The Nepali private sector is the largest contributor to Nepal’s gross domestic product (GDP) as well as the biggest employer in the country, a new study has said. The study, conducted jointly by the International Finance Corporation (IFC) and the Federation of Nepalese Chambers of Commerce and Industry (FNCCI), was published in the report titled 'State of Private Sector in Nepal: Contributions and Constraints' has highlighted the private sector as a major contributor to gross fixed capital formation (GFCF) and consumption in the economy.
According to the report, Nepal’s private sector contributes 81.55 percent to the country’s GDP. The study report is the first of its kind that evaluates the private sector’s contribution to the economy and current context in Nepal.
The private sector has been a catalyst in the overall economic growth and development of Nepal. After the government adopted a liberal economic regime in the 1990s, its contribution to the country’s GDP and employment increased significantly.
The private sector is the largest employer in the country, providing employment to around 80 percent of the total labor force. In 2018, the private sector employed approximately 5.5m people, while the public sector employed less than half a million people.
The contribution of the private sector to Nepal’s economic growth has increased steadily in recent years. According to the Finance Ministry’s Economic Survey, the private sector grew at an annual rate of 6.6 percent in 2018/19, while the public sector grew at 4.8 percent.
“Some of the major sectors contributing to the growth of the private sector include tourism, agriculture, manufacturing, and services. The private sector also plays a critical role in infrastructure development, transportation, and energy,” states the IFC/FNCCI report.
The report says the Nepali private sector is dominated by small enterprises, which make up 62.4 percent of the total, followed by medium-sized enterprises at 22.9 percent, and large enterprises at 14.7 percent.
Private sector investment accounts for more than two-thirds of the total fixed investment in the country. The private sector plays a significant role in capital formation in the economy. According to the Economic Survey 2020/21, the private sector contributed 76.9 percent of the total investment in the country, while the public sector contributed the rest.
The private sector’s contribution to capital formation has been increasing over the years, reflecting the growing role of the private sector in the country’s economy. “Private sector fixed investment has averaged 71.4 percent of the total fixed investment in the last ten fiscal years, indicating the continued dominance of the private sector in driving economic growth and development,” states the IFC/FNCCI report.
In FY 2021/22, gross fixed investment is estimated to have increased by 7.3 percent to Rs 1250.98bn compared to the previous fiscal year, of which private sector gross fixed investment increased by 9.6 percent while public sector investment decreased by 2.8 percent.
The cumulative private investment amounted to Rs 3,191.57bn, as of mid-July 2022. This is an increase of 10.7 percent over the previous year. Nepal Rastra Bank data shows that private investment has been increasing at an average annual rate of 11.7 percent over the past five years.
The average share of public and private sectors in total consumption was 9.1 percent and 89.2 percent respectively. The private sector is also growing in terms of volume, investment, and contribution to GDP.
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. Public sector GFCF increased by 0.6 percent, while the private sector’s GFCF grew by 6.1 percent.
According to the report, the share of total consumption in GDP slightly decreased from 92.3 percent in FY 2020/21 to an estimated 90.7 percent in FY 2021/22. The private sector contributed around 87 percent of intermediate consumption in the economy between 2012/13 and 2021/22, and also 83 percent 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,” states the report.
The private sector has captured approximately one-third of the entire sectoral output in the education sector with a growing trend between 2012/13 to 2017/18. However, since then, the private sector’s share in overall output has declined slightly, owing to restrictions due to the Covid-19 pandemic.
The report states that in the financial and insurance sector, the share of the private sector in the total output of this sub-sector is approximately two-thirds of the entire sectoral output. However, private sector contribution to both sectoral output and gross value added (GVA) is declining. In 2012/13, the private companies sector contributed 74.31 percent to the overall output of this sector. However, in 2021/22, this share was estimated at 65.94 percent. Likewise, the share of privately contributed GVA is on a downward trend.
In the information and communication sector, the private sector contributed 57.18 percent of the total sectoral GVA in 2012/13. Except for the minor decline in FY 2016/17, the private sector continued to increase its share in sectoral GVA to 68.62 percent in 2021/22. In the manufacturing sector, the private sector contributes to above 99 percent of the GVA of the entire industry. The agriculture, forestry, and fisheries industry are solely driven by the private sector with a median contribution of 97.62 percent to sectoral GVA between FY 2012/13 and 2021/22.
