- BY NEWBIZ TEAM

Amidst the economic downturn, Nepali businesses continue investing and taking risks. There is a surge in new investments in sectors including energy, hospitality, healthcare, and automobile assembly.

One is likely to encounter a wave of pessimism about the country's economic situation when conversing with business leaders. Their observations paint a grim picture of the state of the economy: overall market demand has plummeted, business activities across various sectors have slowed dramatically, manufacturing and production have dwindled, and as a result, employment opportunities have diminished and the economy is suffering from unprecedented challenges. There is a consensus among business leaders that the current economic situation is the direst they have witnessed in decades.

In the aftermath of the COVID-19 pandemic's onset in early 2020, the Nepali economy has endured a tumultuous four-year period, with the private sector bearing the brunt, particularly in the last two years. As Nepal struggled to recover from the pandemic-induced economic downturn, soaring interest rates caused by an acute shortage of investment-grade liquidity in the banking system and diminishing market demand created formidable challenges for the country's private sector. In addition to inherent structural weaknesses that have affected the economy for a long time, global economic uncertainty stemming from the Russia-Ukraine war has played a significant role in exacerbating the situation for a country like Nepal.

Industries such as cement and steel, which experienced robust growth in the past decade, now grapple with challenging conditions due to a notable decrease in domestic demand for construction materials, resulting from the sharp slowdown in real estate business and construction activities. The impacts of the economic downturn transcend the manufacturing sector. The businesses importing foreign goods, previously considered resilient to economic and political fluctuations, now contend with substantial declines in their sales, notably in sectors like automobiles and consumer electronics. The bleak macroeconomic scenario of the country has culminated in growing problems for the banking sector, with commercial banks posting marginal credit growth followed by a 13% profit decline in the third quarter of fiscal year 2023/24. The average return on equity (ROE) of commercial banks is currently 8.5%, down from 25% during the banking sector's heydays in the 2000s.

While the challenges paint one side of the picture, there is another side, where amidst this gloom, businesses are investing and taking risks. There is a surge in new investment mainly in sectors such as energy, hospitality, and automobile assembly.

While the challenges paint one side of the picture, there is another side, where amidst this gloom, businesses are investing and taking risks. There is a surge in new investment mainly in sectors such as energy, hospitality, and automobile assembly. Despite voicing concerns about the business climate in the country, these very business leaders are making new investments with some even showcasing their projects at the 2024 Nepal Investment Summit.

In the second week of January 2024, Sahas Urja announced the acquisition of the 341 MW capacity Budhigandaki Hydroelectric Project from Times Energy for Rs 2 billion - the biggest such deal in recent times. Following the successful commercial operation of the 86 MW capacity Solukhola (Dudh Koshi) Hydroelectric Project, Sahas Urja was looking to acquire another large project. The Solukhola Project is the largest hydropower project built and brought into operation by the private sector with domestic investment.

When the umbrella organisations of the Nepali private sector were protesting the rising interest rates in November 2022, Ramesh Corp announced a joint venture with India's Kajaria Ceramics to establish a tile manufacturing industry in the country. The Rs 4 billion venture will produce 500,000 square metres of vitrified tiles and ceramics annually.

In April 2023, Shangri-La Hotel and Resort Group, one of Nepal's leading hospitality groups, announced that it would, together with IHG Hotels & Resorts, develop four new properties: InterContinental Kathmandu in Lazimpat; Hotel Indigo Pokhara in Gharipatan; InterContinental Resort Pokhara in Begnas Lake; and InterContinental Resort Chitwan in Meghauli.

Although a slowdown in consumer demand has impacted private sector expansion and new investment plans, large Nepali companies are undergoing credit rating processes to secure substantial bank loans.

Retail tycoon Min Bahadur Gurung and education entrepreneur Umesh Shrestha have joined forces to acquire a 30% ownership in Hotel De L'Annapurna in a Rs 9 billion deal. Gurung and Shrestha are pooling Rs 2.70 billion for the venture. Post-acquisition, their plan includes securing a 42-ropani land lease from the five-star property situated at Durbarmarg to develop Annapurna Square, featuring a premium shopping mall, hotel and parking infrastructure.

Amidst concerns regarding Nepal's investment climate, development finance institutions (DFIs) have injected $1.1 billion into the country over the past three-four years spanning diverse sectors, including banking, energy, hospitality, and IT.

