Looking for a better and sustainable alternative to grants and loans? Go for FDI

FDI can stimulate a target country’s economic development and create a more conducive environment for companies, the investors, and stimulate the local economy.

Anmol Purbey

  • Read Time 5 min.

A grant refers to the transfer of resources–which are not required to be repaid–from one entity to another. Aid is even ridiculed as an activity of snatching away the hard-earned money from the poor people of the rich countries and giving it to the rich people of the poor countries. Grants are one of the ‘most important policy tools’ that developed countries use to help poor countries improve their people’s well-being and facilitate economic and institutional development.  

Although grants are usually seen as a noble step, there are many unintended consequences associated with them which make them inconsequential. Road to hell is paved with good intentions, goes a popular proverb. A great example of this would be the 2015 earthquake and the utilization of grants for reconstruction. Nepal received approximately NRs.175 billion as grants for reconstruction purposes via different donors. However, these grants suffered the same issues as most of the grants do–mismanagement, numerous delays, corruption, lack of good governance, squandering of grants, and more. Donors want the recipient country to be accountable for the funds supplied and ensure that the funds are used for their intended purpose, which is rarely the case with grants in general.

Loans are no better 

Loans are not any better. Loans are basically government spending but without even having the risk, because the ultimate risk bearers are the future generation. The total government debt has reached NPR 2,011.95 billion as of July 16, 2022. Taking on debt can be beneficial, as it gives a country the capital it needs to build the infrastructure it needs in order to boost its economy. However, the loans have to be paid and to be able to repay the loans in the long term, we have to invest the debt money in productive sectors, that too without delays so the interest does not keep piling up. All our national pride projects are excellent examples of these delays. The epitome of this would be our second international airport–the Gautam Buddha International Airport. The total cost of the airport construction is $76.1 million. Out of this, Asian Development Bank’s contribution is about $37 million in loans and grants, while the OPEC Fund for International Development contributed about $11 million in loans. The government failed to market the airport and launch promotional programs to attract foreign airlines. Because of this there is just one airline operating from that airport (that too not daily and is also on the verge of discontinuing). This is a huge loss for the airport as the loan money and interest are piling up. And we do not have funds to repay the loan which was supposed to come from the airport itself. Loans can be a cause for our economy to enter into a precarious situation.

FDI: A win-win for all                                          

Instead of choosing loans or grants as Official Development Assistance, which burdens the public, why not focus on an alternative that creates opportunities for the public and also addresses the concern related to investments within the country? This win-win situation can be achieved via Foreign Direct Investment (FDI) which is not only sustainable but also fairer and just to the people. FDI is an investment from a party in one country into a business or corporation in another country with the intention of establishing a lasting interest. Foreign Direct Investment plays a vital role in fostering national economic growth in developing countries. FDI creates employment opportunities, raises the level of domestic wages, speeds up economic growth, and improves the distribution of income.  

The recent trend of FDI realization in Nepal shows that there is a huge gap between approved FDI and actual net FDI inflows. 

FDI is the perfect alternative for grants and loans. We will be decreasing Nepal’s risk by bringing in FDI. When an enterprise brings in investment, they are accountable for that investment which is not the case with loans and aid. This is best explained by ‘four ways of spending money’ by Milton Friedman. Spending one’s money on themselves, spending one’s money on somebody else, spending someone else’s money on yourself, and spending someone else’s money on someone else. As an individual, spending someone else’s money on someone else is one thing. It’s a whole other level of waste when it comes to the government spending the taxpayer’s money on someone else. The government does not have direct accountability for how they spend the money, so they are fine with being billed 12 lakhs per month for just washing the cars in the Prime Minister’s residence.  

The recent trend of FDI realization shows that there is a huge gap between approved FDI and actual net FDI inflows in Nepal. The FDI approval may indicate an intended investment (the approved investment may not actually take place) or there may be significant time lags between approvals and actual investments. In some instances, the realization of the approved investment may take place over several years as usually seen in projects with longer gestation periods. Hence, there is a gap between FDI approval and actual FDI inflows. Between 1995/96 and 2020/21, the total actual net FDI inflow stood at around 36.5 percent of total FDI approval. 

The government of Nepal took almost five months to formally decide the lowering of the minimum threshold for FDI. The announcement was made back in May during the budget speech and it was seen as a very positive step especially when the economy has been fighting with the everlasting liquidity crisis. In the last six months, a lot of investment could have come in and eased the liquidity pressure. But, the decision was made when the investors were pulling out their investments–thanks to interest rate hikes in the US and elsewhere. 

To see some finest examples of countries that have overturned their economy with the help of FDI, we do not have to go very far. South Asian countries such as Singapore, Vietnam, Cambodia, Bangladesh, and many more have affirmed the major economic role played by the FDI sector, stressing its continuing importance for the country. 

FDI can stimulate a target country’s economic development and create a more conducive environment for companies, the investors, and stimulate the local economy. Countries usually have their own import tariffs, which makes trading rather difficult. A lot of economic sectors usually require a presence in the international markets to ensure sales and goals are met. FDI makes all of these international trade aspects a lot easier. Moreover, FDI creates new jobs and more opportunities as investors build new companies in foreign countries. This can lead to an increase in income and more purchasing power for locals, which in turn leads to an overall boost in targeted economies. 

FDI eliminates the burden not only from the shoulders of taxpayers of the receiver countries (that comes from loans) but also from the donor countries’ taxpayers as they will not have to worry about their hard-earned money going somewhere that is not going to be enjoyed by them (in the form of grants). Additionally, the foreign investors, to multiply their profit, will also input more technology advancements, bring valuable networks, put in heaps of new knowledge, build infrastructure, and much more. Hence, steps should be taken to bring in FDI in Nepal, as much as possible. It should be the endeavor of the government to put in place an enabling and investor-friendly FDI policy.

Anmol Purbey ​​is a researcher at Samriddhi Foundation, an economic policy think tank based in Kathmandu. The views expressed in this article are the author’s own and do not represent the views of the organization.

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