So you’d like to do business in Nepal?

14 Jul 2019

The rule banning FDI less than Rs50 million is a slap in the face of small and medium enterprises

– Ritu Pradhan Malla

It is whimsical to expect a small tree to provide boundless fruit without fertilising it and enabling its roots to grow. But that seems to be what Nepal’s policy-makers think.

Government revenue is dependent on imports, instead of building a sustainably nurturing an enabling business environment for small and medium-scale enterprises (SMEs). Such narrow vision is discouraging entrepreneurship and making Nepal further dependent on the outside.

Our largest export market is labour with income generated by as many as 5 million young Nepali men and women who send money home, and which makes up 28% of the GDP. The money boosts consumerism, which means more imports.

Not even locally grown fresh vegetables can compete with imported, pesticide-laced vegetables because of the high cost of production compounded by lack of human resources to farm the land. And now, the climate crisis will reduce crop yield further.

Nepali SMEs have not been able to fulfill local demand in food and manufacturing sectors, as imported goods are cheaper. To compete requires access to technology, markets, information and finance, which is evidently not available. Foreign Direct Investment (FDI) should be able to change the situation, but SMEs are barely surviving due to neglect and adverse rules.

A recent law banning FDI less than Rs50 million is a slap in the face of the SME sector. It looks like Nepal’s policy makers did not do much homework before taking this kneejerk decision. It dashes the dream of entrepreneurs who want to  better technology to deliver competitive goods in the current market. It kills the initiative of entrepreneurs who do not have collateral to work with a bank and would have had the option from a foreign investor.

A recent example of an energetic young entrepreneur, who was partnering with a foreign investor to settle her high cost loan. She will no longer be able to do so as the investment threshold has now been increased ten fold.

One can only imagine how many products and services would have been built in Nepal and how many jobs could have been added.  To address the lack of capital and technology transfer, private equity funds in Nepal are still working to make things happen and to attract FDI even when the cost of doing business is still very high.

The government needs to create an inclusive environment for investors who are helping build Nepal’s economy. An SME’s ripple effect on the local economy can be huge. Business Oxygen (Bo2), for instance, accelerates the growth of Nepali SMEs to help create direct jobs, reduce imports, create markets, increase dollar revenue, attract new SMEs in the value chain, etc.

There is still a yawning market gap in access to finance for SMEs working in FITTA negative listed sectors. Recently, newly added negative lists such as primary agriculture and dairy further constricts the growth of SMEs in the agri-sector at a time when the climate emergency is already affecting Nepal’s food security.

Foreign investment could help Nepal’s commercial agri-entrepreneurs use the capital for climate resilience purposes, but the recent FDI threshold limit discounts the need for this intervention where it is needed most.

Nepal needs a stronger support ecosystem for FDI which enable local SMEs, it should not derail them with new rules red tape. After all, we have plans to become a middle-income country by 2030, achieve all of our Sustainable Development Goals. Here is a checklist to harmonise the business environment:

  • Make s sector-specific permission process
  • Provide special concession for private equity that want to help scale up Nepal’s SMEs
  • Provide special consideration of the working environment for foreign investors supporting inclusive growth in the economy
  • The Department of Industry can always check proposals and raise questions when there are areas of suspicion

Ninety percent of companies registered in Nepal are SMEs, and yet we restrict FDI less than Rs50 million. It is no wonder that in 2019 Nepal’s position in the ease of doing business fell five points to 110.

Ritu Pradhan Malla is Senior Investment Manager at Business Oxygen Pvt Ltd

Source: Nepali Times