Evolving Trends in Foreign Aid Flows to Nepal
As a developing country, foreign aid has been a major factor in aiding Nepal to meet the country’s all major development. Throughout the years, Nepal has mostly received foreign aid in the form of grants, loans and technical assistance. The country has received most bilateral aid support from countries such as USA, UK, Japan, India, and Germany and most multilateral aid from organizations including the European Union (EU), the World Bank (WB), Asian Development Bank (ADB), and the United Nations (UN). The central government created the country’s Foreign Aid Policy 2002 to create stipulations for donors. Also, the Nepal government tried to streamline the process for the donors and make the whole system transparent by requiring the donors to upload all the accounting details related to the Aid Management Information System (AMIS) portal. The portal was launched by the government in 2019.
The following graph presents the value of official development assistance (ODA) Nepal has received during FY 2016/17 and FY 2020/21:
The available data highlight fluctuation in the foreign aid that Nepal has received over the last five fiscal years. The official data for the first eight months of the recent fiscal year (FY2021/22) indicates a decline in aid commitment by 32.7 percent as compared to the same period of the previous fiscal year.
The following graph shows a breakdown of ODA disbursement from 2018 to 2020:
While Nepal mostly received grants during the 1960s, concessional loans have been a greater percent of foreign aid after the 1980s. The shift in the amount of foreign aid Nepal received from bilateral to multilateral partners caused this change. The above graph shows that 60 percent of total ODA in FY 2018/19, 69.91 percent in FY 2019/20 and 66.89 percent in 2020/21 were given as loans. A large portion of loans have been taken to develop the infrastructure projects in the country. In FY 2020/21, 98.8 percent of the disbursement received for the road transportation sector, 82.27 percent of the disbursement received for the energy sector, and 73.73 percent of the disbursement received for the reconstruction sector was received in the form of loans.
While the government has been taking out loans to finance development projects, concerns over this preference have been raised in the country. The biggest concern in recent years has been the fear of Nepal falling into debt trap and eventually facing an economic crisis. The tendency of development projects to get extended for completion and lack of effective aid mobilization puts Nepal in a precarious position as greater investment is required to complete these projects. Furthermore, even though its overall contribution to causing climate change is low, Nepal is one of the countries that is most vulnerable to climate change. It is estimated that the country will need USD 46 billion by 2050 to adapt to impacts of climate change. As such, Nepal taking loans from multilateral agencies for adapting to climate change will increase the financial burden on the economy.
While foreign aid has always been an important component for covering the budget deficit, diversifying the source of financing is critical for the country moving forward. Few solution to minimize the reliance on foreign aid could include:
- Focus on Foreign Direct Investment (FDI): Finding alternative sources of financing beyond foreign aid is essential to reduce the dependence on foreign aid. One option for alternative sources of financing could be FDI, which means attracting foreign investors to invest in businesses and projects in Nepal.
- Increased focus on the productive sector: Nepal should strengthen the productive sectors of its economy. The government’s focus should be on providing support to agricultural, service and manufacturing sectors so that the economy can become self-reliant and subsequently a net exporter.
- Applying for grants instead of loans: The government should push for grants instead of loans when it comes to getting foreign aid for projects that are geared towards achieving sustainable development goals and climate resilience. The Nepali government should aim at getting grants to combat the negative effects of climate change in the country.