Hospitality Investment on the Rise

While most sectors are still grappling with the aftereffects of the COVID-19 pandemic and subsequent recession, the hospitality industry has experienced a remarkable recovery in a relatively short period. Driven by a resurgence in tourist arrivals in 2023, new five-star properties have emerged in the Kathmandu Valley and other parts of the country. The year 2023 witnessed a notable expansion of Nepal's hospitality infrastructure with the inauguration of over a dozen new star-rated hotels. According to the Department of Tourism, a total of 13 star hotels, ranging from one-star to five-star accommodations, commenced operations during the year.

Among the notable additions is Varnavas, a luxurious five-star boutique hotel situated in Baluwatar, Kathmandu. This 48-room hotel, built with an investment of Rs 1.31 billion by businessperson and Nepali Congress MP Rajendra Bajgain, enhances the upscale offerings in the capital. Siddharth Vilasa, another five-star hotel, also began operations in 2023.

Kathmandu-based IT companies are collaborating with global companies like Boeing, Airbus and a leading e-commerce company in Japan.

Furthermore, plans are underway for the development of 11 additional star hotels outside Kathmandu with a collective investment of Rs 16 billion. These hotels are scheduled to commence operations between 2024 and 2027.

Data from the Nepal Rastra Bank (NRB) shows a 7.4% growth in bank lending to hotels in the current fiscal year. In 2023/24, banks extended loans amounting to Rs 12.92 billion, compared to Rs 8.90 billion in FY 2022/23.

Similarly, statistics from the Department of Industry (DoI) show a surge in investment in the hotel sector. Over the past two fiscal years, Nepal has attracted approximately Rs 52 billion in investment commitments in the tourism sector.

The robust performance of the hospitality industry is evident in the financial results of publicly listed hospitality companies. Five out of six hospitality companies listed on the Nepal Stock Exchange Limited (Nepse) have recorded growth in their net profits in the first half of 2023/24. Soaltee Hotel Limited, Taragaon Regency Hotels Limited, Chandragiri Hills Limited, Oriental Hotels Limited, and Kalinchowk Darshan Limited have all experienced profit growth. Non-listed hotels have also reported substantial growth in revenue and profits.

Growth in Cement and Steel exports

A notable success story in Nepal's export landscape is the significant increase in cement and steel exports to India. While the economic downturn severely impacted the domestic demand for construction materials, cement, and steel manufacturers have found renewed hope through the growth in exports.

Domestic cement manufacturers are optimistic about the potential for Nepali cement to capture a significant market share in neighbouring Indian cities, especially within a 100-kilometre radius of the Nepal-India border. They cite growing demand for Nepali cement in cities such as Patna, Darbhanga, and Muzaffarpur in Bihar, as well as various cities in Uttar Pradesh, including Gorakhpur, Lucknow, and Bahraich.

The latest data from the Department of Customs reveals a staggering 700% increase in cement exports and a 523% growth in clinker exports to India in the current fiscal year so far. In the first nine months of 2023/24, Nepal exported 2.07 million tonnes of PPC cement valued at Rs 1.49 billion, compared to 607,073 tonnes worth Rs 358.95 million in the previous fiscal year. Furthermore, the export of cement clinker has also seen an uptick. During the same period, Nepal exported 439,105 tonnes of clinker worth Rs 1.47 billion, compared to 396,950 tonnes worth Rs 420.35 million in the previous fiscal year.

Nepal currently has seven assembly plants, rolling out products of motorcycle brands such as Bajaj, TVS, Suzuki, Yamaha, Honda, Hero and Royal Enfield.

"With most of Nepal's cement production plants located near the Indian state of Uttar Pradesh, there is significant market potential for us within a 100-kilometre radius from the areas bordering Nepal," said Pashupati Murarka, Director of Arghakhanchi Cement. "Considering India's annual cement consumption capacity of 500 million tonnes, our ability to capture a share of 1-2 percent of this massive market would be a noteworthy achievement for Nepal. Nepali cement producers have the potential and capacity to capture this market share."

The inclusion of cement in the list of products with export potential in the Nepal Trade Integration Strategy (NTIS) 2023 highlights its promising prospects. Moreover, the government's decision to provide an 8% cash subsidy for cement exports has served as an additional incentive for Nepal's export efforts.

A significant milestone was achieved in July 2022 with the initiation of cement exports to India by Palpa Cement Industries. Since then, six Nepali cement companies have continuously exported cement, with a few also exporting clinker. According to Murarka, as grinding facilities are scarce in Uttar Pradesh and Bihar, there is an opportunity for clinker exports to India as well.

