Foreign Investment Hit by Nepal’s Three-Pillar, Socialism-Oriented Economic Policy: FNCCI

With just 33 days remaining until Nepal’s House of Representatives elections, the Federation of Nepalese Chambers of Commerce and Industry (FNCCI) has presented political parties with a set of recommendations to be included in their election manifestos and implemented thereafter. 

The move comes as the country prepares to vote on March 5, following the seismic Gen-Z protests of September 2025 that toppled the previous government.

The private sector bore the brunt of the unrest. On September 8, peaceful youth protests against the ban of more than two dozen social media platforms, corruption, and nepotism were met with state suppression that claimed nearly two dozen lives. The following day, defiance of curfew orders escalated into widespread vandalism and arson targeting politicians’ homes, government buildings, public facilities, and private enterprises.

FNCCI estimates direct physical damage at around Rs 38 billion, with the private sector incurring losses worth approximately Rs 80 billion.

“While rebuilding is possible, there is no guarantee that private enterprises will not face similar threats in the future,” the FNCCI warned. “Morale is at a historic low. Capital flight is a risk, and despite ample bank liquidity, entrepreneurs are reluctant to borrow for expansion.

If the private sector continues to be discouraged, employment and revenue will further contract, pushing the country toward failure.”

The FNCCI's list of suggestions urges political parties to recognise the private sector as a key employer, service provider, infrastructure builder, tax contributor, and wealth creator. Policies, it says, must raise entrepreneurial morale, enable unobstructed business operations, facilitate investment, and protect property rights.

Private Sector at the Heart of Economic Policy

FNCCI calls for innovation-driven policies ensuring equitable access to economic resources, particularly for disadvantaged communities, while promoting private-public partnerships.

The document critiques Nepal’s current three-pillar and socialism-oriented economic policies for deterring foreign investment. It suggests implementation of a liberal, innovation-focused and inclusive economy to attract foreign investment in the coming days.

Nepal’s economy is structured around a three-pillar framework — comprising the public sector, private sector, and cooperatives — designed to drive sustainable development and long-term economic prosperity.

Notably, under the Directive Principles (Article 50, Clause 3) of the Constitution of Nepal, the state’s economic objective is to develop a socialism-oriented independent and prosperous economy.

It reads: “The economic objective of the State shall be to achieve a sustainable economic development, while achieving rapid economic growth, by way of maximum mobilization of the available means and resources through participation and development of public, private and cooperatives, and to develop a socialism-oriented independent and prosperous economy while making the national economy independent, self-reliant and progressive in order to build an exploitation free society by abolishing economic inequality through equitable distribution of the gains.”

Protecting and Promoting Private Enterprise

FNCCI stresses the need for a “Private Sector Protection and Promotion Strategy.” Key recommendations include:

- Establishing a Directorate of Industrial and Commercial Security under the Armed Police Force.
- Designating industries as special or peace zones with legal protection against violence.
- Categorising enterprises based on investment, employment, revenue, and supply chain importance, with security aligned to sensitivity.
- Deploying rapid response units for immediate protection.
- Ensuring constitutional property rights and facilitating swift reconstruction after unrest.

Smart Governance and Public Service

The FNCCI also highlights the need for digitisation and efficiency in public services. Among the suggestions are:
- Business services to be digitised through the Nagarik app within a year.
- Annual business renewal requirements abolished for compliant enterprises.
- Simplified registration and tax procedures for SMEs at local offices.
- Project-based loans of up to Rs 10 million with shared risk among entrepreneurs, Credit Guarantee Corporation, the government, and development partners.
- Concessional loans for families of foreign workers sending remittances through regular channels.

Investment and Industrial Promotion

To foster a business-friendly climate, FNCCI recommends:

- Launching a decade-long Investment Promotion initiative.
- Reforming land, forest, environment, and public procurement laws.
- Establishing a Private Sector Investment Promotion and Protection Board.
- Reviewing budget formulation using the World Bank-supported “BOOST” method adopted in Uganda, Poland, and Moldova.

- Providing long-term incentives for production-based, high-value industries and import substitution programs.

Nepal is slated to graduate from Least Developed Country status in November 2026. However, with the private sector already hindered by weak demand and policy instability — and further impacted by the September protests — FNCCI recommends deferring the graduation by three years.

For startups, IT, and export promotion, the recommendations include:
- As exports to Europe and other developed countries are expected to face greater challenges following Nepal’s graduation from Least Developed Country status, implement integrated programmes – including targeted training, market development and diversification, and cost-reduction measures – to boost exports.
- Extending existing tax exemption provisions for startups up to 10 years, plus a 50 percent exemption for an additional five years.
- Supporting infrastructure for rural and urban startups and promoting at least 100 private-sector-backed startups annually.
- Mandating the use of domestic software in public and private institutions.
- Establishing internationally accredited laboratories for product quality certification.

Agriculture, Tourism, and Infrastructure

To develop the agriculture sector, FNCCI suggests that all existing processes and policies be restructured, and reform programmes implemented thereafter.

It also suggests providing hotels and resorts, theme parks, cable cars, polytechnic institutes, other educational institutions, teaching hospitals, and data centres established in hill stations with access roads and electricity, along with a provision for a 50 percent income tax exemption for at least the first five years.

In the energy and infrastructure sector, the recommendations include removing legal and procedural bottlenecks.

Under the Electricity Act 2049, companies that construct and operate hydropower projects by mid-July 2025 were entitled to a full income tax exemption for 10 years and a 50 percent exemption for the following 10 to 15 years, along with VAT refunds. FNCCI suggests the timeframe be extended by 10 years.

It also suggests finalising the construction modality of the proposed Nijgadh International Airport and prioritising its development for the optimum use of the  Nijgadh–Kathmandu Fast Track currently under construction. 

Tax Reforms and Regulatory Streamlining

- Reviewing income tax rates to create demand and increase the consumers’ purchasing power.
- Forming a task force, including the private sector, to carry out systematic preparations for the implementation of the multi-tiered VAT system, and as a pilot, implementing it on certain goods and services.
- Granting an investor a 75 percent exemption on income tax, if he reinvests more than 40 percent of his profit.
- Integrating non-tax revenue collection through a unified legal framework.
- Harmonising federal, provincial, and local taxes and ensuring no double taxation.

Among the suggestions is imposing financial penalties for economic offenses without treating them as criminal offenses punishable by imprisonment.