In the aftermath of the balance of payments crisis of the early 1980s, Nepal adopted a liberal economic policy framework. In 1985, Nepal agreed to receive support from the IMF to improve its situation. The Structural Adjustment Programme (SAP) supplemented by the Structural Adjustment Lending (SAL) of the World Bank, offered an opportunity to these creditors to impose their terms and conditions. The SAF agreement with the IMF in 1987 and the ESAF in 1992 were implemented. These were the milestones in the opening of Nepal’s trade and investment with the outside world. In the process of adhering to the conditions agreed upon in implementing the structural adjustment programmes, Nepal removed its quantitative restrictions on international trade, substantially reduced its tariff rates and simplified its tariff structure. The Nepalese currency was made partially convertible on the current account in 1992 and full convertibility was adopted in 1993. Nepal also accepted the Article VIII of IMF in 1994. Also some relaxations were introduced on the capital account. The Industrial Policy, 1992, and Foreign Investment and Technology Transfer Act, 1992, made provisions for non-resident Nepalis to repatriate their capital and dividend. The policy to allow Nepali nationals to open foreign currency account with evidence of source
178
was introduced and the domestic banks were given the freedom to keep their balances abroad. All these were directed towards accelerating the reform initiatives and also were in compliance with the commitments under the SAF and ESAF. Nepal also joined the WTO in 2004. It is expected to further deepen Nepal’s trade and financial ties with the rest of the world.
3.1 Trade and Investment
The policies and institutional frameworks necessary for enhancing the competitiveness of the industrial sector were devised in the early 1990s. Basically, the laws and policies that govern the industrial activities and related services are: The Industrial Policy, 1992; Industrial Enterprises Act, 1992; Foreign Direct Investment Policy, 1992; Foreign Direct Investment and Technology Transfer Act, 1992; Privatisation Act, 1993; Electricity Act, 1992; and Water Resources Act, 1992. These initiatives were aimed at both deregulating and streamlining the investment procedures and at encouraging domestic and foreign investment. Of these, some of the noteworthy institutional arrangements that have played a pivotal role in promoting domestic and foreign direct investment are discussed below:
3.1.1 Foreign Investment and Technology Transfer Act, 1992 The Foreign Investment and Technology Transfer Act, 1992, laid down the country’s present investment mechanism. It was enacted to promote the inward transfer of technology and foreign investment. According to the Act, foreign investment implies an investment made by a foreign investor in any industry as investment in share (equity), re-investment of the earnings derived from the investment in share (equity) and investment made in the form of loan or loan facilities. The Act stipulates that industries set up with foreign investment are also entitled to enjoy all the facilities and incentives. Permission is given to the foreign investors to repatriate the following income outside the country: • Amount procured from the sale of share of FDI as a whole or any part
thereof;
• Amount procured as profit or dividend;
• Amount procured as payment of principal and interest on foreign loan; and • Amount procured under the agreement for the transfer of technology in such currency as agreed upon in the contract accepted by the Department of Industry.
Other incentives include the waiver of income tax on interest earnings from foreign loan and a lower tax rate of 15% on income from foreign technical, management services and royalty. Moreover, the industries set up with foreign investment are entitled to enjoy the following additional facilities:
• No royalty in the generation of electricity for self-use;
• Priority in the supply of electricity and water as well as communication facilities to the industries; and
• Priority to arrange logistic or infrastructural facilities required for the establishment of industries.
The Act, amended in 1996, has allowed for 100% foreign equity participation in all industrial enterprises, except for cottage and some specific types of industries especially reserved for domestic investment. Moreover, the transfer of technology is possible even in case of cottage industries. The government requires that a business enterprise set up with foreign investment or technology should acquire the prior approval of the Department of Industry.
In July 2000, the government constituted a seven-member Fast Track Committee (FTC), under the chairmanship of the Prime Minister, with a view of expediting a decision with regard to projects linked to foreign investment. As a result, a foreign investor could directly send a proposal to the FTC, and a decision would be made within two weeks.
3.1.2 One Window Committee and Industrial Promotion Board There is a provision to establish the One Window Service (OWS) under the Industrial Enterprises Act, 1992. The aim of the OWS is to provide all the services needed to foreign investors under a single roof. Specially, the policy spells out two types of services to be provided by the OWS: a) permission, facilities, and other administrative services under the Foreign and Technology Transfer Act; and b) other infrastructural facilities (such as registration, land, electricity, telecommunication, water) and other services as required by the investors. Unfortunately, the One Window Policy has remained inactive for the last few years.
It has been acknowledged that the One Window Committee has not fully addressed the genuine needs of the investors. Under the Industrial Enterprises Act, 1992, an Industrial Promotion Board was also formed under the chairmanship of the Minister of Industries. The primary objectives of the Board are to:
180
• Provide the necessary co-operation in developing and implementing policies, laws and regulations relating to industrial development;
• Provide the guidelines to achieve the aims of liberal, open and competitive economic policies to be followed by the country in order to make the industrial sector competitive;
• Coordinate between the policy level and the implementation level of the industrial policy; and
• Provide advice to the government on the classification of industries. 3.1.3 Board of Investment
Nepal formed a Board of Investment under the chairmanship of the Prime Minister in December 2001. The Board was set up in order to promote investment and make it more transparent and reliable. The other objectives of the Board include formulation of new policies by reviewing the existing investment policy, maintaining coordination between various government and non-government organisations for the promotion of investment, identifying priority sectors for investment promotion, monitoring the activities associated with investment promotion and providing directives to the concerned department to boost up investment.
3.2 Financial Sector
In the backdrop of the early 1980s’s BOP crisis, major statutory reforms were also undertaken on the financial front to attract foreign investment and encourage domestic investment. These were:
• The amendment of the Commercial Bank Act, 1974, in 1984 mainly to attract foreign joint-ventures;
• The enactment of the Finance Companies Act, 1985, to allow for the establishment of finance companies in order to meet the demand of small borrowers and consumer credit; and
• The enactment of the Development Bank Act, 1996, in order to impart dynamism to the development of the nation’s industrial, trade, and agricultural sectors.
The institutional, legislative and regulatory reforms paved the way for the development of the financial sector. This is reflected in a sharp increase in the number of banks and financial institutions established by the private sector. There were only two state-owned (one with partial ownership) commercial banks and two development banks in the early 1880s. The number of commercial banks
increased to 23 at the end of 2008. Similarly, the number of development banks increased to 58. Besides, there are a number of finance companies and micro- finance institutions offering financial serves in the country at present.
Figure 12
Number of Bank and Financial Institutions
The financial liberalisation not only supported the quantitative growth but also fostered the investment climate leading to the higher levels of financial deepening and private sector credit. Broad money (M2) to the GDP ratio increased more than 50% in 2008 from about 23% in 1980. Similarly, the ratio of private sector credit to the GDP reached to 37% from less than 10% in 1980.
Figure 13
Financial Development Indicators
Source: Quarterly Economic Bulletin, Nepal Rastra Bank.