Investing Aboard
Should Nepalis be allowed to invest abord? Expert Opinions
By Madan Lamsal & Keshav Gautam
While some Nepalis have already started investing abroad by going around legal restrictions as non-resident Nepalis or by showing technical collaboration, the pressure is mounting on the authorities to further relax the five-decade-old restriction on Nepalis from investing abroad.
The pressure is mounting not only because the restrictions have failed all along to stop capital flight, but also because of the pressures and opportunities that have surfaced now. While the domestic political scenario indicates that the country is not likely to be a place for investment for the foreseeable future, thus forcing the investors to search alternates, the whole of Asia including the immediate neighbourhood of Nepal is experiencing a rapid pace of economic growth offering excellent opportunities for profitable investment there.
However, some policymakers as well as intellectuals and business leaders have differences in opinion about this issue. Some oppose it by saying that Nepal is a capital deficit country and therefore cannot afford to allow the limited capital to go out and create employment opportunities abroad instead of here (see the interviews in this section). Others, however, think that as it is practically not possible to contain the capital within the geographical boundary of a country so it is wiser to allow it to move in and out legally and monitor such movement to ensure that the benefits of investment abroad are raked into the country.
It is also argued that as the Nepali companies face stiff competition from foreign companies which produce goods in a least cost location, Nepali companies too need to be given the opportunity to search similar locations for production (see the article by Binod Chaudhary later in this section). They have also suggested a mechanism about how to go about it (see the article by Radhesh Pant later in this section).
If Nepal learns from the Indian experience, there seems to be no harm in allowing mutual funds, state enterprises and corporates to invest abroad, initially limiting such facility to a specified percentage of their domestic investment or net worth. In fact, the commercial banks (and even the central bank) are already allowed to invest abroad by way of their foreign exchange placements. The same facility can be extended to other corporates and even individuals.
Another source of pressure on the authorities is India 's decision to move ahead with its stalled policy to make the Indian rupee fully convertible on the capital account. As the Nepali rupee is pegged to Indian rupee, Nepali policies have to move in tandem with Indian policies failing which there will be disasters in Nepal , it is argued. For example, it is feared that the Nepali rupee will lose its general acceptability and it will be replaced by the Indian rupee in an even "grander manner" (to borrow a term from Madhukar SJB Rana's article later this section).
However, it is not true that the Nepali authorities have not tried to relax the rules for foreign investment. When the central bank last year relaxed the rules for foreign currency earning corporates and allowed them to set up offices abroad, some business houses actually opened up such offices and the experience has not been negative.
Some private sector leaders, particularly those from the tourism industry, point out that as manufacturing has no great future in Nepal as compared to India and China, it would be much wiser for Nepal to focus on the development of hydropower, tourism and financial services while allowing Nepali corporates interested in manufacturing sector to invest abroad and produce the goods there under Nepali brands. They give the example of Switzerland which has done the same and developed as a country specialised in a few industries but claiming global leadership in all those industries in which it has specialised.
Since the basis of such a development of Switzerland is the financial services industry, Nepal too can expect to achieve similar success if it focuses on making Nepal a financial services centre. And that requires rules that allow unrestricted flow of capital in and out of the country.
However, an initiative of the democratic government after the 1990 change to develop Nepal as an international financial centre was abandoned very soon. As informed by contributors of the articles and interviews under this section, the reason was mainly the unstable political environment during the post-1990 period. Will the ongoing democratic revolution of 2006-7 usher in more favourable situation for such type of specialisation? One can only cross fingers and hope.
1. How do you view the demand from some quarters of the business sector to allow Nepalis to invest abroad?
2. How were facilities used by the Nepalis after NRB relaxed this restriction a bit last year?
3. Two issues are clearly evident now. First, some Nepali investors have already started investing abroad though it is not officially recorded. Second, due to the concerns about how the economic policy regime of the country would be in the future, many people are motivated to take their capital out of the country through legal and illegal channels. What is your evaluation of the situation? What should Nepal do to stop this capital flight or to ensure that the gains from such investment abroad come back to Nepal ?
4. India too had a strong law in the past restricting Indians from investing abroad. Now this rule has been relaxed a lot and many Indians investors abroad are doing well thereby helping the Indian economy as well. What can we learn from India 's experience?
5. In early 1990s, there was a plan to make Nepal an off-shore finance centre. What was the logic behind this proposal and why could nothing be done to implement it?
