I. Introduction
Sequencing of Nepals political changes: first democratic movement in early 1990; second peoples movement in 2006, and declaration of Federal Democratic Republican State on Wednesday, May 28, 2008. Overemphasis of political restructuring has overshadowed the need for economic restructuring. ADB, DFID, and ILO-supported initiative in diagnosing growth constraints and identifying opportunities in Nepal is just completed.
Note: A = average labor cost per worker manufacturing, B = value added per unit of labor, C = labor cost per unit of output manufacturing according to the internationally accepted definition of the U.S. Department of Commerce.
InvestmentRate (% ofGDP)
GrossDomesticSaving(%ofGDP)
GDP: Gross Domestic Product Source: Economic Survey (various issues), MOF
Investment Constraintscontd.
ii. Infrastructure Infrastructure in Nepal is one of the poorest and Road density is smallest in the region. Road density is least in Midwestern region. Population to road ratio is highest in Western Development Region. In other words, in this region more people use fewer roads. Distribution of road network is highly unequal. More than fifty per cent of the total road network is concentrated in Terai. See Table 4 and Fig. 3 below:
Investment Constraintscontd.
Table 4: Road Network in Three Geographic Regions
Region Total Length of Roads (Km) Population Influenced Per Km. of Road (Nos.) Road Density (Km./100 sq.Km)
Mountain
742
2274.743
1.431962
Hill
7590
1350.608
12.38719
Tarai
8504
1318.492
24.9978
Investment Constraintscontd.
Fig 3: Road Network in Three Geographic Regions
Investment Constraintscontd.
Figure 4: Density of the total road network (Km.roads / square Km. land area)-2003*
Source: IRF World Road Statistics *Data for India and Afghanistan corresponds to 2002 and 2004respectively
Investment Constraintscontd.
Nepal study shows that if transportation time is reduced by fifty per cent, then it may result in higher income through the increased fertilizer use and yield (MoICS, 2004). Other important constraint is electricity tariff, which is one of the highest in South Asia.
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Investment Constraintscontd.
Figure 5: Electricity Tariff ($/KWh, 2000)
Bangladesh 0.041
Pakistan
0.065
Sri Lanka
0.079
India
0.043
Nepal
0.093
Investment Constraintscontd.
The overall infrastructure situation for attracting investment is very dismal. Expensive and irregular electricity, small and low quality road network, expensive and deficient transportation are some of the examples. Infrastructure quality score shown in the Figure 6 reveals that Nepal, in fact, has the poorest infrastructure in comparison to other South Asian neighboring countries. Highest possible score is seven out of which Nepal secures only 1.9. Nepal's position with this score is 119 out of 125 countries in the world.
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Investment Constraintscontd.
Both quality and expenditure for infrastructure is very low. Nepal spends < 1% of total GDP on infrastructure against 4.8 percent of India. Study shows that Nepal needs to invest US$ 3.44 billion (12.22 percent of GDP) for the period of 2008-2012 in order to achieve eight per cent growth rate.
InfrastructureQuality Score
2.3 3.3
3.4 3
http://siteresources.worldbank.org/INTEXPCOMNET/Resources/2.01_Overall_Infra structure_Quality.pdf
Investment Constraintscontd.
In terms of telecommunications, Nepal has lowest number of telephone subscriber per 100 people in South Asia. Fixed line and mobile phone subscribers (per 100 people) in 2006 remained at 5.9244 for Nepal. It was 18.6356 in India; 36.6930 in Sri Lanka; 24.9911 in Pakistan and 12.9911 in Bangladesh. Although Nepal ranks lowest in the region in terms of subscriber per 100 people, study shows telephone doesnt seem to be a constraint to investment and growth.
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Investment Constraintscontd.
iii. Political Stability and Governance
Governance indicator, as published by World Bank is deteriorating. It may be due to frequent change in government during last one and half decade. Table 6: Governance Indicators for Nepal, Percentile Rank (0-100)
Governance Indicators Voice and Accountability Political Stability Government Effectiveness Regulatory Quality Rule of Law 1996 46.4 26.9 36 22.9 51.4 1998 42.3 23.6 36 31.7 52.9 2000 43.3 14.4 40.8 28.3 44.8 2002 24.5 6.7 37 31.7 42.4 2003 25.5 5.3 34.1 33.2 37.1 2004 2005 18.3 2.9 22.3 31.2 32.4 13.9 1.4 15.2 25.9 23.8 2006 2007 Region Avg. 15.4 22.6 28 2.9 21.8 26.3 33.3 2.9 21.8 26.7 31 19.3 36.5 31.9 38.3
Investment Constraintscontd.
Similarly frequent bandh is deteriorating smooth functioning of business sector.
Figure 7: Number of Days of Bandh (Excluding Indefinite Bandh)
City District Region Country 36
24 21 13 9 1 8 4 7 9 5 2 3 5 4 5 3 2 3 2 2 4
21 13
September
December
February
August
October
March
April
July
April,2007
January,2008
Source: Various News Papers Note: This chart doesn't include Bandh called for indefinite period. District: One district Region: Two or more district City: City or part of highway in one district e.g. Bhairahawa-Sunauli highway
November
Total
June
June
May
May
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Investment Constraintscontd.
Fig 8: Share of Bandh for City to Country (Excluding Indefinite
Country 5% City 25%
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Review shows, investors demand the revision of the rigid Labor Act, 1992 to avoid labor market rigidity. Other equally important acts such as Bankruptcy and Mergers Act should be enacted without further delay to reduce investor's risk. It is important for the government and private sector to find out the reasons why increased FDI has not been very significant in the growth of Nepalese GDP in absolute as well as in the relative sense (http://ideas.repec.org).
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Banks are holding more funds than they are required to, however, investment in larger infrastructure projects suffers as there is a limited access to international financial markets. The survey of foreign affiliates in Nepal shows that majority of the projects with capital participation from developed countries are small-scale projects with individual investors. There is a predominance of JVIs even when 100 per cent equity ownership is allowed. This is the area to be investigated.
The draft Industrial Policy, 2002; Industrial Development Perspective Plan: Vision 2020 and Foreign Investment Policy, 2002 are relatively better designed. In the revised policies, provision for enhancing NRNs involvement in Nepals development initiatives be ensured. The new government should get rid of weaker administrative practices and conservative attitudes towards business.
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