Largest employer in Nepal
According to the report, the Nepali private sector continues to be the largest provider of employment, creating a significant portion of both formal and informal jobs. In 2018, the private sector provided jobs to 4,938,566 persons. Of this, MSMEs accounted for 4,564,040 jobs, SMEs for 333,077 jobs, and large industries for 41,449 jobs. Till March 2022, 555,776 micro and small industries were registered and they created 3,008,369 jobs. 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.
Private sector contributes significantly to income tax
The report states the private sector plays a significant role in contributing to the country’s tax revenue. Citing the statistics of the Inland Revenue Department (IRD), the report says the sector accounted for 80 percent of the total income tax revenue in the fiscal year 2019/20. Private enterprises’ share in revenue collection has been growing over the past decade. In 2021/22, private enterprises contributed Rs 749m in income tax revenues.
MSMEs account for 95.3 percent
According to the report, 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 business enterprises operating in Nepal.
“There were a total of 923,356 private sector establishments operating in Nepal in 2018, up 47.6 percent from 610,364 recorded in the 2011 Economic Census,” says the report.
IFC and FNCCI said Nepal needs to continue strengthening the competitive private sector to achieve its goal of becoming a middle-income country by 2030. “To do so, the government needs to improve 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,” it reads.
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,” the report says.
Private sector contribution to GDP
| FY |
Contribution to GDP (in percent) |
| 2012/13 |
86.67 |
| 2013/14 |
85.05 |
| 2014/15 |
83.97 |
| 2015/16 |
84.59 |
| 2016/17 |
82.3 |
| 2017/18 |
82.86 |
| 2018/19 |
83.55 |
| 2019/20 |
81.49 |
| 2020/21 |
80.98 |
| 2021/22 |
81.55 |
Private sector contribution to total sectoral GVA (in percent)
| Agriculture, forestry, and fisheries |
98.08 |
| Mining and Quarrying |
99.63 |
| Manufacturing |
99.99 |
| Electricity, Gas, and Air Conditioning Supplies |
83.06 |
| Water Supply |
95.86 |
| Construction |
81.97 |
| Wholesale and Retail Trade |
93.28 |
| Transport |
98.19 |
| Accommodation |
100 |
| Information and Communication |
83.65 |
| Financial and Insurance Activities |
65.94 |
| Real Estate |
99.93 |
| Professional, Scientific, and Technical activities |
66.67 |
| Administrative and Support Service Activities |
100 |
| Public Administration and Defense |
0 |
| Education |
64.33 |
| Human Health, Social Work, and Other Service Activities |
25.59 |
| Arts, Entertainment and Recreation |
79.53 |
Private sector contribution to total domestic output
| FY |
Public Sector (in percent) |
Private Sector (in percent) |
| 2012/13 |
12.13 |
87.87 |
| 2013/14 |
12.91 |
87.09 |
| 2014/15 |
13.65 |
86.35 |
| 2015/16 |
13.42 |
86.58 |
| 2016/17 |
15.59 |
84.41 |
| 2017/18 |
15.16 |
84.84 |
| 2018/19 |
15.34 |
84.66 |
| 2019/20 |
16.58 |
83.42 |
| 2020/21 |
17.6 |
82.4 |
| 2021/22 |
16.92 |
83.08 |
Private sector contributions to income tax
| FY |
Public Limited (in Rs, in m) |
Private Limited (in Rs, in m) |
Other Agencies (in Rs, in m) |
| 2012/13 |
149 |
213 |
28 |
| 2013/14 |
188 |
273 |
36 |
| 2014/15 |
205 |
303 |
46 |
| 2015/16 |
273 |
350 |
46 |
| 2016/17 |
335 |
451 |
56 |
| 2017/18 |
370 |
532 |
78 |
| 2018/19 |
479 |
588 |
103 |
| 2019/20 |
472 |
542 |
89 |
| 2020/21 |
536 |
633 |
88 |
| 2021/22 |
560 |
749 |
110 |
