Kathmandu- Nepal's economic development has lagged despite decades of significant capital formation. The country’s capital formation has surpassed that of Bangladesh and even aligned with India in recent years, yet economic growth remains stagnant, with per capita income showing little improvement.
Economic theory suggests a strong correlation between capital formation, job creation, and growth, but Nepal presents a counter-narrative.
From the 1990s to the 2010s, Nepal's capital formation, averaging 33.3 percent of GDP, consistently outperformed many least-developed countries and even matched middle-income economies, according to Dr. Biswas Gauchan, Executive Director of the Institute for Integrated Development Studies (IIDS). However, this capital formation has not translated into tangible development.
Gauchan attributes this disconnect to poor resource mobilization.
'Resources were not directed to quality projects, leading to inefficient use,' he said at a Policy Conclave organized by IIDS. He noted wasteful government investments in projects with uncertain returns and rising household debt used for consumption rather than productive endeavors.
'This inefficiency extends beyond the government to the private sector and foreign donors. Gauchan emphasized the need for frugality and strategic investment across all levels,' he added.
Nepal Rastra Bank Governor Mahaprasad Adhikari, while acknowledging the issue, defended some infrastructure investments as long-term necessities. 'Not all projects are wasteful; some will yield benefits over time,' he said, adding that strategic concessions to key industries are also unavoidable.
Economist Dr. Rameshwor Khanal highlighted similar inefficiencies in the private sector. 'Many industries in Nepal operate below capacity because investment decisions are driven by momentum, not market analysis,' he said, pointing to overcapacity in sectors like cement and carpets as evidence.
Despite strong capital formation metrics, Nepal’s development story underscores the critical need for strategic resource allocation and better governance to bridge the gap between investment and growth.
