Image: Aadarsh Pandey
Nepal sits between the world’s two fastest-growing economies and on top of some of its most powerful rivers. Its 40 gigawatts of commercially viable hydropower potential could, in theory, turn it into South Asia’s battery. Its GDP, around $43 billion, is rising, and remittances from abroad have kept the country afloat. Yet Nepal remains a byword for economic frustration. Foreign investors, lured by its cheap labour and vast untapped renewable energy potential, now approach the country with the caution of mountaineers assessing an unstable slope.
Foreign direct investment has grown in the past decade or so, but from a low base. America accounts for just over 3% of total FDI stock; the bulk comes from India and China (more out of proximity than confidence). The problem is not a lack of opportunity. It is that Nepal’s politics have made opportunity nearly impossible to seize.
Since the monarchy was junked in 2008, Nepal has changed governments more frequently than some countries hold cabinet reshuffles. The average administration lasts less than two years; coalitions form and crumble with wearying regularity. In 2023 the governing alliance that had promised stability split within months of taking office. Another coalition collapsed last month in less than 20 months amid Gen-Z-led protests.
The churn paralyses policymaking. Investors must contend with (among others) shifting priorities, rewritten regulations and civil servants unsure whose orders to follow. Each new minister promises reform, few survive long enough to implement it. A senior official at the Investment Board of Nepal recently quipped to the Katmandu Journal that “every project here begins twice and ends once”.
The consequences are measurable. Transparency International ranks Nepal 108th out of 180 countries for perceived corruption. The World Bank’s “Doing Business” indicators, though discontinued, consistently placed it among the region’s most cumbersome bureaucracies. It takes more than 20 procedures to secure a construction permit in Kathmandu, compared with fewer than ten in Singapore.
In 2019 Nepal revised its Foreign Investment and Technology Transfer Act (FITTA), promising a more open and transparent regime. The new law created a “Single Window Service Centre” to process FDI applications within seven days and to approve profit repatriation within 15. On paper that was a breakthrough.
In truth the window is rarely open. Investors still report weeks of delay and conflicting interpretations of the law across ministries. The FITTA’s minimum investment threshold of Rs20m (about $154,000) excludes smaller ventures, particularly in technology and services. Sectors from primary agriculture to retail and media are partially or wholly closed to foreigners. And corruption in the form of “facilitation fees” persists at every stage.
Such inconsistencies reflect politicisation of the bureaucracy. Civil servants are shuffled with each new coalition, ensuring continuity of neither expertise nor accountability. Courts, too, are prone to political pressure. A foreign investor once described litigation in Nepal as “a process of discovering who your opponent knows”.
Defenders like to point to its topography as an explanation for its economic troubles. The Himalayas make road-building ruinous and logistics expensive. The country’s ports lie across India’s borders, adding layers of paperwork and vulnerability to diplomatic spats.
Yet geography explains only part of the problem. Landlocked Switzerland and Austria manage to attract billions in investment; Ethiopia and Rwanda have done so from a far lower base. What they share, and Nepal lacks, are predictable institutions and consistent policy. Even the Millennium Challenge Corporation (MCC) Compact, a $500 million American grant to improve roads and electricity transmission, was delayed for years amid conspiracy theories that it undermined sovereignty. It finally took effect in August 2023, a rare instance of bipartisan follow-through.
Infrastructure remains the bottleneck. Power shortages, despite the country’s hydropower bounty, persist in dry months. Transmission lines lag behind generation capacity. A single customs dispute with India can choke imports for weeks. Investors in manufacturing and logistics thus face higher costs and higher uncertainty.
Wedged between India and China, Nepal’s geopolitical position is enviable. Its two giant neighbours together account for nearly one-fifth of global GDP. Yet Kathmandu has turned this into a liability rather than a lever.
China’s Belt and Road Initiative has treated Nepal warily since the latter’s domestic politics grew unpredictable. Projects are slow to materialise, and Chinese firms complain of red tape and local opposition. India, once the dominant economic partner, remains cautious after past experiences of politicised backlash. Hydropower export deals, potentially Nepal’s golden goose, tend to stall amid nationalist resistance and bureaucratic turf wars.
The government’s target to generate 28.5 GW of electricity by 2035 is ambitious; today it produces less than one-sixth of that. To reach its goal it must attract billions in private and foreign capital and coordinate with Indian and Bangladeshi grids. It also needs to maintain policy coherence over decades. For now none of those conditions exist.
To foreign investors, Nepal offers both peril and potential. Returns can be high for those who endure the paperwork and politics: hydropower projects backed by Indian firms have yielded stable profits and the tourism sector remains resilient. But these are exceptions. For most investors, Nepal’s risk premium outweighs its promise.
The government’s instinct is to legislate reform rather than institutionalise it. Yet the real solution is not depoliticising the bureaucracy; rather it is clarifying property rights and enforcing contracts. These are mundane tasks that produce the greatest payoff.
Without them, Nepal will continue to squander its comparative advantages. Geography has given it water and access to vast markets. Politics has turned those assets into obstacles. Until Kathmandu can provide what capital values most, which is predictability, it will remain what one weary diplomat once called “a place of great meetings and little progress”.
The Himalayas may stand still, but Nepal’s governments do not. Investors have learned to wait until the political weather clears. They have been waiting for a long time. ■
