New foreign aid policy to streamline foreign aid

By Rajkumar K.C.

KATHMANDU, Sept 23: Not many know how much foreign aid Nepal has received over the decades. The general public has never been informed even when more than Rs. 10 billion in foreign aid (including loans and grants) remained unaccounted for till fiscal year 2056/57. This happened largely because Nepal lacked a policy on foreign assistance.

Donor agencies are known to put undue pressure on Nepalese officials to accept aid even if it is not viable for Nepal's development. One such example is the Poverty Reduction Growth Facilitation (PRGF) assistance. Without first receiving it, developing countries are unable to get other multilateral assistance. "The case of the Melamchi Drinking Water Project is a glaring example," said a senior official at the Nepal Rastra Bank.

The much-awaited Foreign Aid Policy -2002 of His Majesty's Government is expected to streamline foreign aid that Nepal receives in the form of loans and grants.

If planners and decision-makers can prioritize areas where foreign aid is needed, Nepal will not have to face undue pressure from the donor agencies. The new policy is expected to make both aid receivers and donors accountable to one another on utilizing aid money.

The policy is, however, still silent regarding the use of aid in certain sectors. "The policy is good, but it has not mentioned how and which authority will decide on how aid is to be used in particular areas like hydropower, irrigation, health or education," said Deependra Bahadur Kchetry, a senior official at the Nepal Rastra Bank (NRB).

On the one hand, the policy has set a target of recording all kinds of aid or grants in the national accounts so as to keep tab on all grants being received by various non-governmental organisations.
On the other hand, the policy does not talk about how this will be done.

One of the guiding principles of the Foreign Aid Policy-2002 is to direct aid towards achieving the over-arching national goal of poverty reduction by fostering economic growth and enhancing productivity.

Apart from this, the policy aims at improving the quality, effectiveness and efficiency of foreign aid operations. A broad range of appropriate policies and practices on the part of Nepal and donors - in project selection, design, management, review, monitoring and evaluation - are imperative, says the policy paper.

In order to achieve the objectives, the government has chalked out certain strategies aimed at ensuring transparency and accountability; enhancing the quality of aid; strengthening aid coordination; project identification; securing sustainability and creating a foreign aid management information system. An economic and sectoral perspective plan will be formulated.

However, the success of these objectives and strategies will depend on how the policy is implemented. According to economists, the policy has covered a wide range of economic issues. "But everything depends upon the commitment of planners and decision makers," said a senior official at the Ministry of Finance.

According to official sources at the NRB, total foreign debt has reached more than Rs. 200 billion, whereas total debt was Rs. 38 billion till 1990. Much of the debt will mature in the next couple of years. "We could fall into a debt trap," says Prof. Guna Nidhi Sharma.

Since Nepal embarked on the process of planned development with the launch of the first Five Year Plan in 1956-61, a substantial portion of the development expenditure, averaging about 55 per cent per annum, has been financed through foreign aid. Currently, annual foreign assistance accounts for about 5-6 per cent of Gross Domestic Product and finances about 25-30 per cent of the total government expenditure.

"The new policy is not going to do much unless and until we first overcome the economic disparity and political instability," added Sharma. "Foreign aid must reach the needy areas. Therefore, before we chalk out a policy, we must improve our governance."