Promoting Investment For Prosperity

Since the 15th Plan, Nepal government has established a long-term vision of 'Prosperous Nepal, Happy Nepali.' To achieve prosperity, the plan has outlined four key objectives: first, accessible modern infrastructure and enhanced connectivity; second, the development and full utilisation of human capital potential; third, high and sustainable production and productivity; and fourth, high and equitable national income. The 16th Plan continues to align with these long-term objectives, which are expected to be achieved by 2100 B.S. It will require significant investment to realise these goals

The implementation of the 16th Plan has begun from current fiscal year, covering a five-year period with a targeted average economic growth rate of 7.1 per cent and per capita income of 2351 US$. The plan estimates an investment requirement of Rs. 9,483 billion ($71 billion) at 2023/24 prices. Of the total investment, 67 per cent is expected to come from the private sector, amounting to Rs. 6,372 billion (about US$ 48 billion). Achieving the growth targets of the 16th Plan will, therefore, require substantial investment, particularly from the private sector. In this context, it is essential to understand investors' expectations to increase investment in Nepal. 

Capital formation

A higher economic growth requires higher capital formation, which requires huge investment. Prosperity depends on high economic growth, which, in turn, raises per capita income, necessary for living standards. However, investment is a sensitive economic decision, intertemporal in nature — deciding today to reap benefits in the future while navigating various uncertainties and risks. In the economy, investment plays a crucial role in both aggregate demand and supply. On one hand, it is a key component of aggregate demand in macroeconomy, and on the other, it builds the productive capacity of the economy. Without increased investment, higher economic growth cannot be achieved. 

In fact, investment is a dynamic factor that drives the level of economic activity. As a result, fluctuations in investment can lead to economic cycles of booms and busts. There are several economic theories that explain investment decisions. Eminent economist John Maynard Keynes introduced the concept of the Marginal Efficiency of Capital (MEC), which refers to the expected rate of return on an additional unit of capital. Investment decisions are made by comparing the MEC with the prevailing interest rate: if the MEC exceeds the interest rate, investing is profitable; otherwise, it is not. Business confidence and expectations about future profits play a crucial role in influencing investment decisions by impacting the MEC. When businesses anticipate higher future profits, they are more likely to invest. Thus, profit expectations are a key factor in determining investment decisions. 

Several factors determine profit in the economy, including market demand, competition, and the cost of production — such as raw material and labour costs, land, and technology — along with a stable economic environment and government policies on taxes and regulations. Additionally, the government must create a favourable environment for investment by ensuring property rights, the rule of law, macroeconomic stability, access to finance, peace and security, and adequate physical infrastructure. It itself must invest significantly in infrastructure development to support this environment. Furthermore, investment requires substantial financial resources, and for a country like Nepal, domestic resources alone may not be sufficient. 

The government has been focusing on creating a favourable environment for private investors. Recently, it has amended seven different laws to facilitate private investment, including foreign direct investment, and implemented a one-window system to streamline the processes. Additionally, the government has been placing emphasis on the development of start-ups.

The 16th Plan outlines several strategic measures to promote investment in the economy. These include simplifying legal and administrative procedures for both domestic and foreign investment, automating entry and exit processes, promoting the consumption of domestic goods, encouraging investment from non-resident Nepalis, supporting young entrepreneurs through start-up initiatives, strengthening special economic zones, establishing business incubation centres, fostering public-private partnerships, and completing the under construction industrial estates and special economic zones, among other initiatives. However, these strategies need to be implemented effectively to accelerate the investment in the economy.

Recently, Nepali banking system has experienced ample liquidity at lower interest rates. Utilising these financial resources for domestic production can generate a multiplier effect in the economy. By increasing the velocity of financial resources, the multiplier effect can be even greater. However, production in Nepal also depends on imports of raw materials, capital goods, and technology, making domestic resources insufficient. Foreign investment, both equity and borrowing is necessary not only to bridge the resource gap but also to bring in advanced technology and help explore international markets.

Foreign investment

While the government has laid significant emphasis on attracting foreign investment, inflows remain below expectations despite the country's immense potential, particularly in sectors like hydropower, tourism, herbal products, minerals, IT and high-value agricultural products. There are, in fact, challenges to investment, including Nepal’s landlocked position, weak institutional capacity, weak physical infrastructure and low competitiveness. Additionally, we have yet to fully tap into the large markets of our neighbouring countries. Therefore, further reforms and diplomatic strategies are needed to attract more investment. Being a victim of climate change, Nepal also needs to explore climate fund to make the economy more climate resilient. 

Lastly, Nepal needs to increase its readiness to attract investment by meeting the expectations of investors, developing right financial instruments for facilitating infrastructure development, and developing specialised public institutions to mobilise long-term capital along with enhancing implementation capacity. For this, government and the private sector should collaborate and increase investment in the economy from infrastructure to production of goods and services. Development partners should channelise more climate fund to Nepal. 

(Dr. Shrestha is an executive director at Economic Research Department of the Nepal Rastra Bank. (praks.shrestha@gmail.com)