6. What will be the impact on Nepal if India goes for full capital account convertibility towards which it is moving now pretty fast?
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"It should be on case-to-case basis"
Krishna B Manandhar
1. Presently we have a very strict policy regarding investment by the Nepalis in foreign countries. Under this system, until and unless someone gets permission from the government of Nepal and that permission is published in a gazette, nobody can make an investment abroad. This legal provision was made almost five decades ago. Significant changes have taken place in between in the economic policy framework and there has been relaxation in the exchange control regime. As a result, sometimes Nepali business sector face difficulty in integrating with the global economy. We need to view this demand from Nepali business sector under these perspectives.
We need to be clear on a couple of issues. Presuming that permission is granted for Nepalis for investment abroad, it obviously cannot be granted across the board. It necessarily will have to be on a case-to-case basis. The obvious candidate for such facility could be an industry with a clear cut scope of value addition to the country. The other criteria could be a profitable track record in Nepal and no loan default with Nepali banks. With these safeguards in place, the possibility of any misuse of this facility will clearly be limited.
2. The Nepal Rastra Bank has been relaxing the exchange control provisions since the last so many years, as a result of which, foreign exchange transaction has become quite liberal and also decentralised. We believe that the business sectors concerned are using these facilities to an optimum level.
3. The definition of capital flight is the movement of capital from the domestic sector to external sector in an unauthorised manner. So, obviously, nobody will know the degree and magnitude of such a phenomena. It is very difficult to evaluate the situation officially.
However, the reason or circumstance under which the capital flight takes place is obvious to anybody. So long as the domestic investment is secured and profitable, nobody needs to make a capital flight. So, all our efforts, naturally, will have to be geared towards that direction.
4. The basic lesson which we can learn from India 's experience is there is no alternative for economic liberalisation and whatever liberalisation measures are adopted will have to be executed in a phased manner. There is no short cut.
5. The main logic behind was to take the advantage of Nepal 's location giving some policy advantages to the prospective foreign entities so that they could operate from Nepal in a profitable way. The government of Nepal had indeed enacted one law. But even after the enactment of the law, no foreign entity showed any interest in investing in Nepal . In the initial stage, the policymakers in Nepal were led to believe that once the law is enacted, foreign entities will come in hordes. The reality was different.
One very important lesson which the country has learned from this episode is, under the present technological conditions, there is no geographic advantage as such. There are so many off-shore centres in the world that we need to compete with. And the deciding factors which attract potential investors in such centres are the facilities offered. So long as there are no clear cut additional facilities to be enjoyed, no foreign investor is going to come here. Apparently, so far we have not been able to provide such facilities and the result is there for anybody to see.
6. We need to look into this from the fact that Indian rupee enjoys full and unlimited convertibility in Nepal . If we cannot leave this full and unlimited convertibility (for whatever reason) there will be no other alternative for Nepal except to move in tandem with India .
However, while everybody is talking about full convertibility, we need to be clear that full convertibility may come in two ways: one is without any real restrictions, e.g. anyone going to any bank and converting local currency into foreign currency. If that type of full convertibility comes in India , then we may be forced to face a really challenging situation. It is because, in this situation, we will have really no choice except going the Indian way.
On the other hand , if India adopts a radically liberlised exchange control system, but without the facility of unrestricted conversion of local currency into foreign exchange, then we may not be immediately required to move in tandem with what happens in India.
(Manandhar is Deputy Governor, Nepal Rastra Bank)
"It is genuine and realistic demand"
himalaya sjb rana
1. It is a long pent-up demand not openly articulated so far for fear of being branded anti-nationalist. It is a genuine and realistic demand.
2. Tokenish.
3. It is an open secret that Nepalis investors have been investing abroad although it is not officially permitted. This trend will continue until a dependable economic policy is announced and implemented by the new regime which is on the anvil. Indisputably, capital flight will stop and returns from investment abroad will be ploughed back into Nepal if and when accumulation of capital is deemed safe and can earn a reasonable return.
4. Indian experience should be studied and emulated as befits our situation.
5. Nepal 's geographic location, more specifically its placement in the international timing map, which facilitates dealing with the financial centres both in the West and the East was canvassed as the main logic behind the proposal. The project did not advance because it was advocated by only a couple of prominent politicos and was not backed by top banks and financial institutions.