The surge in exports has attracted additional investment in the cement sector. The latest entrant is IME Group, which plans to enter cement manufacturing with an investment of Rs 20-25 billion in collaboration with foreign partners.

The exports of iron and steel products have also been remarkable in the last two years, positioning them as Nepal's top export items during this period. During the first nine months of the current fiscal year, the export of iron and steel surged by 63.2% to reach Rs 12.79 billion, accounting for the highest exports share of 11.23%.

Major Companies Continue Borrowing Momentum

Although a slowdown in consumer demand has impacted private sector expansion and new investment plans, large Nepali companies are undergoing credit rating processes to secure substantial bank loans. According to data from three Nepali credit rating agencies, 12 major private sector entities have undergone credit rating procedures to secure loans totaling Rs 184.63 billion from banks and financial institutions (BFIs). These companies have secured loans ranging from Rs 10-35 billion.

Jagdamba Steel, a flagship enterprise of the Shankar Group and Nepal's largest steel company, is one of those borrowers. With an operating income of Rs 40.17 billion in 2023, Jagdamba Steel has been rated for Rs 12.58 billion in long-term loans and Rs 27.6 billion in short-term loans.

Following closely is Ncell, which is undergoing a credit rating process for Rs 27.22 billion in both short-term and long-term loans.

Jagdamba Enterprises Pvt Ltd ranks as the third-largest borrower, with a credit rating of Rs 15.80 billion, including Rs 1.88 billion for long-term loans and Rs 13.92 billion for short-term loans.

Saurya Cement has also undergone a credit rating process for loans totaling Rs 15.01 billion, with Rs 11.04 billion earmarked for long-term loans and Rs 3.07 billion for short-term loans.

Bhatbhateni Supermarket, the operator of Nepal's largest supermarket and department store chain, has likewise undergone a credit rating process for loans amounting to Rs 12.87 billion, with Rs 5.25 billion allocated for long-term loans and Rs 7.06 billion for short-term loans.

Growing Presence of DFIs

Over the past three years, a notable development has been the growing involvement and investment of Development Finance Institutions (DFIs) in Nepal. Once considered a minor player in foreign direct investment, DFIs have now risen to prominence as significant stakeholders in the country's economic landscape.

Between 2014 and 2023, DFI investments surged to approximately $1.09 billion, with the majority directed towards the energy sector. In 2023 alone, DFI investment commitments amounted to $300.75 million. The surge in DFI investment commitments occurred post-2018 when the government initiated the external commercial borrowing window, facilitating engagement with foreign lenders like the British International Investment (BII), the development finance institution of the UK government, by Nepali banks. Notably, about 59% of DFI commitments have flowed into financial services, 28% into energy, 10% into funds and the remainder into various sectors.

Regarding investment products, 84% has been allocated as debt, primarily channelled into hydropower projects or banks, while 15% has been designated for equity. Additionally, some DFIs are introducing guarantee instruments as part of their investment strategies.

Based on their experiences so far, these DFIs are venturing into new realms of engagement in Nepal. In line with this endeavour, representatives from 14 DFIs convened in Kathmandu before the 2024 Nepal Investment Summit for the Second DFI Mission. The three-day mission was geared towards exploring investment opportunities in Class 'B' banks, microfinance institutions and digital financial service providers.

Facilitated by Invest for Impact Nepal, the DFI mission drew participation from 14 DFIs and Impact Investors hailing from the United States, Europe and the United Kingdom, alongside multilateral agencies like the IFC and ADB. The mission centred on expediting DFI investments in Nepal's financial services industry, with a specific emphasis on institutions beyond class 'A' banks.

While Nepal may still face challenges such as low GDP growth, insufficient infrastructure, and political uncertainty, which dissuade large commercial investors, the growing presence of DFIs bodes well for private sector development and impact investment in the country.

"Development agencies, being non-profit organisations, typically refrain from undertaking the kinds of risks associated with commercial operations that DFIs are equipped to manage," said Jorg Frieden, chairman of the Swiss Investment Fund for Emerging Markets. "We provide funding for commercial operations and actively seek returns on our investments, positioning us squarely within the realm of real-world business."

As the investment commitments of DFIs for Nepal in 2023 amounted to $300 million, Frieden believes DFIs should aim for the $300 million mark as a potential for collective investment from DFIs annually in Nepal.

