Fixed Capital Formation Decline: What It Means for Investment in Nepal

Nepal’s recent macroeconomic data highlights a worrying trend: the steady decline in Gross Fixed Capital Formation (GFCF), which measures investments in infrastructure, machinery, plants, and other long-term productive assets. In FY 2020/21, GFCF accounted for 29.3% of GDP, but by FY 2024/25, this ratio has fallen sharply to 24.1%. This downward trend indicates that the economy is not building sufficient productive assets, raising concerns about Nepal’s capacity to sustain long-term growth.

The decline reflects multiple structural challenges. First, delays in public infrastructure projects and weak capital expenditure have limited the government’s role in driving investment. Capital expenditure remains stuck at 3.6% of GDP, far below potential, meaning budget allocations for development are either underutilized or inefficiently deployed. Second, private sector investment has slowed due to high uncertainty, policy inconsistencies, and limited credit expansion. While lending rates have eased, with the base rate falling to 6.02% in FY 2024/25, businesses remain cautious, as demand is still recovering and external shocks persist.

The consequences of weak fixed capital formation are significant. Without adequate investment in productive assets, Nepal risks low productivity, limited job creation, and sluggish industrial growth. A heavy reliance on remittances to fuel consumption has kept Gross National Disposable Income rising, but this income is not being effectively transformed into domestic investment. The result is a consumption-driven economy with limited structural transformation. This also explains why, despite high savings—36.2% of GDP in FY 2024/25—Nepal struggles to channel resources into infrastructure, manufacturing, and export-oriented sectors.

For Nepal to sustain higher growth, reversing this decline is critical. Policies must focus on improving project execution capacity, creating a more stable investment climate, and incentivizing private capital formation. Public-private partnerships, reforms in land and energy sectors, and greater policy certainty could help attract both domestic and foreign investors. If Nepal fails to boost fixed capital formation, its growth will remain consumption-heavy, dependent on remittances, and vulnerable to external shocks.