6. Unprecedented and remarkable increase in our foreign exchange reserve due to remittances from Nepali workers abroad has led some to raise the issue of full capital account convertibility in Nepal . This should be done only when we are internationally ranked as politically and economically stable. We should not forget the sad experience of quite a few countries from whose huge foreign exchange reserves billions were moved out within hours and days once the holders of capital sensed instability.
(Rana is the first Governor of Nepal Rastra Bank and currently, the Chairman of Lumbini General Insurance Company Ltd.)
"There is no rationale for this"
dr. yuba raj khatiwada
1. Nepal is a heavily capital deficient country. Look at the saving rate which is only 13 per cent of the GDP! Investment requirement could be over 25 per cent of the GDP if Nepal is to attain a 6 per cent GDP growth. We are balancing this huge saving gap with remittances and foreign aid. Meanwhile, we are talking of more investment opportunities which have opened up with the peace process advancing in the right direction and the economy gradually picking up. Thus there is neither any need nor any rationale that Nepalis should be allowed to invest abroad on an individual basis. Still, institutional investment with the central bank's approval could be discussed down the road. But we should also understand who is desperately asking for this facility? Clearly those who already have done it clandestinely want their investment to be legalised in this way.
2. Relaxation of foreign exchange control in the form of higher exchange facilities under the current account transactions has worked positively. Non Resident Nepalis who bring in their capital and are allowed to remit it back are likely to bring in more foreign capital. Banks are already doing foreign placement of their foreign exchange balance in a large amount. I have been saying that if we are financing US treasury deficit by allowing our banks to buy US government bonds, we are doing great!
3. No answer.
4. India is soon going to be a capital surplus country and if we look at its private sector performance contributing to growth, we can see the rationale for India opening capital account for institutional investment abroad. But I doubt whether India would allow individuals to take away capital in any way, even with a liberalised regime.
One thing is, however, for sure - if India opens up capital account to the extent that everybody can buy dollars in the tiny markets of Raxual or Jogbani , Nepal has no point of maintaining capital control so far as the Nepali rupee is fully convertible with the Indian rupee.
5. First, the intention was to grab the opportunity of capital expected to be flowing in with China taking over Hong Kong but two economic policy of China did not let this happen. Second, money laundering issues related to terrorism made countries very conscious on off-shore financial transactions. Third, because of the unstable political environment in Nepal many who wanted to make investment here lost interest. Finally, the need for intensive work on legal and regulatory framework did not facilitate this.
6. If India opens capital account only for institutional investors, there would be not much implication for Nepal . But if there is fully unrestricted opening of the capital account as the one I mentioned above, Nepal will have to follow suit and let the exchange rate of Nepali currency with the Indian currency to float and be market determined.
(Former Member of National Planning Commission, Dr. Khatiwada is currently associated with UNDP Asia Pacific Regional Office; working with Integrated Package of Services to the region to support countries on preparing MDG-based national development strategies)
Encourage Investment Banking
By Radhesh Pant
Let me make one thing clear first. Restricting people to invest abroad will not be an option for the government of Nepal in the future. With globalisation of the international capital market such restrictions will do much harm than good. If we look around us, two giant economies are growing at an incredible pace. Why not try to reap the benefits of this? How much longer will it take for the government to realise the loss in opportunities? I completely understand why the government is reluctant about loosening up policies for investment abroad. The major concern for Nepal is the probability of high capital outflows. But capital outflows are going on even today. No government can restrict capital outflows by simply restricting people from investing abroad. If the government is really thoughtful towards decreasing the capital outflow from the country then it should focus more on its policies for FDI's and investment.
At this point in time, I do not think we should be arguing about whether the government should let citizens invest abroad or not. The concern should really be at what degree the government should allow citizens to invest abroad. But investing abroad is an unchartered territory not just for the general public but even for many financial institutions. If we look at the regulation of the Central Bank, financial institutions (mainly Commercial Banks) can invest in US dollars but only where the principal is totally protected. Even today, financial institutions are deprived from investing in Indian rupee markets. Hence, in order to allow public as well as institutions to invest abroad, government should first assess the risk associated with such investments and its effect on the economy as a whole. In order to establish this, the central bank should prepare guidelines and policies to augment investment banking functions for commercial banks and government should devise policies whereby individuals as well as institutions are able to invest abroad through either commercial banks or other local brokerage firms. Further to monitor and effectively manage public as well as institutional foreign investment, the government and central bank should form an independent foreign investment cell. By doing this the central bank and the government can closely monitor the outflow of capital from Nepal and ensure that investment gains are well routed back to Nepal.
