Foreign direct investment in Nepal, always low in this land-locked kingdom, has seen annual decreases across the five years of the Ninth economic plan (1997/98 to 2001/02), from an annual total of $11 million in 1997/98 to annual totals of $6 million in both 2000/01 and 2001/02, according to IMF estimates. The fiscal year 1999/2000 actually had the lowest annual total, at $3 million. In 2001, according to the government of Nepal, there were 670 foreign investment projects in the country, worth together about $1 billion. Of these, 35% were Indian and 11% (69 projects) were from the United States with other prominent participants being Japan, China, Germany, and Korea. India's dominance is due not just to its proximity, but also to incentives for Indian investors to take advantage of the preferential trade regime India extends to Nepal's manufactures through their bi-lateral trade agreements. The bi-lateral trade treaty signed 4 December 1996 lifted all customs duties on Nepalese industrial products, while imposing more lenient rules of origin than the international norm. The renewed treaty in March 2002, while imposing quotas on four primary and raw material exports, preserved the preferences on industrial products intact. Besides India, Nepal has negotiated bilateral investment agreements with Bhutan, Germany, and Norway.
In conjunction with the advent of multiparty democracy in 1991, Nepal has undertaken economic reforms that, at least on paper, have been aimed at making Nepal increasingly attractive to foreign investors, beginning with the Foreign Investment and One Window Policy Act of 1992 and the establishment of an Investment Promotion Board. Steps have been taken to privatize dozens of government-owned public enterprises (PEs), and to open up for private investment previous government monopolies in telecommunications, hydroelectric power, and air transportation.
Licensing requirements have been streamlined, and 100% foreign ownership is now permitted. In 1999, minimum investment requirements were also lifted. The legal basis for the full-scale private development of Nepal's massive hydroelectric resources and private export to India have been laid. The first fully private power projects are now in operation, though less than 1% of the potential has been exploited. Repatriation on income by foreign permanent non-residents is taxed at 10%. Foreign investors are entitled to repatriate outside of Nepal the amount received from the sale of all or part of shares in their Nepali investment, and all amounts received as profits or dividends.
The US State Department, however, has reported that the implementation of the liberalizing reforms has been distorted not only by bureaucratic delays and inefficiencies, but by contradictory policies that mitigate and even negate the reforms. Many sectors remain closed to foreign investment, including financial services and management consulting, as well as traditional cottage industries, defense-related industries, alcohol and tobacco. On intellectual property rights both legislation and practice are considered inadequate. All foreign investment and technology transfer must have specific permission from the Department of Industries. Problems doing business in Nepal, even aside from the intensifying insurgency, make a formidable list: lack of direct access to airports, poor ground transportation, lack of skilled labor and technological expertise, unclear rules on labor relations, inadequate power, inadequate water supply, few local raw materials, non-transparent and arbitrary tax administration, and inadequate and obscure commercial legislation. One result, according to the US State Department, is the necessity for constant interaction with government officials, far from the "One Window" policy set out in the 1992 legislation.
In 2002, the government has spoken about plans for new bankruptcy and debt recovery legislation, new intellectual property legislation, and intentions to open the country to international accounting and auditing firms, but these have not taken concrete form. For 2002/03 perhaps the promising step is the introduction of a 10 year multi-entry visa for non-resident Nepalis (NRNs) willing to invest in Nepal.