Investment is the process by which an economy accumulates capital and enlarges its productive capacity. Though net investment gives a more accurate picture of an economy’s rate of capital accumulation, due to the complexities involved in measuring capital consumption, the usual practice is to use gross fixed capital formation to analyse the investment trends and behavior. This study also uses gross fixed capital formation to analyse the investment trends in Nepal. The total domestic investment exhibits nearly a stable pattern in terms of its ratio to the GDP. However, if we observe its composition, public investment is shrinking gradually while private investment is increasing gradually since the early 1990s. Though Nepal has opened up to the inflow of foreign direct investment (FDI), the data of the actual amount of such investment is not available. The observation of the approval-based data exhibits a massive surge in FDI inflow during the early years of 1990s.
2.1 Domestic Investment
The total fixed capital formation has remained around 20% of the GDP over the past twenty years. While the share of private investment as percentage of the GDP has increased over the years, the share of government investment has decreased.
Figure 3
External Sector Indicators
(% of GDP)
During the early years of the 1980s, the total gross fixed capital formation was around 17% of the GDP. Of the total, private investment was around 10% and public investment was around 7% of the GDP. The private investment reached 13.1% of the GDP while the public investment stood at 8.2% of the GDP in the mid-1980s. Consequently, the total investment reached 21.3% of the GDP in 1985. The public investment reached its peak (9.4% of the GDP) in the final year of the 1980s whereas the private investment declined to 10% of the GDP. Consequently, the total investment stood at 19.4% of the GDP at the end of the 1980s.
Figure 4
Figure 5
Gross Fixed Capital Formation in 1980s
(% of GDP)
The trend of the private and public investment reversed since the early years of the 1990s. The private investment, which was 9.4% of the GDP at the end of 1980, reached 16.5% of the GDP in 1996, while the public investment declined to 7.5%. The structural adjustment programme and the liberalisation measures, such as the privatisation of state-owned enterprises, export-oriented bilateral treaty with India, various incentives for promotion of private sector investment, and rationalisation of the tariff structure, created a conducive trade and investment climate for the private sector in the aftermath of the political
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regime shift to democracy in the early 1990s. Consequently, the total investment reached its peak at 24% of the GDP in 1996.
The investment climate began to erode since the mid-1990s due mainly to political instability and inception of the Maoist insurgency in the country. Private investment began to decline in terms of percentage of the GDP since 1997, while public investment plunge massively since 2001 as government could not continue its development activities due to a surge in internal violence, political instability, frequent closures and transportation strikes.
Figure 6
Gross Fixed Capital Formation in 1990s
(% of GDP)
Figure 7
Gross Fixed Capital Formation since 2000
(% of GDP)
The trend with regard to the number of industries registered also reveals a similar picture. The number of industries registered surged massively during the early years of the 1990s. However, the rate of registration of industries is almost stagnant during the last decade.
2.2 Foreign Direct Investment
The history of foreign investment in Nepal dates back to 1951-52 when the Nepal Commercial Corporation was set up as a joint venture with 67% equity participation by Indian investors. The FDI inflow was quite slow during the 1960s. In 1961, a provision was introduced for foreign investment in medium- scale industries with the investment of Rs. 50,000 to Rs. 500,000 and large- scale industries with the investment of more than Rs. 500,000. There is a lack of complete data capturing the actual amount of FDI inflows. The Department of Industry (DOI) maintains the FDI data only on the basis of approval or commitment. However, an appropriate mechanism to monitor the realisation of such commitment is still lacking. Therefore, our discussion on FDI is based on the approved or committed FDI.
After the political regime shift of 1990, the move towards liberalisation was further accelerated. It not only encouraged domestic investment but also foreign investment in the country. As a result, the FDI commitment in the early nineties surged remarkably. The FDI commitment which was around 0.4% of the GDP till 1992 surged massively to about 2% of the GDP in 1993. However, this trend could not be sustained and it declined to its lowest level at 0.2% of the GDP in 1995. Though the FDI commitment remained quite low after 1995, some signs of recovery can be envisaged in 2008. This is mainly due to the improved expectation of the business community in light of the improvement in the country’s political and security situation.
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Analysis of the approved FDI by sector reveals that the highest share of FDI is held by the manufacturing sector. The DOI-approved joint-venture projects since 1990 amounted to about Rs. 42 billion of the FDI. Of the total approved FDI, the manufacturing sector alone accounted for 36% of the FDI. The services sector is in the second position with about 24% share, and the energy sector occupied third position with 15%. The FDI commitment to the tourism sector accounted for 13.5%. The share of the FDI in construction, mineral and agricultural sectors are 5.9%, 5.4% and 0.5%, respectively.
Figure 9
Analysis of the FDI by country of origin reveals that India alone comprised about 44% of the total FDI. Open-border and preferential-bilateral-trade treaties with India as well as social and cultural similarities are believed to have stimulated Indian investors in Nepal. USA, South Korea and China occupied second, third, and fourth position with 11.1%, 9.3%, and 8.9% shares, respectively. UK, Norway and Japan accounted for about 2.5% each of the total approved FDI.