Measuring private sector contribution to the country’s economy

The Federation of Nepal’s Chamber of Commerce and Industries (FNCCI) and International Finance Corporation (IFC) jointly released a baseline study last week on Nepal’s private sector — State of Private Sector in Nepal: Contributions and Constraints. The private sector's contribution to the country’s GDP has shrunk but remains the largest employer of the total workforce in the country, according to the study.

The sector contributed 81.55% of the country’s total GDP in the last fiscal year 2021/22 which was estimated to be 86.67% in 2012/13 but has since declined.

The study assessed private sector contribution as well as its present situation analysing the data between fiscal year 2011/12  and 2020/21.

The report shows the following contributions and characteristics of the private sector:

Defining private sector

Establishments owned and managed by individuals, groups, or corporations including enterprises, such as cottage industries, MSMEs, retail and large businesses, and multinational corporations. Private households, which are an important part of consumption and production, are also considered a part of the private sector. 

Gross Fixed Capital Formation (GFCF) and consumption

The private sector is a major contributor to the GFCF and consumption in the economy. Public sector GFCF increased by 0.6% in the fiscal year 2020/21, while the private sector’s GFCF grew by 6.1%.

GFCF refers to the total amount of investment made by a country or an economy in the production and improvement of fixed assets, such as machinery, equipment, buildings, and infrastructure, during a specific period of time, usually a year.

In consumption expenditure, the government share increased by 4.4%, while private consumption expenditure grew by 5.5%. The share of total consumption in GDP slightly decreased from 92.3% in 2020/21 to an estimated 90.7% in 2021/22. 

The private sector contributed around 87% of intermediate consumption in the economy between 2012/13 and 2021/22, and also 83% of national GDP at a constant price during the same period. However, the declining trend in private sector consumption over this period indicates potential hindrances to its growth.

Largest employer

The private sector employs 85.6% of the country’s total workforce. According to the recent census, the five most significant sectors ranked by percentage of people employed are — agriculture, forestry, and fisheries (57.3%), wholesale and retail trade including repair of motor vehicles and motorcycles (12.5%), construction (8.1%), other services (3.9%), and manufacturing (3.8%).

Private sector establishments registered at the Office of Company Registrar (OCR) provided jobs to 4,938,566 persons. Of this, micro, small, and medium enterprises (MSMEs) accounted for 4897117 and large industries accounted for 41,449 jobs.

Composition

The number of private sector establishments increased significantly over the past 35 years — from 28,660 in 1983 to 923,356 in 2018. When compared to the 2011 economic census data, the growth in the number of private sector establishments stood at 47.6%. 

Small enterprises constitute 62.4% of the private sector, followed by medium-sized enterprises (22.9%), and large enterprises (14.7%). 

The service sector has the highest number of establishments, accounting for 85.5% of the total, followed by the secondary sector — industries, construction, and energy — at 11.9%, and the primary sector — agriculture, forestry, and fisheries — at 2.7%. 

The report also involves a primary survey of 517 firms across Nepal to assess the impact of COVID-19 on businesses and their awareness of sustainability and climate change. 

50% of the surveyed firms were wholesale and retail traders, 13% were from the hotel and accommodation sector, and 12% from the manufacturing sector. 

Furthermore, 79% of enterprises incurred a loss of revenue during the lockdown. However, once the lockdown was lifted, 50% of the firms reported profits. During the COVID-19 restrictions, 87% of the surveyed firms were affected, with 63% reporting full closure. 

The report, in particular, is the initial effort to set a broad baseline for Nepal’s private sector. In order to provide a view of the contribution made by the private sector to Nepal’s economy, the report comprises analyses of both published and unpublished secondary data.

According to the report, the role of the private sector in Nepal’s development has been significant ever since the country’s return to democracy in the 1990s followed by the government’s liberalisation, privatisation, and globalisation policies. This has led to significant growth in several sectors, such as finance, hospitality, tourism, education, and health.

On the other hand, the report identified a number of areas that need to be improved, such as streamlining bureaucratic procedures, increasing transparency and accountability in the public administration, enhancing the reliability and affordability of transport services, and lowering tariffs on essential imported inputs.

Summarised by Vivek Baranwal