Rising FDI Commitments Signal Interest, but Structural Gaps Persist in Nepal’s Economy

Nepal has witnessed a notable rise in foreign direct investment (FDI) commitments during the first five months of the current fiscal year, reflecting renewed international interest in the country’s economy. According to data from the Department of Industry, investment commitments worth over Rs 38.59 billion were approved between mid-July and mid-December. While the figures indicate growing confidence among foreign investors, a closer look reveals structural imbalances that continue to limit the long-term economic impact of these inflows.

In numerical terms, the surge appears impressive. A total of 438 foreign investment projects were approved during the review period, suggesting strong momentum compared to previous years. However, the composition of these projects raises important questions about the direction of foreign investment and its ability to drive sustainable economic transformation.

The most striking trend is the dominance of the information and communication technology (ICT) sector in terms of project count. More than half of the approved projects—236 in total—fall under ICT. This reflects Nepal’s increasing attractiveness as a destination for digital services, software development, and outsourcing-based activities, largely driven by a young workforce, competitive labor costs, and expanding internet penetration.

Yet, despite its numerical dominance, the ICT sector accounts for only a modest share of total investment value, with commitments limited to around Rs 1 billion. This highlights the small-scale and service-oriented nature of most technology investments, which, while important for employment and skills development, contribute less to capital formation and export capacity compared to large industrial projects.

In contrast, agriculture and forest-based industries have emerged as the leading sector in terms of investment volume. With commitments nearing Rs 22 billion, this sector accounts for the largest share of total pledged capital. The trend suggests growing foreign interest in agro-processing, commercial farming, and value-chain development, areas that hold potential for rural employment and import substitution if effectively implemented.

Tourism has also regained momentum, attracting over Rs 10 billion in commitments across 135 projects. This resurgence signals renewed investor confidence in Nepal’s tourism potential following years of disruption. Investments in hotels, travel services, and related infrastructure point to expectations of rising tourist arrivals, though the sector remains vulnerable to external shocks and seasonal fluctuations.

Despite these positive signs, the most concerning aspect of the data is the weak presence of foreign investment in energy and infrastructure—sectors widely regarded as the backbone of long-term economic growth. Hydropower, transmission networks, and large-scale infrastructure projects require substantial capital and long gestation periods, yet they remain largely absent from the current investment landscape. Economists attribute this gap to policy uncertainty, lengthy approval processes, post-approval bottlenecks, and local-level implementation challenges.

The size distribution of approved projects further underscores this concern. Of the 438 projects, 423 are small-scale, eight are medium-sized, and only seven qualify as large projects. This imbalance suggests that Nepal continues to attract investors seeking quick returns with limited exposure, rather than those willing to commit long-term capital to transformative ventures.

Data from mid-November to mid-December reinforce this pattern. During this single month, FDI commitments worth Rs 1.91 billion were approved across 56 industries, the majority of which were small enterprises. While this steady inflow helps sustain short-term economic activity, it does little to address structural constraints such as trade deficits, energy shortages, and limited industrial capacity.

The approval of over Rs 1.62 billion in royalty repatriation during the same five-month period indicates that existing foreign investors remain operational and profitable. However, it also highlights the importance of ensuring that new commitments translate into actual investment inflows and domestic value creation, rather than remaining confined to paper approvals.

Economists argue that the rise in FDI commitments should be viewed as an opportunity rather than a final achievement. Without targeted reforms to attract large-scale investment in energy, infrastructure, and manufacturing, Nepal risks remaining trapped in a low-capital, service-driven growth model. Policy stability, faster project facilitation, stronger investment protection, and effective coordination between federal and local governments are widely seen as essential to converting commitments into tangible economic outcomes.

In essence, while the growing volume of foreign investment pledges signals renewed interest in Nepal, the challenge lies in reshaping the structure of investment. Only by shifting from small, short-term projects toward capital-intensive and productivity-enhancing sectors can foreign investment become a true driver of sustainable economic transformation.