The capital expenditure as a percentage of gross domestic product dropped significantly over the last few years, stated the report titled “Nepal Growth Diagnostic” jointly prepared by the government and Millennium Challenge Corporation, a bilateral US foreign aid agency.

“Despite a modest recovery, the level of capital expenditure remains low in comparison to other South Asian countries,’ states the report, adding policy instability, uncertainty, inadequate supply of electricity, high cost of transpiration and rigid labour relation were main constraints to growth.

The government’s capital expenditure stands at 48.50 percent as of June 19, 2014.

Joint Secretary at National Planning Commission (NPC) Puspa Lal Shakya said the constraints would hinder Nepal’s prospects of graduating to a developing country by 2022, as it requires huge investment from both the government and the private sector, including foreign investors.

“Policy unpredictability and infrastructure problems will hinder the country’s potential to attract investment which is necessary to increase the per capita income,” Shakya said, who is also a member of the study team.

Nepal’s per capita income is estimated at $717 for this fiscal year, as per the latest National Account Estimate of Central Bureau of Statistics. The per capita income has to reach $1,190 by 2022 for Nepal’s graduation to a developing country.

The report states political instability caused unpredictability in policy implementation raising investors’ concerns. “While much of Nepal’s bureaucratic structure and policy documents have remained the same, changes in leadership of a ministry often leads to significant shifts in the implementation of government policy,” the report has noted.  Although the political situation is relatively stable after the second constituent assembly election, the low stock of infrastructure would continue to constraint economic growth for a while, it said.

The report has rightly pointed out that the electricity shortage has increased the hidden cost of power. For large firms, self-generation accounts for 40 percent of their electricity usage. “The cost of generator-produced electricity is roughly 3 to 4 times the cost of electricity from the grid. This makes it especially difficult for firms that are intensive in electricity to remain competitive,” the report states.

“Business owners in Nepal report 26 percent annual revenue loss due to power outages,” it says. This is the highest rate in the world and twice that of Bangladesh, the next worse off country in South Asia.

Transport quality and costs have also affected the country’s competitiveness. Nepali exporters rate transport as key constraint. While 33 percent of firms, on an average, cite transport as a constraint, this doubles to 66 percent if only exporting firms are considered, according to the report.

As far as industrial relation is concerned, political instability over the last few years affected labour-employer relations. “Labor unions in Nepal are generally aligned with political parties. Because of this, unions often call strikes, or bandhs, for political purposes rather than for negotiating labor contracts,” the report notes. “This is especially problematic in the current environment of frequent changes in government and policy uncertainty.”

A proliferation of political parties has led to a proliferation of labour unions, which increases the number of unions a firm has to negotiate with.

Besides the four critical constraints, the report has also pointed out a potential banking crisis, possible drop in remittance, coordination failure among government agencies and Nepal’s vulnerability to earthquake as other constraints.