Shreyasi Rana
New Delhi, Feb 4 (UNI) For more than six decades, Nepal has operated under an unusual contradiction: it actively courts foreign capital at home while prohibiting its own private sector from investing abroad. That asymmetry, rooted in the Foreign Exchange Regulation Act (FERA) of 1962, made sense in a post-monarchy, inward-looking developmental state. In today’s hyper-connected economy, however, it increasingly looks like a structural constraint on Nepal’s growth, competitiveness, and geopolitical relevance.
The debate over outbound investment is no longer academic. Nepal’s private sector today contributes more than four-fifths of national GDP, according to a joint study by the Federation of Nepalese Chambers of Commerce and Industry (FNCCI) and the International Finance Corporation (IFC). Government revenue, which stood at NPR 12 billion in 1990–91, has ballooned to NPR 1.178 trillion in fiscal year 2024–25, with nearly 90 percent coming from taxes. These figures reflect the transformation unleashed after Nepal’s economic liberalization in the early 1990s—yet the country’s legal architecture still treats outward capital flows as an existential threat.
That tension is becoming harder to sustain. Nepal’s liberal turn began after the 1990 People’s Movement, which ushered in multiparty democracy and a shift toward market-oriented reforms. The Foreign Investment and Technology Transfer Act (FITTA) of 1992 opened doors to foreign direct investment, and India rapidly emerged as Nepal’s largest source of FDI. Indian-backed ventures such as Dabur Nepal, Unilever Nepal, Nepal SBI Bank, and Everest Bank became cornerstones of manufacturing and finance.
But while inbound capital was welcomed, outbound capital remained effectively taboo. FERA continued to restrict Nepali citizens and firms from sending money or investing overseas without explicit state approval—a level of control that most liberalizing economies abandoned decades ago.
The result is a partial integration into globalization: Nepal participates as a host economy and as a labor exporter, but not as a capital-exporting business hub.
This asymmetry has strategic consequences. Countries that successfully internationalized their private sectors—India, China, and increasingly Vietnam- did not rely solely on exports. They encouraged their firms to acquire assets, establish subsidiaries, and embed themselves in foreign markets. Over time, this created global business diasporas that reinforced national influence, expanded diplomatic leverage, and generated resilient foreign-exchange earnings.
Supporters of strict capital controls often argue that allowing businesses to invest abroad would drain foreign exchange and reduce domestic investment. Nepal’s own economic structure suggests the opposite.
The country already relies heavily on cross-border income flows—just not from firms. In fiscal year 2024–25, Nepal received NPR 1.723 trillion in remittances, almost equal to the national budget of NPR 1.86 trillion. Labor migration, once politically controversial, has become the backbone of macroeconomic stability.
This experience offers two lessons. First, outward flows of people and capital are not inherently destabilizing; they can become lifelines. Second, when formal channels are restricted, informal channels flourish. Nepal’s own history with remittances—once largely informal, now increasingly regulated—demonstrates how legalization improves traceability, taxation, and policy control.
Applying the same logic to outbound investment would likely reduce, not increase, capital flight.
The government has already begun to acknowledge this reality—albeit cautiously. Recent legal amendments now allow Nepali IT firms to establish operations abroad, earn foreign income, and repatriate profits. Eligible companies can invest up to $1 million or 50 percent of their export earnings (whichever is lower), subject to approval from the Ministry of Communication and Information Technology and the central bank.
This is a quiet but consequential shift. It marks the first formal recognition that outward investment can serve national economic interests.
Yet limiting this privilege to IT alone exposes a deeper inconsistency. Nepal’s consumer brands, manufacturers, and service companies—ranging from instant noodle giant Wai Wai to apparel and outdoor-gear firms—remain confined to exporting rather than building overseas production, retail, or branding networks.
Exporting alone rarely creates global champions. Ownership of distribution, branding, and intellectual property does.
Allowing outbound investment would produce three strategic dividends. The first is Economic Resilience. Nepal’s domestic market of roughly 30 million people cannot sustain perpetual high growth. Overseas operations would give firms access to larger consumer bases, diversify revenue streams, and reduce vulnerability to domestic downturns. Over time, profit repatriation could complement remittances as a stable source of foreign exchange.
The second of course is Competitiveness and Technology Transfer that Nepal can gain from. Firms operating abroad absorb new management practices, technologies, and regulatory standards. These capabilities eventually feed back into domestic operations, raising productivity and innovation. This learning-by-doing effect was central to East Asia’s industrial ascent.
Corporate presence abroad creates informal channels of influence. Indian and Chinese firms abroad do more than sell products; they anchor business communities, shape perceptions, and create constituencies with a stake in bilateral stability. Nepal currently lacks such soft-power multipliers.
The government’s principal concern is monitoring: how to ensure that overseas earnings are reported and taxed. This problem is solvable. Nepal Rastra Bank already regulates complex cross-border remittance flows.
Similar reporting requirements, mandatory repatriation rules, and digital tracking systems could be applied to corporate overseas income. Many countries operate such regimes without resorting to blanket prohibitions. More fundamentally, excessive restriction creates precisely the risks policymakers fear.
When legal avenues are closed, illicit ones expand. A permissive but regulated system is more transparent than a prohibitive one.
Nepal’s continued reliance on a 1960s-era law reflects a broader strategic hesitation: whether to see globalization as something to manage defensively or to shape proactively. The IT sector reform suggests the beginnings of a new mindset.
But incremental exceptions will not substitute for structural change. FERA either needs to be repealed or replaced with a modern foreign exchange framework that treats outward investment as a legitimate economic activity rather than a suspect one.
The larger question is what kind of economy Nepal wants to become. If the goal is to remain a remittance-dependent, import-heavy state, capital controls can persist. If the goal is to evolve into a confident middle-income economy with globally active firms, then enabling outward investment is not optional—it is foundational.
Nepal has already learned to export its labor. The next step is to export its entrepreneurship. Without that leap, the country risks remaining a peripheral participant in globalization rather than an actor shaping its own economic destiny.