Big Strides in IT 

"An area that excites me is digitalization. Recently, we've seen the launch of the world's first borderless neobank connecting the US and Nepal, a global security company valued at $100 million operating from Kathmandu, and a global AI company about to go public on Nasdaq," said economist Swarnim Wagle while addressing a session at the 2024 Nepal Investment Summit. Wagle was referring to the tie-up between XUNO, a borderless banking and payment company founded by IT entrepreneur Bal Krishna Joshi, and Nepal Clearing House Limited (NCHL), as well as the upcoming listing of the Nepal-originated AI company FuseMachines on the US stock market NASDAQ.

As Wagle noted, the IT sector has become one of Nepal's most dynamic industries in recent years, with the export of IT services reaching $515.4 million in 2022, positioning it as the top exportable product.

The 2023 Institute of Integrated Development Studies (IIDS) report shows there are more than 60,000 freelancers and over 100 companies within Nepal's IT sector. Among these, the most promising prospect lies in the ongoing expansion of the freelance workforce.

According to the report, the export of IT services grew by a remarkable 64.2% in 2022. "Both IT companies and freelancers experienced significant growth, with IT companies achieving an 80.5% increase in service exports and freelancers witnessing a growth of 55.2%," the report states. In 2022, IT service exports contributed 1.4% to the country's GDP and accounted for 5.5% of its foreign exchange reserves.

The fact that Nepali IT companies serve global giants based in the US, Europe, and Japan underscores the capabilities of home-grown tech firms. Kathmandu-based IT companies are collaborating with global companies like Boeing, Airbus and a leading e-commerce company in Japan.

Companies such as Cedar Gate, FuseMachines, Leapfrog Technology, Dearwalk, Logpoint Nepal, EKbana, Cloud Factory, InfoDevelopers, and Rara Labs, among others, have established a strong track record of serving global clients over several years.

Growing Automobile Assembly Business

Despite challenges in the domestic automobile market due to the slump in demand for internal combustion engine (ICE) vehicles in recent years, the Nepali private sector remains resilient, forging ahead by establishing assembly plants for both two-wheelers and four-wheelers with investment of billions of rupees.

Four two-wheeler assembly plants have started operation over the past year, while the country's first four-wheeler assembly plant is set to begin operations next month.

On April 14, the Chaudhary Group launched the Hero assembly plant with a capacity to assemble 75,000 units per annum. Four Hero products – Xpulse 200 4V, Super Splendor and Splendor+ motorcycles, and Xoom 110 scooter – will be assembled at the new assembly facility located in CG Industrial Park in Nawalparasi.

Nepal currently has seven assembly plants, rolling out products of motorcycle brands such as Bajaj, TVS, Suzuki, Yamaha, Honda, Hero and Royal Enfield. These products are assembled in Nepal using completely knocked-down (CKD) parts imported for the purpose.

The surge in the number of automobile assembly plans is driven by government incentives like excise duty and customs exemptions. This strategic policy has notably spurred the interest of Nepali business groups, particularly those already engaged in the automobile sector as authorised distributors of various vehicle brands, to invest in assembly plants.

The impacts of the automobile assembly plants are now visible. The import of unassembled motorcycles has surpassed that of assembled ones in the current fiscal year. Given that many two-wheeler distributors have established assembly plants for their respective brands, there has been a notable decline in the import of fully assembled motorcycles and scooters in the current fiscal year.

Over the first nine months of 2023/24, Nepal imported 52,052 units of unassembled motorcycles and scooters valued at Rs 6.74 billion. Such imports amounted to 29,600 units valued at Rs 3.42 billion in the corresponding period of the previous fiscal year. Conversely, the import of assembled motorcycles and scooters in the first nine months of 2023/24 stood at 41,766 units, in contrast to 49,928 units during the same period in 2022/23. 

Rising Investment in Healthcare Sector

Although many hospitals have faced financial difficulties post-Covid, the healthcare sector is continuing to attract new investments. Three new hospitals, with a combined investment of Rs 14 billion, are preparing to start operations in the next three years.

Kathmandu International Hospital (KIH), a multi-specialty facility situated in Tinkune, Kathmandu, is one among them. Backed by the promoters of Chitwan Medical College, KIH is currently in the infrastructure development phase. An estimated Rs 7.46 billion is being invested in the new facility.

Additionally, Dr Bhakta Man Shrestha, former executive director of BP Koirala Memorial Cancer Hospital, and other investors are investing Rs 4 billion in the Bharatpur-based Newton General Hospital. The hospital will have 350 beds. Furthermore, Rajendra Raut, Chairman of Shivam Organization, is investing Rs 2.5 billion to establish a 200-bed hospital in Budhiganga of Morang.

