Nepal and the problem of foreign aid

Nov 21, 2012

Yam Prasad Chaulagain

The backdrop of the Marshall Plan’s success in rebuilding post-war Europe was the epoch-making inauguration of the history of development cooperation. In 1961, the Development Assistance Committee (DAC) of the Organization for Economic Development and Cooperation (OECD) formally introduced the definition of official development assistance (ODA) by paying special attention to the official and concessional part of the flow of development assistance.

Nepal seems to have been grappling for foreign aid since World War II after the establishment of diplomatic relations with the US in 1947. At the same time, the communist revolution in neighbouring China in 1949 increased strategic interest in Nepal. This means that recently flourishing ties with the international community opened new avenues for external actors beyond India’s traditional influence in Nepal’s geopolitical landscape.

Nepal joined the league of aid recipient countries for its development financing with the launch of its First Five-Year Plan (1956-61). Until the mid-1960s, Nepal depended mostly on foreign grants for all its development projects. Multilateral assistance programmes began in the 1970s, and by the end of the 1980s, a huge amount of foreign aid was in the form of multilateral assistance programmes directed through the international development association of the World Bank and the Asian Development Bank described as soft loans. The World Bank established the Nepal Aid Group in 1976 consisting of six countries and 16 international agencies; and from the late 1980s, it accounted for the largest share of aid to Nepal.

Most importantly, the strategic interest of the superpowers in Nepal had increased the flow of foreign assistance particularly from the US and China. However, Nepal couldn’t achieve much in drawing foreign assistance from the major superpowers because of a changed scenario in the international political landscape. In recent years, most importantly after the path-breaking Comprehensive Peace Accord (CPA) signed between the seven political parties and the Maoists in 2006, Nepal received a huge amount of bilateral and multilateral assistance from the international community especially to assist the transition from war to peace and post-conflict recovery.

Donors’ strategic interest

Foreign aid to Nepal is provided by a diverse group of donors, including OECD-DAC donors, International Financial Institutions (IFIs), United Nations agencies, global vertical funds and providers of South-South cooperation. India, China, Japan, Germany and the US are also key bilateral donors to Nepal. These donors reported total disbursements amounting to US$ 1.08 billion in fiscal 2010-11. Approximately 58 percent of these resources came from multilateral donors, while 36 percent came from OECD-DAC bilateral donors and over 6 percent from bilateral South-South cooperation partners.

Nepal is also being viewed from a security perspective because it adjoins two emerging superpowers, India and China. For instance, China’s interest in Nepal at present is concerned with Tibet’s safety from the outside world, while India’s strategic interest seems to be related to political and security concerns and particularly the water resources sector. The US is still continuing its pre-Cold War objective — containment of a possible threat of communism in Nepal. The important remark here is that the donor countries and agencies often preserve their strategic interest while providing bilateral and multilateral assistance to Nepal. However, in the recent context, the major donors such as USAID, CIDA and the EU have shifted their priorities from humanitarianism and sustainable development to freedom and international security.

Effectiveness of ODA

The Paris Declaration 2005 as a consensus among donor agencies includes some vital aspects of aid effectives — ownership, alignment, harmonization, result and mutual accountability. According to a report issued by International Aid Transparency Initiative (IATI), only nine donor agencies out of 58 achieved a score of more than 60 percent. It apparently shows that most of the aid agencies haven’t fulfilled the spirit of the Paris Declaration. Aid agencies in Nepal have also been reported to have shown unethical behaviour in conducting their various affairs. According to the chief of the Foreign Aid Coordination Division of the Ministry of Finance Lal Shankar Ghimire, more than 70 percent of the capital expenditure is financed by foreign aid.

Despite a rise in ODA, Nepal is the only country in South Asia that has not experienced any significant improvement of its micro and macro economic prospective. According to the Human Development Index (HDI), Nepal is in the 157th position under the low human development category. This indicates that there is an institutional gap in mobilizing the resources received or government mechanisms have not been functioning well.


The donors and the government are equally responsible for the poor performance of ODA in Nepal. To ensure its effectiveness, donors should be transparent in providing assistance and refrain from imposing unnecessary conditionalities on the recipient government. However, conditionalities related to cross-cutting issues such as governance, inclusion, accountability, transparency and political stability should be welcomed by the government of Nepal.

Furthermore, there seems to be a mismatch of priorities between the donors and the government of Nepal. The role of the Finance Ministry’s Foreign Aid Coordination Division in channelising funds has not been seen in a progressive way. The Nepal Development Forum, which is responsible for coordinating between the Nepal government and its development partners, has not produced a conducive environment with regard to acquiring quality foreign aid. This contradiction creates resource gaps, overlapping and duplication, and eventually needy sectors remain uncultivated.

As the Paris Declaration suggests, the accountability issue is very important to ensure aid effectiveness. And the best way to ensure accountability is to ensure transparency in the way aid is managed and used. Development history shows that no country has achieved sustainable growth without expanding trade flows. And expansion depends on the quality of domestic policies, institutions and infrastructure. This is exactly what Fukuyama has written in his book State Building. The state’s scope is the ability to create and enforce laws and policies. Strength is the ability of the state to plan and execute policies and enforce laws cleanly and transparently. This is now commonly referred to as institutional capacity. 

Chaulagain was an Erasmus scholar at the University of Warsaw where he earned an MA in International Relations

The Kantipur Daily, 21 November 2012

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