Nepal’s private sector contributes 81.55 percent to Nepal’s GDP, making it a crucial driver of economic growth
the HRM
Biratnagar Jute Mill was established in 1936 as the first industry in Nepal. Founded by the late Shree Ramlal Golchha, the patriarch of the Golchha family, the jute mill heralded an era of organized private investment in Nepal.
From 1936 to 2023, it has been almost nine decades since Nepali private investors began investing and making significant contributions to the national economy. Nepali businesses have evolved over time from their humble beginnings to becoming the large corporate houses of today with varied interests across different business verticals.
After Nepal adopted a mixed economic system after the overthrown of the Rana regime in 1951, which combines elements of both market-oriented capitalism and state intervention, the private sector has played a crucial role in driving economic growth, generating employment opportunities, and contributing to the overall development of the country. Private investments have been instrumental in sectors such as manufacturing, services, agriculture, tourism, and infrastructure development.
The new study by the International Finance Corporation (IFC) and the Federation of Nepalese Chambers of Commerce and Industry (FNCCI) underscored the fact that the Nepali private sector is the largest contributor to the country’s gross domestic product (GDP) and serves as the primary source of employment in the country.
The study, titled ‘State of Private Sector in Nepal: Contributions and Constraints,’ emphasizes the pivotal role played by the private sector in Nepal’s economy.
With the adoption of economic liberalism in the early 1990s, the government introduced reforms to promote the private sector’s participation in the economy and foster entrepreneurship in the country. These measures have resulted in a notable increase in the private sector’s contribution to Nepal’s GDP and employment. Nepal’s private sector accounts for 81.55 percent of Nepal’s GDP, making it a crucial driver of economic growth. The study is the first of its kind in Nepal, providing an evaluation of the private sector’s contribution to the economy in the current context.
According to the report, the private sector is the largest employer in Nepal, providing jobs to a significant portion of the country’s labor force. The private sector employed around 5.5 million people in 2018, which accounted for approximately 80 percent of the total labor force. In contrast, the public sector, including government institutions and state-owned enterprises, employed less than half a million people in 2018.
A significant portion of the business landscape in Nepal is comprised of small-scale businesses. According to the report, small enterprises make up 62.4 percent of the total private sector, followed by medium-sized enterprises at 22.9 percent, and large enterprises at 14.7 percent.
The report highlights the substantial contribution of the private sector to capital formation and investment in the country. The government has also acknowledged this fact and stated in the Economic Survey 2020/21 that the private sector accounted for 76.9 percent of the total investment in Nepal, while the public sector contributed the remaining share.
In line with the global trends, where private sector investments are often the primary driver of economic growth, the Nepali private sector has also been contributing significantly to capital formation.
The IFC/FNCCI report says there has been a consistent and increasing trend in the private sector’s contribution to capital formation in Nepal. Over the last ten fiscal years, private sector fixed investment has averaged 71.4 percent of the total fixed investment, reaffirming the private sector’s dominance in driving economic growth and development in the country. In FY 2021/22, gross fixed investment in Nepal is estimated to have increased by 7.3 percent to Rs 1250.98 billion compared to the previous fiscal year. The private sector gross fixed investment experienced a higher growth rate of 9.6 percent whereas public sector investment recorded a decrease of 2.8 percent.
The cumulative private investment in Nepal amounted to Rs 3,191.57 billion as of mid-July 2022, an increase of 10.7 percent compared to the previous year. The data from Nepal Rastra Bank shows private investment has been steadily increasing at an average annual rate of 11.7 percent over the past five years.
As per the report, the private sector has a significantly larger share of total consumption compared to the public sector. The average share of the public sector in total consumption is 9.1 percent, while the private sector accounts for 89.2 percent.
The private sector has been a major contributor to gross fixed capital formation (GFCF) and consumption in the economy. In FY 2020/21, government consumption expenditure increased by 4.4 percent, while private consumption expenditure grew by 5.5 percent. The public sector’s GFCF increased by 0.6 percent, while the private sector’s GFCF grew by 6.1 percent.
