Slump in FDI highlights Nepal’s economic woes

The year 2016 has been a grim one for Nepal. The aftermath of a devastating earthquake in April 2015 and the political instability that followed it continue to hurt both trade and investment.

Already-minuscule levels of foreign direct investment show little sign of recovery, with just two announcements of greenfield projects by foreign investors in 2016, down from the five recorded in 2015 by fDi Markets, an FT data service. The amount of planned capital expenditure on greenfield projects plummeted from $753m in 2015 to $21m in 2016.

Most greenfield FDI into Nepal consists of construction and energy projects. The two sectors attracted totals of $990m and $783m, respectively, between 2003 and 2016, according to fDi Markets. But events over the past year and a half have crippled much-needed investor activity in the two sectors.

A few months after 2015’s 7.8 magnitude earthquake, which killed 9,000 people and left hundreds of thousands homeless, political turmoil took its own toll on the country and its economy.

In September 2015, Nepal’s ethnic Madhesi, a minority group, triggered a five-month trade blockade with India, the country’s southern neighbour, in response to the passing of a new constitution that the Madhesi said did not adequately represent them.

While the Madhesi set up roadblocks and held protests that frequently ended in violence, the Nepalese government accused India of imposing and enforcing the blockade — to strong Indian denial. The blockade severely disrupted trade routes to India, which provides 65 per cent of Nepal’s imports — including all of its petroleum supplies — and takes 67 per cent of its exports. Landlocked between India to the south and China to the north, Nepal relies heavily on its neighbours for trade and has been unable to access construction materials desperately needed to rebuild homes destroyed in the earthquake, or other supplies needed for investment projects.

Two construction projects were announced for Nepal in 2015, both from China: Hongshi Holdings Group and Huaxin Cement announced plans to invest $300m and $140m, respectively, creating a combined 1,747 jobs.

But no more foreign construction projects have been announced or signalled since then, according to fDi Markets, even though the trade blockage was lifted in February 2016.

Hydropower has vast potential to attract more FDI to Nepal. The country is estimated to have 40,000MW in commercially viable hydroelectric reserves, while production is currently just 800MW. And though the government has encouraged investment in hydropower, the political instability and a lack of much-needed reforms in the energy sector have deterred investors. No new energy projects have been recorded by fDi Markets in the past year.

The only foreign greenfield investments announced in 2016, recorded in November and December, are manufacturing projects in the consumer goods and communications sectors.

Disappointing economic growth and investment in 2016 represent lost income and productive capacity for the small country following its natural and man-made disasters. Such problems are not helped by Nepal’s chronic difficulties with bureaucracy, corruption and inadequate infrastructure.

The disruption to trade and delays in reconstruction have pushed construction and manufacturing down sharply. As Damir Cosic, the World Bank’s country economist in Nepal, noted: “It’s hard to have a vision when your average government lifespan is a year.”

Natasha Turak is global markets reporter for fDi Magazine, an FT publication.

Follow us on Twitter @em_sqrd