It can happen only in spanking new Nepal. The budget speech for FY 2011/12 has opened the door for foreigners, including foreign citizens of Nepali origin (better known as NRNs), to buy commercial and residential houses and apartments. Even as the country's Civil Code prohibits any foreigner from engaging in any real estate transactions, the budget presented by Finance Minister Bharat Mohan Adhikari has a provision to allow NRNs to purchase houses and apartments "in specified terms", without specifying what those terms are, and, further, foreign individuals or companies to purchase houses and apartments amounting to US$200,000 or more. This means that NRNs can purchase houses and apartments of any amount. This provision comes with a caveat that such purchases cannot be sold until five years from the date of purchase, although it is not clear whether it applies to foreigners of non-Nepali origin only or NRNs also. It can be argued that the provision does not violate the Civil Code because foreigners will still not be allowed to purchase land, and this argument is likely to weather any challenge at the court of law given the country's juridical history. But as houses and apartments stand on land—not in the air—the spirit of the Civil Code is violated. Predictably, the implications of the provision were not analysed in the mainstream media, a major section of which was busy taking partisan positions on the budget. Analysts wearing political blinkers were too busy making hackneyed points drenched in political prejudices to deign to debate a provision introduced with the aim of appeasing the NRN community, whose demands of their ex-homeland are no way matched by their contributions. Below are some implications, and an assessment, of the provision.
1. The Finance Minister cited the need to attract foreign investment in the commercial houses and apartments sector as a reason for introducing the provision. The reality is that there is no such need—for the economy as a whole, if not for a handful of people that until recently rode high on the real estate and housing boom. Overinvestment, rather than underinvestment, is the problem. It is not for nothing that the central bank tightened bank credit to the sector (although it has begun to relax it, the overall stance is still restrictive, for good reason). Opening the door to foreign investment in the sector threatens to further puff it up. It will only delay the inevitable correction course and make a bust more painful.
2. Investment in new houses and apartments surely constitute "fixed capital formation". They will surely increase the investment component of GDP – in a technical sense. But they do not increase the economy's effective productive capacity; they do not lead to a sustained production of goods and services and a sustained employment generation (except for construction materials to the extent they are produced domestically, and workers to the extent they are Nepali nationals).
3. Yes, the country needs foreign investment – in the tradable sector ((i.e., the export sector and the import-substituting sector) and in sectors like hydropower that provide critical inputs to the tradable sector. Even as it opened the non-tradable housing sector to foreign investment, the budget was wanting in introducing measures to attract foreign investment into hydropower projects to cater to the domestic demand. At the very least, it could have, in keeping with an earlier commendable position taken by Energy Minister Gokarna Bista, introduced a policy of utilizing the electricity generated by all projects, already awarded or yet to be awarded, to meet domestic needs before considering exports.
4. That NRNs can purchase houses and apartments of any amount, in particular, has equity implications. The additional demand (in fact not only of NRNs but also of other foreigners, even if the latter can make purchases of US$200,000 and over only) will contribute to inflate prices of houses/apartments and land alike. The impact of high prices will be borne by middle-class Nepalis making a living on their soil and desirous of buying a house/apartment or land to build a house. (Besides, the lowering of capital gains tax (on income from the sales of houses and land) by 50 percent, announced in the budget, may benefit foreign investors too.)
5. Foreign investment will temporarily add to Nepal's foreign exchange reserves (although it is not clear whether NRNs will be required to make the purchase in foreign currency or not). Investment will be forthcoming if the investors believe that they will be able to reap more than what they have put in. After five years, they will have the right to repatriate their original investment and earnings (capital gains) in foreign currency, without having contributed to increase the productive capacity and production of the tradable sector (i.e., the export sector and the import-substituting sector). So the medium- to long-term, if not short-term, implication for the balance-of-payments is negative. If the provision was ostensibly introduced to encourage foreign investors to invest in the tradable sector or hydropower, then it should have been tied to investment of certain amounts in such sectors.
6. Formally, the Nepali rupee is convertible in the current account only. By opening up investment in the speculative, frothy housing sector, the government has, unwittingly, made a move towards capital account liberalization. Although foreign investment into the housing sector cannot be called portfolio investment and will count as "foreign direct investment" technically, the fact remains that it is basically guided by expectations of capital gains.
7. Neither the communist/Maoist prefix/suffix in the names of the two major ruling parties nor the Mahamanav variety of socialism the main opposition party supposedly cherishes were strong enough barriers to introducing, or not opposing, such a provision.
