus on several key areas: ensuring policy stability, simplifying legal and procedural frameworks, enhancing coordination between institutions, guaranteeing the ease and security of profit repatriation, streamlining record-keeping processes, and improving the management of foreign exchange. In this endeavor, Nepal Rastra Bank (NRB) has consistently played a pivotal role, making significant efforts over the years to support these objectives.
Nepal Rastra Bank has undertaken several key initiatives to promote FDI and facilitate foreign investors in Nepal. One significant action is the establishment of a Foreign Exchange Facilitation Unit under the One Stop Service Center (OSSC). This unit simplifies the process for foreign investors by offering direct foreign exchange services.
Further, NRB performs its operations as guided by NRB Foreign Investment and Foreign Loan Management Bylaw, 2021 (Third Ammendment). To ease the initial investment phase, NRB has waived the requirement for prior approval when bringing in foreign currency for feasibility studies and pre-operating expenses. Up to 3 percent of the paid up capital can be recorded as foreign investment. In the case of Greenfield investments, NRB has removed the need for prior approval, requiring only a pre-notification to remit convertible foreign currency.
To enhance service efficiency, NRB has set time limits for each approval process. The bylaws stipulated by NRB requires the recording of foreign investment to be made within 7 days. Similarly, the process of exchanging foreign currency for the purpose of repatriation shall be completed within 15 days. Moreover, investors who previously obtained approval from the Department of Industry (DOI) can now easily record their investments with NRB through the ratification process without needing prior approval from the bank.
Nepal Rastra Bank has also made significant strides in streamlining foreign loan processes to encourage external capital inflow. Under the Foreign Investment and Technology Transfer Act (FITTA) 2075, foreign loans have been excluded from the definition of foreign investment, allowing more flexibility for businesses to secure loans. Foreign investors, including those not classified as FDI industries, now only require NRB’s approval to bring foreign loans. Once a foreign loan has been recorded and its repayment schedule approved, further approval from NRB is no longer necessary for repaying the principal and interest. Moreover, the NRB has increased the limit for foreign loans, allowing loans to be brought in up to five times of paid-up capital of related foreign from the parent company, compared to the previous limit of 100 percent.
Moreover, to enhance coordination, NRB has established a Foreign Investment and Loan Facilitation Committee, chaired by the Deputy Governor, which ensures streamlined cooperation among related agencies. Additionally, system development efforts are underway to automate the Foreign Exchange Facilitation Unit’s processes, allowing investors to apply online for pre-notifications, approvals, and repatriations, further reducing administrative burdens and improving service delivery.
Also, FITTA 2075 guarantees foreign investors the right to repatriate funds in convertible foreign currency, including profits, dividends, and returns from investments like share sales and technology transfer agreements. It also allows the remittance of loan repayments and interest payments on foreign loans. Repatriation is permitted after all tax obligations are fulfilled and necessary documentation, such as proof of investment and the legality of funds, is submitted.
Nepal Rastra Bank has made a number of provisions that facilitate the repatriation process including the removal of restriction on repatriation to other than the investing country; minimizing the approval time and limiting the processing period. NRB only ensures that investments are legitimate and tax liabilities are settled, promoting transparency while modernizing regulations to ensure efficient handling of repatriation requests, boosting investor confidence.
Nepal Rastra Bank is exploring several future initiatives to further facilitate FDI and foreign loans in Nepal. One potential reform involves relaxing approval requirements for some brownfield investment projects, such as in listed companies and sick industries, to make the investment process smoother for these sectors. Additionally, NRB is considering extending the time frame for regularizing foreign investments and loans in cases where investors have missed deadlines for recording, providing prior information, or obtaining necessary approvals. This would provide flexibility for investors and encourage compliance. Another proposal is to allow the introduction of excess funds beyond the initially approved foreign investment amount, with a provision for post-facto approval from the relevant investment authority. Furthermore, NRB is considering exempting the need for approval for reinvestments made from the earnings of industries that have already received FDI approval, simplifying the process for reinvested profits.
Other initiatives under consideration include raising the ceiling for loans from parent companies, enabling companies to access more capital for expansion. NRB is also planning to permit a broader range of fees and charges related to foreign loans, as long as they fall within the allowed interest ceiling. To encourage longer-term investments, the bank is looking to increase the tenor of Nepali currency (NPR) denominated loans with fixed interest rates.
Additionally, NRB may allow third parties in foreign loans without incurring any financial obligations, adding more flexibility to financing options. Convertible foreign loans, which can later be converted into equity, are also being considered as a new financing tool. Finally, NRB is evaluating the possibility of accepting bank guarantees issued by foreign banks to grant loans in Nepal, particularly in sectors like climate/green financing, women entrepreneurship, and small and medium enterprises (SMEs). This measure aims to improve access to credit and encourage investment in key development areas.