FDI For Economic Growth
Foreign commercial investment is very important for fuelling developing countries’ economic growth. It is divided into two parts - foreign direct investment (FDI) and foreign portfolio investment (FPI). This article focuses on the necessity and benefits of such investment in Nepal.
A foreign private investment used for establishing goods and service industries is called FDI, whereas an investment to already established industries’ stock is called FPI. FPI is less important than FDI because it does not directly contribute to a country’s revenue and employment growth. Rather, it contributes to promote capital market. No legal provision has so far been made for attracting FPI in Nepal. However, the process is underway to this end.
Nepal government formulated FDI Act in 1992 to create atmosphere conducive to brining in foreign investment. However, the country failed to receive expected FDI response. Contemporary world has already moved ahead in the context of economic development. To be on the same page, we do not have an alternative of getting desirable amount of investment. Public sector can pour only limited money to the infrastructure development as it lacks sufficient resources. Furthermore, managerial capacity of public sector is not still up to mark compared to the private sector. Likewise, domestic private sector alone cannot fulfil the investment gap. So, the investment of foreign private sector is a must.
Another important role of FDI in the countries like Nepal is to keep balance of payment (BoP) positive. BoP is a different amount of foreign currencies between inflow and outflow within a fiscal year. According to Nepal Rastra Bank (NRB), BoP recorded a surplus of only Rs. 960.2 million in the fiscal year 2017/18 compared to a surplus of Rs. 82.11 billion in the previous year. The current account deficit showed a marked expansion to Rs. 245.22 billion in this review year compared to a narrow deficit of Rs. 10.13 billion in the previous year.
Nepal suffers from huge trade deficit. According to NRB, the total export amount was Rs. 81 billion while the import was Rs. 1243 billion in last fiscal year 2017/18. Some import materials, such as petroleum products, vehicles, electronic instruments and machineries are inevitable. However, we can stop or at least reduce the imports of consumer goods, agriculture products and food and fancy items by manufacturing them within the nation. Only minimising the import is not sufficient, we further have to increase the export of those items.
We have surplus labour market and cost of labour is also cheaper compared to the rest of the world. We also have suitable ecological environment to produce raw materials in agriculture, water resources, forestry, mining, etc. Naturally we have comparative advantages in such sectors, but we have huge deficit of capital, technology and experts to produce high quality products at reasonable price that can be marketable in international market. We have to welcome FDI without any hesitation given the country’s acute shortage of capital and domestic savings.
Nepali economy is mainly based on remittances. Last year Nepalis spent Rs. 175 billion on travel and tour abroad, which also includes Rs. 38 billion spent for study abroad. However, in review year, Nepal earned Rs. 67 billion from tourism sector. Even though we have low revenue from trade and low inflows of FDI, remittances have greatly helped in meeting foreign currency’s liabilities. Remittances, sent home by Nepali migrant workers, reached Rs. 755 billion last year.
We have sufficient reserve of foreign currencies that enable the country to buy goods from foreign countries for about 9 to 10 months. Being said that, we do not have to forget our reality that we, Nepali people, are sacrificing our human rights in order to maintain BoP. We cannot immigrate to other countries with our property and we also cannot expand our business abroad with our own capital. When nation will have reliable and sustainable source of foreign exchange, then we enjoy human rights.
Recently, international investment position (IIP) of Nepal went downward though it is not in bad position. IIP shows a ranking of a country in terms of the value and composition of external assets and liabilities in the entire world. A net international investment position (NIIP) is a nation’s stock of foreign assets minus its foreign liabilities. According to NRB, the net IIP remained in surplus of Rs. 318.27 billion with foreign asset Rs. 1138.24 billion as of mid-July 2018. This surplus was Rs. 430.76 billion a year ago.
A country gets a net creditor or net debtor status depending on whether the IIP stock data has a positive or a negative sign. The IIP is the basis for assessing the exposure to the risk of a country as it presents the stock, breakdown by sector and maturity of external liabilities, notably external debt, as well as the volume and composition of claims on non-residents. Our current figure shows Nepal as a risk free country.
FDI reached Rs. 186.00 billion as of mid-July 2018, which is 6.20 per cent of the Gross Domestic Product (GDP). For the economic transformation of the country, that ratio should be 25 per cent. Likewise, other investments reached Rs. 633.85 billion as of mid-July. Of which deposit was Rs. 43.5 billion, loan was Rs. 525.2 billion, and trade credit and advance was Rs. 54.5 billion. Nepal has Rs. 10.5 billion special drawing rights (SDR) in International Monetary Fund (IMF). FDI inflow of Rs. 17.51 billion was recorded in the last fiscal year 2017/18. The significant portion of inflows was observed in the energy, cement and hotel industries, which is good news. The FDI inflow was Rs.13.50 billion in the previous year.
To sum up, we can become safe in foreign exchange reserve but that is only good for our foreign partners. Our need is more than that. We should target to meet the rest of the world very soon by achieving economic prosperity. So, we need to pour more and more foreign investment in profitable business that increases the revenue of government as well as citizen’s income rapidly.