Off-budget disbursement has mostly been criticized alleging that such aid money is spent according to the wishes of the donors and not spent in line with the government’s priority and country system. In order to understand the various issues about the use of on-budget and off-budget aid flow, it would be useful to review the existing practices of these two modalities.

From the perspective of funding procedure, on-bu-dget implies those funds that are disbursed through the government’s budgetary mechanism whereas off-budget means funds that are not disbursed in such a manner. In this connection, on-budget projects are those which are reflected in the government’s budget whereas off-budget projects are not reflected in its annual financial plan. On the other hand, disbursement of on-budget projects may be on-treasury or off-treasury or both. In this respect, off-treasury disbursement may happen when the donor makes direct payment. In Nepal, it was found on-budget projects had disbursed 18 percent of the aid amount through off-treasury channels during fiscal 2012-13. If we look at the government’s annual budget, the modes of disbursement are classified into direct payment, cash, commodity and reimbursable.

Each year, estimates of expenditure for the current fiscal year are reflected in the Red Book at the time of the budget announcement. This presents in detail the summary of the annual budget allocation for the whole country. This covers, among others, the budget details under various budget heads, budget sub-heads, names of ministries or constitutional bodies, sources of funding and modes of disbursement.

Estimates of expenditure can also be seen as recurrent and capital expenditure. In case of foreign aided projects, the project name and the names of the development partners providing assistance, aid amount and type, mode of disbursement and the names of the implementing agencies are stated in the Red Book. Projects thus reflected in the Red Book are understood as on-budget projects. Besides, the Ministry of Finance submits to Parliament separate statements of technical and other assistance including those implemented through international non-governmental organizations (INGOs) (TA book or blue book) that are not included in the Red Book. Such projects are understood as off-budget projects.

The technical assistance is generally utilized for institutional strengthening, capacity development, transfer of expertise and technical know-how and formulation and development of projects and programmes. Apart from bilateral and multilateral development partners, the development assistance channelled through various INGOs also constitutes a significant share of foreign aid in Nepal. Various INGOs are engaged in implementing programmes in partnership with government agencies, local bodies or local NGOs and also through active community participation by empowering and making aware poor, excluded and marginalized people. Thus, the off-budget projects in Nepal include technical assistance, INGO implemented projects and those projects which are implemented directly through development partners. Direct implementation may also include turn-key projects and humanitarian assistance.

Any expenditure through on-budget mechanism encourages effective budget control whereas off-budget escapes effective budget control. Thus, recipient countries prefer aid through the on-budget mechanism because it creates incentives for stronger budget processes, better alignment to country priorities and greater accountability to legislatures and citizens. The resulting improvements in the budget documentation can contribute to accelerating and deepening the implementation of commitments to strengthen the role of parliaments in the oversight of development processes, as agreed in Busan. On-budget aid is also recognized as one of the indicators of aid effectiveness. Therefore, it is always a good practice that aid should be channellized through the on-budget mechanism.

Off-budget expenditures refer to financial transactions that are not accounted for in the national budget. This is funding disbursed to third parties or managed by the donors themselves. Off-budget refers to various classes of transactions that are often (but not always) excluded from the national budget and are difficult to control through ordinary budgetary processes. If aid is not on-budget, the budget cannot be comprehensive, and there cannot be full transparency of information and decision-makers cannot be held accountable. It is difficult for oversight agencies, and sometimes even for the concerned line ministries, to monitor off-budget projects  because they are not reflected in the national budget. Although they are sometimes used to escape budget control, off-budget practices have become normal incidents of modern governments. They flourish where the government actively seeks to manage the economy, redistribute resources, promote investments and pursue a broad range of social objectives.

All off-budget projects are not as bad as often argued because they also contain defined procedures and criteria to approve the work plan and monitor the project activities. In this mechanism, although aid flow remains outside the government budgetary system, most of the activities are implemented according to the annual work plan approved by a joint team representing the government and donor agencies. In addition, the financial progress of off-budget projects is required to be reported to the Aid Management Platform housed at the Ministry of Finance and audit reports have to be issued to the respective line ministries.

Global scenario of aid on-budget

Based on the methodology adopted by the OECD in its recent Global Monitoring of Effective Partnership Progress Report 2014 (the proportion of the donor’s scheduled disbursements against the amount recorded in the government’s budget was assumed to be “on budget”), 64 percent of the scheduled development cooperation funding for the government sector was reflected in the developing countries’ national budgets across all the countries reporting aid on-budget indicator in 2013.

In aggregate, the above situation is said to be a positive trend in comparison with the 57 percent in 2010. Reaching the 2015 target for this indicator requires the current aggregate ratio to increase to 85 percent by 2015, which is defined in the Global Partnership monitoring framework as the minimum acceptable level.

The above method of arriving at aid on-budget, however, does not take into account how much was actually disbursed through the government budgetary mechanism but recognizes overestimation or underestimation of the planned disbursement from the donor. This method may also not reflect the true picture of on-budget coverage because this is based on estimation of the donor’s planned disbursement and amount recorded in the government budget, both of which could be underestimated or overestimated or both. Comparing the status of planned disbursement reported in the AMP through development partners and the amount recorded in the government’s budget in Nepal, the planned disbursement from development partners is generally under-reported, and the corresponding amount recorded in the annual budget is over-estimated. This situation is further proved by the low level of expenditure against the allocated budget each year.

According to the government’s recent Development Cooperation Report, Nepal recorded 64 percent on-budget and 36 percent off-budget aid disbursement during fiscal 2012-13 whereas on-budget was 77 percent and the off-budget portion was only 23 percent in fiscal 2011-12. If we compare with some other similar AMP implementing countries, it is found that Malawi has 65 percent on-budget and 35 percent off-budget, Tanzania 57 percent off-budget and 43 percent on-budget and Moldova 70 percent off-budget and 30 percent on-budget in fiscal 2012-13. M

The methodology of arriving at the above scenario of aid on-budget is, however, totally based on the volume of the actual disbursement. The global result shows that it is not possible to channel all aid money through the government budgetary system. Global findings also confirm that reform takes time, but it works.

In this perspective, Nepal seems to be gradually progressing towards bringing more and more aid through the national budget in recent years. This also indicates a profound transformation in the way development cooperation is managed and delivered in the country. The government’s new development cooperation policy has further emphasized the mobilization of aid through the on-budget mechanism and made a mandatory arrangement for reporting to the Aid Management Platform. It should, however, be remembered that aid money should be effectively utilized, whether on-budget or off-budget.

(Bhandari is associated with the Aid Management and Coordination Project at the Ministry of Finance. The views expressed are his own.)