Is Nepal suffering from capital flight?

Is Nepal suffering from capital flight?
Prakriti Prasad
The Himalayan Times, Feb 1 2007

Stories of royalists, armymen and a powerful section of the business community siphoning off money from Nepal for investments outside the country have been doing the rounds in recent times.

While the fear of confiscation of property post the Jan Andolan II period is understood to be the reason behind royalists routing their money out of Nepal, continuing insecurity, extortions and rising labour problems apparently are goading the business community to invest abroad, primarily to India.

Although an accepted fact by most industry insiders, capital flight from Nepal remains a hush-hush affair.

The Act on Prohibition of Investment Abroad ensures ‘not a single penny can be invested outside without the permission of the Central Bank,’ points out Ram Prasad Adhikari, executive director of the research wing of the Nepal Rastra Bank. “Even to open liaison offices outside Nepal, NRB’s permission is mandatory,” he adds.

Interestingly, while the NRB official maintains there’s no evidence of capital flight from Nepal, the market is full of stories about Nepali business houses setting up construction and real estate interests in Dubai, hotels in Colombo and Maldives, steel factory in Orissa or a noodle factory in Sikkim. Some travel entrepreneurs are said to have invested even in restaurants in Delhi.

Most of these investments are apparently being made in the name of relatives or using dual citizenship, in case of India as marriages between Indians and Nepalis is an old practice.

According to insiders, while the pace of investments outside Nepal was very high till about six months back, it may have come down after the peace accord.

“Till about 10 months back the scenario was totally negative. But now we can see light at the end of the tunnel as we are moving towards stable politics,” quips Rajendra Khetan, director Khetan group.

What about his company’s plans to set up a factory of Mayo’s noodles in India? “Certainly not without proper clearance,” Khetan answers.

“We plan to come up with a noodles factory in Bhairahawa to cater to western Nepal as well as bordering Indian markets. While we are looking at setting up banking and insurance branches in India with due permission from both governments, in the manufacturing sector we feel there is ample scope for diversification within Nepal,” he adds.

Given the opportunity, the company would be keen to set up a noodles factory in Delhi or north India, confesses Khetan.

“All that we are asking of the government is to guarantee peace and a safe working environment, and we will ensure the country grows at a double digit,” gushes Shekhar Golchha, executive director, Golcha organisation which employs 13,000 people and claims to be the largest employers after the government of Nepal.

While Golchha concedes almost everybody is exploring opportunities outside Nepal, he claims to be a strong believer in the huge potentials of this economy.

“After this transition phase, we are bound to hit a golden period,” he says, “Doing business in Nepal is a different ball game as there are better returns on investment here unlike other countries.”

Even as most businessmen are optimistic about Nepal’s future and predict a 90 per cent de-escalation in insurgency in the next three months and solution to the Tarai problem, others are busy shifting their business interests to India.

“There’s been no talk on economic agenda or sustainable development in the past six months,” says one on condition of anonymity.

Another claims, “For businessmen, there can be no barriers. The Nepali market is not a competitive one as the size of the market is so small. There’s no market for industrial investments which explains why there are so few multi-nationals here.”

Meanwhile, NRB’s Adhikari feels the sense of restlessness in the business community abut operating in a restricted market has been sensed by the government.

“The government will be seriously thinking of liberalising its policies to allow at least limited amounts of investment abroad,” he points out.