The chart on this page illustrates the proposed process by which an individual or a financial institution can invest abroad and is self-explanatory:
In addition to this, to safeguard individuals as well as institutional investment and to protect Nepali economy, appropriate policies and guidelines are a must.
a. Limit should be set in terms of monetary value for allowing commercial banks to invest abroad. This limit should be solely derived based on the banks' capital as well as investment in the domestic market. The amount of investment in offshore market should not exceed the investment in domestic market. For every investment made abroad, a certain portion should be equated to domestic investment in the most liquid instrument.
In the case of individuals, the amount permissible for investing abroad should be derived from their tax statement.
b. Return on investments and the investment itself should be received either in Indian rupees or US dollars.
c. Settlement of return and investment amount between the local counterparts must be carried out only in local currencies.
d. Till the peg between the Indian rupee and the Nepali rupee is fixed, commercial banks as well as individuals can invest in offshore market but after obtaining proper approval from the foreign investment cell for each individual or lump sum investment.
e. Settlement of INR for USD or USD for INR in the offshore market should not be allowed till a peg system is in place.
f. The above d. and e. can be relaxed if the peg is removed.
g. In order to safeguard the investment, proper provisioning system in case of financial Institutions needs to be established.
(Pant is Managing Director of Bank of Kathmandu and President of Nepal Bankers’ Association)
Not a question of trade-off
By Binod Kumar Chaudhary
The question of whether Nepalis should be allowed to make investments abroad is not a question of trading off the investment in Nepal . There is no doubt that investment must increase in Nepal but at the same time, Nepalis should also be allowed to invest abroad if the investors feel it is appropriate. The relevant question is: how to enhance the competitive strength of the Nepali businesses in the fast globalising and competitive world and reap the benefits for Nepal from such an enhanced strength.
This requires a two-pronged strategy. On the one hand, we have to improve the investment environment at home and encourage more investment here from the domestic as well as foreign investors, while on the other hand, we have to let the domestic investors invest abroad so as to let them grow to become multinationals.
There seems to be a consensus among the top regulators of the country to accept the proposal of the private sector to let Nepalis invest abroad and the central bank has already sent a request to the government to amend the five-decade-old law, which prohibits Nepalis from investing abroad. However, there still seems to be lot of confusion about this proposal among some quarters of the policymakers and intellectuals. These confusions are not well-founded and need to be clarified.
One concern heard frequently is related with the possible repercussion of such a policy on the foreign exchange balance of the country as it is feared that it would speed up capital flight. The next is about the loss of employment opportunities that would have been created if the investment is made within the country. Both these concerns are not based on sound logic.
India has already been allowing its citizen (both corporate and natural) to invest abroad. Some well-known big Indian business houses have grown by investing abroad and now they are increasing investment not only abroad but also in India . Now for some years, India has been allowing even individuals to exchange $ 25,000 each year to invest abroad not only in businesses or in stocks but also to buy real estate. There has been no rush to the banks to exchange foreign currency and depleting the foreign currency reserve of the country. Rather the foreign exchange inflow in India is growing faster than before.
Also it is a well-known secret that capital flight takes place from Nepal even now and the present policy of restricting Nepalis from investing abroad has not been able to stop it. Capital flight takes place when the investment climate in the country is not conducive. No law will be able to stop it if the climate is not conducive at home. But when the environment is conducive, the capital that has flown away will fly back immediately. Lots of Chinese businessmen who had fled the country once are now investing in China as they have now found the investment climate conducive.
Another point that I would like to make about it is that only genuine investors will invest abroad when they are allowed to do it in a legal manner. Non-genuine investors who are doing business on the strength of their connection with the power centres will not be able to invest abroad because out there the basis of competition is efficiency not connection. Genuine investors will surely bring back the capital as well as the profit and interest they earn by investing abroad.
If Nepal does not change its rule and start allowing people to invest abroad, the people will find ways to circumvent the rules and there will be lots of distortions. Such distortions are already visible.
