An assessment of public capital expenditure and private investment in Nepal
Date
2023
Authors
Journal Title
Journal ISSN
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Publisher
Department of Economics
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.
Description
Keywords
Public expenditure, Foreign investment