The report highlights that the private sector has been a major contributor to intermediate consumption in the economy, accounting for around 87 percent between 2012/13 and 2021/22. “However, the declining trend in private sector consumption over this period indicates potential hindrances to its growth,” states the report.
A Dominant Player
Except few, the private sector is the dominant player in major sectors of the economy. The private sector has a significant share, approximately one-third of the total sectoral output in the education sector. Private educational institutions have played a substantial role in providing educational services in Nepal. Between the years 2012/13 and 2017/18, the private sector’s share in the overall output of the education sector showed a growing trend.
In the financial and insurance sector, the private sector holds a significant share of approximately two-thirds of the total output. However, the study states that the private sector’s contribution to both sectoral output and gross value added (GVA) has been declining. In 2012/13, private companies contributed 74.31 percent to the overall output of the financial and insurance sector. However, by 2021/22, this share was estimated to have decreased to 65.94 percent. Similarly, the share of privately contributed GVA has also shown a downward trend.
In the information and communication sector, the private sector’s contribution to the total sectoral Gross Value Added (GVA) was 57.18 percent in 2012/13. Over the years, with the exception of a minor decline in FY 2016/17, the private sector continued to increase its share in sectoral GVA, reaching 68.62 percent in 2021/22.
In the manufacturing sector, the private sector dominates, contributing above 99 percent of the GVA for the entire industry. This highlights the significant role of private companies in driving manufacturing activities and generating value within the sector.
The agriculture, forestry, and fisheries industry also heavily rely on the private sector. Between FY 2012/13 and 2021/22, the private sector’s median contribution to the sectoral GVA was 97.62 percent.
Largest employer in Nepal
The Nepali private sector is the largest employment generator in the country, contributing to both formal and informal job opportunities. In 2018, the private sector created jobs for a significant number of individuals, employing a total of 4,938,566 people.
Within the private sector, Micro, Small, and Medium Enterprises (MSMEs) played a particularly significant role in job creation. MSMEs accounted for 4,564,040 jobs, demonstrating their substantial contribution to employment generation. SMEs (Small and Medium Enterprises) provided 333,077 jobs, while large industries accounted for 41,449 jobs in 2018.
The report also highlights the registration of 555,776 micro and small industries as of March 2022. These registered micro and small industries created 3,008,369 jobs, indicating the significant employment opportunities generated by this sector.
The formal private sector comprises over 99 percent of small and medium-sized enterprises, with only 18 percent of these firms employing more than 20 individuals. These figures underline the critical role played by the private sector in employment generation in Nepal, particularly through MSMEs and SMEs. The private sector’s contribution to job creation is essential for fostering economic growth, reducing unemployment, and improving livelihoods across the country.
MSMEs account for 95.3 percent
Micro, small, and medium enterprises (MSMEs) accounted for 95.3 percent, SMEs for 4.5 percent, and large industries for only 0.2 percent of the total private sector establishments in the country.
In 2018, the IFC/FNCCI study states that there were a total of 923,356 private sector establishments operating in Nepal. This figure represents a significant increase of 47.6 percent compared to the 610,364 establishments recorded in the 2011 Economic Census. This growth suggests a notable expansion of the private sector and the entrepreneurial landscape in Nepal during that period.
The study has emphasized the importance of strengthening the competitive private sector in Nepal to achieve its goal of becoming a middle-income country by 2030.
“The government needs to focus on enhancing policy design and implementation, enhance governance, simplify bureaucratic processes, and promote transparency and accountability. There is a need for better coherence and harmonization in policies to facilitate investment in the productive sector,” the study said.
In their report, IFC and FNCCI have suggested reforms in intellectual property laws and uniform enforcement of ethical business practices without hindering entrepreneurship. “Nepal should also address supply-side constraints to export by improving the reliability and cost of electricity and transportation services and reducing tariffs on crucial imported inputs,” reads the report.
