Beginning 2010, with the affirmation by Chinese entrepreneurs (during the 11th meeting of the Nepal-China Non-Government Cooperation Forum) and a US delegation (American Chambers of Commerce in India) about the investment potential in Nepal, Kathmandu has increasingly begun to project itself as a potential investment destination. Hydropower, tourism and infrastructure comprise the major investment sectors in Nepal, in addition to construction (cement), information and communication, agro-processing and health. This projection is well supported by Nepal’s liberal investment policies, precisely the Foreign Investment and One Window Policy along with the fact of most of these investment sectors being less explored, and the availability of cheap labour force in Nepal.

To what extent does this signify a positive trend? What is the degree of Chinese investments in Nepal? Will the trend be able to arrest the pessimism surrounding the delayed constitution-building and peace processes?

Nepal as an investment destination: A reality check
Despite Nepal hosting 399 foreign investment projects with a total project cost of USD 1.07 billion and relentlessly asserting its less explored sectors as investment-friendly, there is a decline in the level of foreign investment. According to the World Investment Report 2011 released by the UNCTAD, Nepal ranks 134 out of 141 countries in the Inward FDI Performance Index, same as the previous year. Foreign investors are shying away from the country owing to problems of excessive load shedding, perceived non-seriousness of political leaders who continue to be embroiled in their own controversies and the increase in the frequency of strikes demanded by trade unions, among others.

What is reassuring, perhaps, is Nepal’s two largest neighbours, China and India, are showing a keen interest in investing, with the former already investing in Nepal’s tourism and hydropower sectors. Although the degree of foreign investments has remained static, there is potential to grow in the future years.

Chinese presence: Genuine camaraderie or underlying motives?
China is the third largest investor in Nepal, closely following India and the US. In the wake of the Chinese Premier’s visit in January 2012 and the subsequent signing of agreements, one on economic and technical cooperation, China would soon become Nepal’s largest foreign investor. There is Chinese interest in developing Nepal’s religious site of Lumbini, Buddha’s birthplace.

Their investment relationship has further experienced a new wave with the proposed inking of an agreement between the Nepal-China Chamber of Commerce (NCCI) and the International Enterprise Management and Investment Association (IEMIA). Additionally, China has been investing in areas involving long-term engagement and commitment from both sides, such as in the hydropower and tourism sectors. Although this suggests that Chinese investments are completely dependent on bilateral relations with Nepal, it alone does not appear to be the case.

This rise in investments is laden with political motivations stemming from the notion of China being ‘Nepal’s all-weather friend.’ China is believed to be ‘supplementing political efforts with economic content’.  This is evident in the treatment meted out to Tibetan refugees in Nepal during Wen Jiabao’s visit and the synchronized call taken by Nepali leaders of their adherence to the One China Policy. Chinese presence could therefore be directed at two things: one, securing its hold over Nepal especially over the latter’s Tibet policy, and two, countering Indian influence in the country. 

What does this mean for Nepal?
These developments have certainly fed into the larger aim of the Nepal Investment Year 2012/2013. But, the country is still struggling to identify 50 viable projects to be presented to the investors before the start of the investment year – 16 July 2012. The investment plan may have been developed to arrest the pessimism challenging the political transition in the country. But the resentment portrayed by some Nepalese analysts by accusing Nepal of suffering from a ‘begging bowl syndrome’ and ‘as continuously establishing itself as a client state of China’ have accorded this development highly political connotations. 

Since Nepal continues to be the ‘yam between two boulders’, investments or any form of monetary assistance to the country shall always have political footnotes. These underlying motivations of its neighbours coupled with the country’s inability to sustain and increase the flow of investments will continue to impair such initiatives. 
   
As such, it is expected of Nepal to take two essential steps at this juncture. At the external level, it should not restrict its investment policies to China but approach other countries in the region and beyond, like Bangladesh, and South Korea as well. Some of these countries have already been approached. At the internal level, it should work towards improving the regulatory frameworks overlooking the investment plans. There exists a discrepancy in the existing mechanisms for attracting investment to the country. There is need, therefore, to iron out policies that may hinder investments to the country.