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Restricting Investment Abroad and Illicit Capital Outflows

Given Nepal’s unfavorable business environment–Nepal ranks 107th in the World Bank’s Doing Business Report 2016—it is not very surprising if Nepalese wished to invest abroad for better returns. However, the Government of Nepal has barred Nepalese from making any foreign investments through the Act Restricting Investment Abroad, 2021B.S (1964) with genuine motives of preventing Nepalese capital to go out of Nepal so that it could all be channeled to Nepal’s economic growth. This Act was introduced 53 years ago when globalization was a far cry. However, the relevance of this law today is questionable.

The Global Financial Integrity (GFI) report released in December 2015, Illicit Financial Flows from Developing Countries: 2004- 2013, has ranked Nepal 86th out of 149 developing countries surveyed for Illicit Financial Flows (IFF). Nepal’s average illicit capital outflow from 2004-13 was 567 million US dollars per year. According to an article in Republica, economists reason, “prolonged political transition, lack of an investment friendly environment, and no guarantee of profit due to low productivity are encouraging the capital outflow.” The GFI report has drawn attention to the existing illegal means by which people have taken their money out of their borders. It is therefore clear that the government’s attempt at protecting and promoting the economic growth of Nepal through restrictive measures has failed to achieve its desired goals.

Circumventing laws in Nepal is not a new practice – Nepal ranks 131st in Transparency International’s Corruption Perception Index, 2016. If people with right connections are already capable of taking money out of Nepal despite the Act to Restrict Investment Abroad (1964), and it is agreed that Nepal’s investment climate is not very favorable, restricting its other citizens (without connections) from making more profitable investments does not sound like a 21st century idea of development. If there are better prospects outside, any rational investor will start looking for loopholes in the law to be able to invest outside. If a government so wishes for capital to channel it towards domestic investments, then it would make more sense to in fact frame policies that incentivize even foreigners to come and invest in their country. When even foreigners are coming in for this host country which now offers better returns and better investment climate, then fewer domestic nationals would take their money out of the country.

There are several benefits of globalization that Nepal has not been able to capitalize on. These are missed opportunities for Nepal and for Nepalese. The relevance of policies that bar Nepalese from making foreign investment needs to be reconsidered. It only makes sense to have laws that are implementable. Laws that are binding only upon those who are unable to violate them are of no good to the nation, and is clearly indicative of the public sentiment around it. Coercion has its own limitations, and even if Nepal tries to shy away from globalization, the citizens will not.

About Shalini Gupta

Shalini is a Research Officer at Samriddhi Foundation

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