Nepal recently unveiled a new foreign aid policy, even as a debate on the effectiveness of aid rages on in the country. The document, titled Development Cooperation Policy (DCP) 2014, is an important departure from the earlier Foreign Aid Policy 2002. In this context, it would be useful to look beyond Nepal and observe the global trend of foreign aid.

Aid realities

Even though Official Development Assistance (ODA) throughout the world increased by 6.1 percent and reached new heights of $134.8 billion in 2013, the General Secretary for the Organisation for Economic Cooperation and Development (OECD) reports that assistance to some of the neediest countries is falling. The distribution of aid is not equal, neither on regional nor national terms. In 2013, Afghanistan and Puerto Rico, for instance, were the largest recipients of ODA. In South Asia, Pakistan, India, Bangladesh and Nepal appear respectively on this list of recipients after Afghanistan.

However, both developing and least developed countries (LDCs) are on the same list of ODA recipients. Countries with high per capita incomes, like South Africa ($7,314), Brazil ($11,340) and Turkey ($10,600) get a sizable chunk of ODA whereas LDCs like Nepal, Bangladesh, Myanmar, Ethiopia, Sudan, Niger, and Malawi still have to compete for more aid. Likewise, India has been consistently growing for a long time and spends more than $32 billion in defence.  And though it is not a member of the Development Assistance Committee, India still provides development assistance to many LDCs including Nepal. Despite this, India figures high on the list of ODA recipients. Does India really need foreign aid? No, but ODA is not merely a monetary phenomenon; it is a reflection of the close ties between nations.

Misinformed criticism

The importance of foreign aid has not lessened, despite the fact that it is being misused and its effectiveness questioned everywhere. Authorities in Nepal are often blamed for being donor driven and not serious about screening foreign aid. Some argue that foreign aid simply promotes the interest of donors, creating conducive conditions for interference and support for a corrupt government; aid, thus, is not directed at the betterment of the poor and destitute.

But much of this criticism is either a result of misinformation or ignorance. As a February 2012 editorial in The Hindustan Times read, “Developing country elites dislike aid because it smells of dependency, neo-colonialism and reminds them of domestic policy failure.” A 2012 impact study of foreign aid in 36 African countries found a positive impact of foreign aid on several macroeconomic variables, including growth. It should be understood that investment levels in developing countries is quite low because of low savings, low foreign currency reserves and insufficient revenue. This gap needs to be filled, which is mostly done through foreign aid.

In his book Does Foreign Aid Really Work, Roger C Riddle writes that each year millions of children are immunised, receive basic health care, go to schools, are provided with clean water and sanitation, and hundreds of classrooms and kilometres of roads are built in developing countries, all through foreign aid.

Nepal has been receiving aid since the 1950s and its volume and frequency has been ever increasing. All our periodic plans have been implemented with at least 50 percent external aid. Major highways, power plants and important social and economic infrastructures have all been built with donor support. This implies that the level of development we have achieved so far would have not been possible in the absence of external aid. So at this stage, we cannot opt for low or no aid, but what we can do is screen and go for effective aid.

A fresh start

The government’s new aid document aims to address concerns relating to aid effectiveness. To do so, it has specified and fixed broad conditions and some thresholds for loans, grants and technical assistance. In the past, maximum flexibility was exercised in the area of development cooperation with development partners. This has been streamlined in the new aid policy. Also, the use of new terms like ‘development cooperation’ instead of ‘foreign aid’, and ‘development partner’ rather that ‘donor’ are welcome changes. The Ministry of Finance, however, could have a difficult time interpreting the Policy to the heterogonous development partners.

The new policy is not without its own set of challenges either. One problem is the provision that projects costing less than  $5 million will not be proposed for donor support. And donors will also have to comply with this provision. Likewise, it also sets a threshold of $10 million and $20 million for soft loans and loans from Exim Banks.

There are many instances of donors providing less than $5 million in aid. For instance, on July 14, 2013 Nepal and Japan signed a grant agreement for 149 million Japanese Yen for election support. The Chinese government also provided about the same size of support for elections. And generally, support from UN agencies rarely cross the $5 million threshold for a project.

Nonetheless, projects costing less than $5 million risk cost escalation or manipulation and even lose funding altogether. The policy does, however, hint that the government should be able to finance such small cost projects itself and not be dependent on external sources. Still, we have to be alert about keeping our development partnerships intact. Likewise, the modalities of development cooperation we have with some partners also need revision.

For a nation that is compelled to allocate millions of rupees every year for low priorities use and where more than 50 percent of its development expenditure is being met by development partners, it could be very risky  discouraging aid. No doubt, there are problems in managing foreign aid in Nepal and it could be argued that aid has distorted our habit of thriftiness and self-reliance. Yet, we need to understand where the problems lie—is it in the aid itself or the principle and practices we have adopted in managing aid?

If we delve into the Development Cooperation Report (DCR) 2014, we find that some development partners are committing around $5 million and others, less than that. But there is diversity in development cooperation. So we have to be cautious about  the monopoly of richer and bigger nations in our development. The DCR reveals a situation where 36 percent of external support is already being provided through off-budget mechanisms. So there are dangers of further diversion of resources to INGO and the private sector instead of it going through the government system, as planned by the document.  

Pandey is under-secretary at the Ministry of Finance