One such method is to create a non-resident Nepali in the family which intends to invest abroad. According to the present rules a person who has stayed abroad for 183 days or more in a year is considered an NRN and such a person can invest his earnings anywhere in the world. But if someone has stayed abroad for only 180 days and has made an investment abroad, he is treated as a criminal. There is no rationality in such a rule.
The other method is to search for a partner and invest abroad through him. But as you cannot depend fully on such a partner, businesses will have to limit such partnership to technology transfer. However, in such cases, the partner benefits more than the Nepali business house because the latter will not have the chance to reap the full benefits of the opportunity available which could be realised by making capital investment as well.
Fast expanding globalisation has made it imperative for the Nepali business houses to invest abroad to be competitive. If the competitor of a Nepali business house is selling its products in Nepal by producing them in an environment where the cost of production is less, the country should allow Nepali business house too to produce in similarly lower cost locations. Otherwise how can the Nepali business house be competitive? If it is allowed to seek such least cost locations to produce its products, it will be prepared to face even that imminent situation under which there will be no tariff barriers. This will also pave the way for them to be multinationals.
The problem is that the policymakers are still not aware of business intricacies. So much so that the budget document for the current fiscal year contains a grave error in the use of the term "special economic zone". The Bhairahawa location referred to in the document is in fact an "export processing zone" (a closed compound with facilities to the units located there to make their products less costly for export only by providing tax concessions) which is totally different from special economic zone (which is a region of the country focused on special type of economic activities and its ancillaries by providing special facilities to them). Similar misunderstandings are prevalent in numerous other issues as well including the proposal to invest abroad.
(Chaudhary is the President of CNI and Chairman and MD of Chaudhary Group)
Policy Integration is the Key
By Madhukar SJB Rana
While taking up the issue of whether Nepalis should be allowed to invest abroad, we must not forget to improve the investment climate within the country itself so that the demand for permission to invest abroad would not arise or while some Nepali people may be investing abroad, foreigners may be investing here, thus ensuring a balance.
First and foremost, we need to improve the investment climate, reduce transportation and transaction costs (e.g. remove any need for licensing other than for a very small negative list for environment protection), and introduce labour reforms to be able to garner national private sector investment in Nepal for rapid economic growth, employment creation and to create regional economic balance through investment in roads, water, energy and agro-industrials.
Then we need to develop policies for more productive utilisation of foreign remittances by promoting equity and bond markets and promotion of small and medium enterprises and micro-finance.
Further, we have a provision for free trade, free foreign exchange convertibility and free movement of labour between Nepal and India . Unfortunately, it is not quite so as we do not yet provide full national treatment to the Indians. Allowing Indians to freely enter Nepal and letting them invest in all sectors, including our stock market and in fixed deposit schemes of banks, will dynamise Nepal 's economy. And when Indians come in droves so too will the rest of the world, particularly Bangladesh and China . This requires that the foreign exchange rates be market driven so that problems with 'hot' or speculative, short term capital is avoided.
In the context of the broader picture, as painted above, Nepali businesses wishing to invest in Indian capital markets and create Indo-Nepali joint ventures is an acceptable proposition. Until Nepal is fully open to Indian capital, technology and skills, Nepalis investing in India should be (a) bound by a system of FDI licensing to keep track of capital outlflows and expected returns from such investments by way of dividends, capital repatriation and fees; and (b) permission may be given to the financial institutions to engage in portfolio investments in India so that the problem of interest rates being lower than inflation rates would not occur.
The above scenario presumes that NRB is strong and independent; and banks and financial institutions practice good corporate governance. NRB must be adequately engaged in basic research on long term interest rate and growth trends and structural changes in the economy. At the same time, prudent fiscal policies must be pursued to limit interned-external public debt within the safe limits.
The concept of developing Nepal as an off-shore finance centre was founded on the same logic of Nepal's advantage of geographic location as is the vision to make Nepal the 'transit economy' between South and Central Asia - transit economy is terms of space advantage while off-shore finance centre in terms time-zone advantage.
If India goes for full convertibility while Nepal fails to match it, probably, the Indian rupee will take over as the common currency in a grander manner than it is today.
Having said all these, we can conclude that Nepal needs to move from development policy to fully integrated economic and financial policies. This will be a measure of our maturity in macro-economic management in the age of globalisation. Opening the financial markets presents risks as capital markets are capricious and subject to frequent crises for any number of reasons-- including investor psychology and speculation. Growth is highest where risk management is most astute.
(Rana is former Minister of Finance)
