Economic Freedom of Nepal and Private Capital Inflows: A Case of Nepal

Abstract

This paper examines the impact and importance of economic freedom index on private capital inflows in Nepal. The foreign direct investment is treated as the private capital inflows and considered as dependent variable for this study. Economic freedom index, one year lag of private capital inflow, consumer price index and exchange rate are the independent variables. The data are collected from the data bank of Heritage Foundation. In addition to this, different published articles and reports are also analyzed. The information regarding economic freedom index is based on four key categories: rule of law (property rights, judicial effectiveness, and government integrity); government size (tax burden, government spending, and fiscal health); regulatory efficiency (business freedom, labor freedom, and monetary freedom); and market openness (trade freedom, investment freedom, and financial freedom). The multiple regression model is applied to test the significance and importance of economic freedom in the Nepalese context specific to private capital inflows.

The result shows that economic freedom is not the potent determinant of private capital inflows in Nepal. The increasing trend of private capital inflow and positive relationship between consumer price index (CPI) and exchange rate (ER) states that Nepal's economy is beyond the control of the authority and failing to stabilize the domestic currency as in each year Nepalese currency is depreciated and it is again fueled by the increasing trend of CPI.