An assessment of public capital expenditure and private investment in Nepal

Abstract

Public expenditure is an important fiscal policy tool to achieve the macroeconomic objectives. Different forms of public expenditure have different effects on the private sector of a country and in many cases the desired results are not achieved due to the difference between actual and expected effect. In such context, this study is an important attempt to assess the desired effect of public expenditure in Nepal. The prime objective of this study is to determine the relationship between public capital expenditure and private investment in Nepal. In order to meet its objective, this study uses time series data covering a forty-five years period from 1975 to 2019, employing the ARDL (1,1,1,0) approach of co-integration. The growth trend of the variables revealed that the growth of public capital expenditure and private investment in Nepal is satisfactory during the current Republic System, as compared during the Panchayat Regime and Monarchy. It was observed that, in the long run, public capital expenditure crowds-in private investment. Other things remaining same, if the public capital expenditure increases by a percentage, the private investment of Nepal increases by 0.10 percentage. The short run dynamics and relationships between the variables were estimated using the Error Correction Model (ECM). However, it was observed that in the short run public investment crowds-out the private investment in Nepal. When real public investment increases by a percentage, change in real private investment is expected to decrease by 0.15 percentage, other things held constant. The existence of long run relation was further supported by the negative and significant error correction term, which indicated that the system converges to equilibrium at a speed of 38.42 percentage towards the long run equilibrium after a short-term deviation. In order to minimize crowding-out of private investment, the public investment should be concentrated in building quality infrastructures. Government policy should be strictly oriented to minimize the effect on the private sectors as a result of high inflation, exchange rate instability, and fiscal deficits. Policymakers should consider these short-term effects while designing and developing investment and fiscal policies of Nepal.