Meanwhile, Norvic International Hospital, a premier private healthcare institution in Kathmandu, is undergoing expansion. The hospital is constructing a new building to increase its capacity to accommodate 200 beds. The estimated cost of the project is Rs 2.38 billion. These substantial investments signal promising prospects for Nepal's healthcare sector.

Government Promises More Facilitation

Addressing the 2024 Nepal Investment Summit, Prime Minister Pushpa Kamal Dahal, Minister for Finance Barshaman Pun, former finance ministers Dr Yubaraj Khatiwada and Dr Prakash Sharan Mahat and Rastriya Swatantra Party leader Dr Swarnim Wagle made a commitment to facilitate and create an enabling environment for foreign investors in Nepal.

"Our unwavering commitment to liberal economic policies lays the foundation for a vibrant and investor-friendly business environment. We are strongly committed to carry out continuous reforms to facilitate investors, industrialists and innovators and improve the ease of doing business," said Prime Minister Dahal.

Finance Minister Pun termed the recent legislative amendments through an ordinance as a testament to Nepal's dedication to legal reforms. "Nepal is diligently enhancing its business environment through legal and regulatory reforms, alongside procedural streamlining," he said.

While the private sector had to wait till the investment summit for amendment to the much-needed investment-related laws to materialise, these amendments, if implemented, will facilitate investment not only from the Nepali private sector but also from foreign investors.

The government has amended eight laws: the Lands Act 1964, the National Parks and Wildlife Conservation Act 1973, the Land Acquisition Act 1977, the Special Economic Zone Act 2016, the Public Private Partnership and Investment Act 2019, the Foreign Investment and Technology Transfer Act (FITTA) 2019, the Forests Act of 2019, and the Industrial Enterprises Act of 2020.

The amendments to these laws were imperative given the challenges investors were facing while investing in the country. The fact that the Nepali private sector is still hesitant to further accelerate new investments, as shown by the recent report of the Confederation of Nepalese Industries (CNI), illustrates this notion. A whopping 59.68% of the respondents who participated in the survey said they don't have new investments planned for the upcoming quarter.

According to the CNI report, industries operated at 62.31% in Q2 of 2023/24, down from 63.86% in Q1 of the same fiscal year. The service industry's capacity utilisation rate was 62.78% in Q2, a decline from 66.28 percent in the first quarter. In contrast, the manufacturing industry's capacity utilisation rate fell to 61.97 percent in Q2 from 63.7 percent in the first quarter. 

There are indications of recovery as well. The average revenue growth across industries in Q2 of 2023/24 was -1.87 percent, an improvement from -5.56 percent in Q1 of the same fiscal year. The manufacturing sector saw a revenue decline of 6.71 percent in Q2 of 2023/24, compared to -10.27 percent in Q1 of 2023/24.

While the last few years have undoubtedly been challenging for the Nepali private sector, the growing investments across multiple sectors point to the resilience of the business community which can pave the way for the country's better economic future. 

• In the second week of January 2024, Sahas Urja announced the acquisition of the 341 MW capacity Budhigandaki Hydroelectric Project from Times Energy for Rs 2 billion - the biggest such deal in recent times. 
• In November 2022, Ramesh Corp announced a joint venture with India's Kajaria Ceramics to establish a tile manufacturing industry in the country. The Rs 4 billion venture will produce 500,000 square metres of vitrified tiles and ceramics annually.
• In April 2023, Shangri-La Hotel and Resort Group, one of Nepal's leading hospitality groups, announced that it would, together with IHG Hotels & Resorts, develop four new properties.
• 11 additional star hotels outside Kathmandu are being developed with a collective investment of Rs 16 billion.
• Retail tycoon Min Bahadur Gurung and education entrepreneur Umesh Shrestha have joined forces to acquire a 30% ownership in Hotel De L'Annapurna in a Rs 9 billion deal. Gurung and Shrestha are pooling Rs 2.70 billion for the venture. 
• Three new hospitals, with a combined investment of Rs 14 billion, are preparing to start operations in the next three years.
• Development finance institutions (DFIs) have injected $1.1 billion into the country over the past three-four years spanning diverse sectors, including banking, energy, hospitality, and IT.
• Jyoti Group's Syakar Trading Company, the official distributor of Honda two-wheelers in Nepal, inaugurated the Honda assembly plant in the first week of March this year. Jyoti Group’s subsidiary, Himal Moto Nepal Pvt Ltd will assemble Honda motorcycles and scooters. Jyoti Group has invested Rs 600 million in the new subsidiary.