The donor’s dilemmaWe should conduct aid diplomacy by coming out of the ‘begging bowl’ mentality
Nepal is a capital-poor, low-savings and low-investment economy. It needs foreign aid to implement projects and programmes, and is one of the highest foreign aid receiving nations in South Asia. Despite six decades of foreign aid, there has been little development, and it is difficult to say that foreign aid boosts growth; in many sectors, it has been somewhat deleterious for our development. Nepal’s problem is not lack of foreign aid or technical support, it is political. There is scarcely a politician who can credibly claim to have seriously tracked ‘economic viability’ in the course of his long career. The primary objectives of aid flow are to gain political support of the donors, accelerate growth in the recipient country, increase donors’ exports and improve income distribution in the recipient country.
Aid makes up a substantive part of Nepal’s annual government budget. In the fiscal year 2016-17 approximately 29 percent of the annual budget expenditure was aid-supported in the form of grants and loans. The five largest development partners—the World Bank, Asian Development Bank, USAID, UK and the UN Country Team—provided 71 percent of the foreign aid. Official development payouts also included a substantial amount of South-South cooperation, mainly from China and India.
Foreign aid is part of our solution and part of our problem. Aid has shown modest favourable impacts in some areas, especially health and education. Foreign aid helped to bring down poverty from 49 percent in 1990 to 21 percent in 2016. In recent years, donors also started supporting mega infrastructure projects. At the same
time, there is the belief that donor money has weakened our civil society voices and increased corruption.
According to the Finance Ministry, expenditure by international and non-governmental organisations accounts for 7 to 9 percent of government expenditure. They spend a major share of their budget on capacity building, advocacy, report writing and consultancy. Critics also say that aid has not only increased dependency but also lowered local innovation.
The structural adjustment conditionalities imposed by the World Bank and International Monetary Fund in the 1990s to eliminate subsidies on fertiliser and privatise state enterprises are seen as one of the major causes behind the collapse of our agriculture and manufacturing. Currently, even after providing subsidies on fertiliser and injecting massive capital into sick industries, there has been no substantial improvement in these sectors. We should seriously think about stopping accepting aid money for foreign consultants and engineers. Donors who provide food aid must be made to buy items like rice, oil and wheat from local suppliers instead of importing them.
The gap between aid commitment and disbursement by donors is very wide. Generally, Nepal receives only 50 percent or less of the committed amounts; this means donors are also responsible for 50 percent of our project delays or failures. There is no doubt that our system and sub-systems to utilise aid money have countless problems and deficiencies. Foreign aid in Nepal is not well managed. Moreover, leakage and misuse of resources, poor top-down planning, lack of accountability and transparency, crisis of leadership, interference and fear of prosecution by officials are other reasons behind the underperformance.
The government’s debts totalled Rs831 billion as of mid-January, which is 32 percent of the Gross Domestic Product, according to the Financial Comptroller General Office. This year’s budget has set aside Rs58.66 billion and Rs26.46 billion for loan and interest repayment respectively. This shows that we are almost in a debt trap,
not because we have excessive loans, but because we have a low absorption capacity. Last year, capital expenditure came to Rs31 billion, or 13 percent of the capital budget. Do we need foreign aid for such a small amount of capital expenditure? Our yearly development expenditure must equal our yearly principal and interest payments to arrive at the breakeven point.
We must strengthen our institutional coherence, develop a robust monitoring and evaluation system, and strengthen the enabling environment for accountability and dialogue for better utilisation of aid money. We should conduct aid diplomacy by coming out of the ‘begging bowl’ mentality. We must give high preference to national priorities instead of taking whatever comes in.
Shrestha is a former under-secretary at the Ministry of Finance and has served at the United Nations Development Programme in South Sudan and Sierra Leone.