Nepal has jumped to an all-time high rank of 94 out of 190 economies as per the ‘Doing Business Report 2020’ in terms of ease of doing business by scoring 63.2 points on various parameters. Last year, Nepal was ranked 110th with a total score of 59.7 points. The primary reasons for this achievement were due to the improved availability of credit information and ease in cross-border trade. However, despite improving the environment for doing business, the country has made starting a business more difficult and property registration more expensive.
Table 1: Ranking of South Asian nations in the Ease of Doing Business Report (2020&2019) Source: World Bank Group ‘Ease of Doing Business Report 2020
Economies with a higher rank (normally ranging from one to twenty) have simpler and friendlier regulations for opening up of new businesses. Out of the 10 indicators used by the World Bank group to evaluate the ease of doing business in various economies, Nepal has significantly improved in five indicators, slipped in three, and remained constant in the remaining two as compared to the previous year.
Nepal has scored highest on access to credit information, ranking 37th out of 190 economies- by expanding the parameters and functioning of the Credit Information Bureau (CIB). The CIB currently looks after the credit functions of 116 banks, financial institutions, and debt seekers. This easy access to accurate and reliable credit information has also reduced the cost of borrowing for lenders and has helped them in making more informed credit decisions. Similarly, the nation also scored high on cross-border trade, ranking at the 60th position. The opening up of the ‘Birgunj Integrated Check Post’ (ICP) greatly reduced export costs and improved import times. Likewise, Nepal has also improved in other indicators such as- dealing with construction permits, protecting minority investors and resolving insolvency.
Figure 1: Nepal’s ranking on different indicators used by the World Bank Source: World Bank Group ‘Ease of Doing Business Report 2020
Despite all this, the country is still ranked poorly when it comes to starting a business, as the report has ranked Nepal in the 135th position. Similarly, the country has also raised property transfer registration fees, introduced stronger enforcement contracts, increased the tax slab, and has made it more difficult to get electricity.
The improved rankings can help the economy in attracting new and potential foreign investors and induce them to invest in various development projects, domestically. However, the revelation comes at a time when the country is facing an economic slump. Despite the economy succeeding in achieving its projected real GDP growth of 7.1 percent, its domestic consumption and demand are still very low. Likewise, rising social instability across the nation in the form of strikes and demonstrations due to unemployment and other fiscal and governance failures are a huge threat to business units. Improvements in few sectors do not guarantee the development of others. Hence, although the government has succeeded in making a more business-friendly environment for investors (through the opening up of Birgunj ICP and a stronger CIB), the regulation side needs to be much stronger. The imposition of high tax rates on traded goods is making it more difficult for both importers and exporters.
Foreign Direct Investment (FDI):
The flow of foreign direct investment (FDI) has reduced from USD 70 billion (in FY 2017/18) to USD 13 billion (in FY 2019/20). Stringent government acts such as – rectification of the Foreign Investment and Technology Transfer Act (FITTA) and Industrial Enterprise Act (IEA) has further obstructed the influx of foreign investment. The rectified ‘FITTA Act’ failed in introducing a ‘pre-approval system’ for investment, wherein, a provision on venture capital and issuance of securities in the foreign market still needs approval from the government. Similarly, the post ‘pre-approval stage’ too is riddled with problems. The IEA made it mandatory for all business activities falling under the definition of ‘industry’ to be registered as an industry. However, many provisions of this act which were to be issued in the form of regulation has not been formulated as of yet. All this is making it more difficult for foreign investors in their investment process, here in Nepal. Lastly, increment in the threshold level (of investment) from NPR 50 lakhs to NPR 50 crore is damaging the blooming start-up ecosystem or new small and medium enterprises (SMEs) from growing. Thus, the government needs to introduce new reforms and policies to make the economy more investment-friendly.
Restrictive labour regulations (the new Labor Act 2074) in Nepal are associated with a 35 percent increase in a firm’s unit labour cost. Similarly, the government has made paying taxes more difficult through the 2017 labour act.The introduction of a labour gratuity, medical insurance, and accident insurance paid by employers has placed a huge burden on companies who are already facing considerable bureaucracy. Similarly, the government made starting a business more difficult by requiring ‘in-person follow-up’ for employee registration for social security. Hence, rigid labour laws are hampering the productivity of labourers.
The private sector in Nepal is no longer FDI-friendly. Prevalence of interest groups such as the Federation of Nepalese Chamber of Commerce (FNCCI), Confederation of Nepalese Industries (CNI) and Chamber of Commerce (CoC) are lobbying their interests rather than what is required by the economy. This is giving out wrong signals, regarding the business climate in Nepal to foreign investors.
The ongoing trade war between the world’ two largest economies (USA and China) has pushed the global economy to an edge of distress. However, this trade war has also opened up new avenues for many nations across South Asia. Economies of this region have taken numerous steps to attract foreign direct investment and business into their nation. High FDI inflow has further supplemented them in boosting their comparative edge along with easing their previous prohibitive regulations.
Talking about the ease of doing business in India and Bhutan, these countries laid heavy emphasis on improving the business environment by reducing their corporate tax rates, abolishing filing fees and by making it easier to obtain a construction permit. Similarly, they have also lessened the hurdles that exporters and importers face while trading their goods.
Although Nepal too has introduced new initiatives to improve its business environment, more efforts from the government is required in providing a business-friendly environment with world-class infrastructure and better tax frameworks. Thus, even with the threat of inflation, proper implementation of structural reforms can improve the business climate across the nation and help the economy in reaching below the 80th position in the global ranking next year.
Shraddha Ghimire holds a Bachelor's in Economics (with Honors) from Lady Shri Ram College for Women, Delhi University, and a graduate certificate in International Development Studies (economic policy) from University of Oslo, Norway. She is currently working as a research associate at the Centre for Social Inclusion and Federalism (Nepal) and as a research analyst at the International Development Institute (USA). Her keen interest and specialization lie in development economics and public policy, alongside researching and writing about economic development and contemporary issues in Nepal. Ms. Ghimire was previously associated with institutions and think tanks including SAMRIDDHI (Nepal), Nepal Economic Forum (Nepal), South Asian Watch on Trade, Economics & Environment (Nepal), and Observer Research Foundation (India).