Trend of Foreign Aid in Nepal

Bhanju Raj Aryal & Pramod Pyara Shrestha

Foreign Aid and Foreign Debt in Nepal

Transfer of capital and technologies from developed countries and donor agencies to the underdeveloped 'Third World' countries either in the form of loans or grants from time to time is generally known as the 'Foreign Aid'. Foreign aid is generally considered as one of the important factors for development after World War II. With growing independence of many developing countries and with the workout of the Marshall Plan, the scope of foreign aid has become more significant. The term 'Aid' has many different interpretations. At one extreme, it is narrowly interpreted to mean grants and long-term loans for the purposes of economic development of a country. But on the other, it is defined as an inclusion of private investments and trade together with grants and loans.

Rosenstein-Rodan (1961) argued that, the purposes of an international program of aid to underdeveloped countries are to accelerate their economic development up to a point where a satisfactory rate of growth can be achieved on self-sustaining basis. He also includes technical assistance as part of aid, although it is not a normal capital inflow, because it is a form of transfer of skills, which can result in economic growth. Nepal has received aid both in cash and in technologies.

Capital accumulation is regarded as a core process by which all other aspects of economic development are possible. Capital increases by investment and investment itself needs more savings or foreign assistance. Foreign aid should be given to those who help themselves. In short-term calculation of aid requirements, the industrial assumptions need to be looked at very carefully. Over a long-time, it is not of much use and may be positively harmful. However, one writer has stated, "Although failures in aid activities can be cited, these have been mainly in earlier decades of development assistance. With experience, the failures have diminished. Now donor agency undertakes better policy analysis and participates more actively in a policy dialogue with recipient governments, and recognizes the necessary balance between the public and private sectors. Moreover, the end of the cold war has reduced the politicization of bilateral aid and has restored the central objectives of aid the reduction of poverty through efficient economic management" (Meier: 1995).

As she opened her borders to the outside world, Nepal searched for development assistance from external sources. "Foreign aid appears to have played a laudable role in as much as it has inspired successive governments in Nepal to demonstrate their commitment to development. Even if the desire of the people of Nepal to have a better living standard has a product of endogenous stimuli, everything else from the objectives of development to the strategy, policies, and projects are destined to be influenced by foreign aid. Channeling of funds was not significant until the beginning of Nepal's first Plan in 1956. Since then, foreign aid from various sources has been meeting a large proportion of the cost of Nepal's development program".

In the mid 1950's, the United Nations assessed the need for aid in three least developed and landlocked countries of Asia: Nepal, Afghanistan, and Laos. The report stated, "It is clear that the strictly limited domestic resources which they can mobilize at the present time are inadequate to support rapid economic development. Foreign aid in the form of equipment, supplies, and technical personnel facilities provides and initial impetus towards growth. The necessity of such help is all the more apparent because recent expansion of investment is new productive capacity have strained both domestic finance and foreign exchange reserves. In all the countries, therefore, the role of foreign aid has come to be highly important (Isaacson: 2001)."

The history of foreign aid to Nepal actually was begun before that UN report, with the signing of the 'Point Four' agreement with the United States on 23 January 1951. Health, agriculture, forestry development, education, and transportation were the major sectors that have benefited through bilateral and multilateral assistance. The donor countries have followed deliberate policies of building institutions and supporting the development of human resource. Because of strategic location, Nepal has also received economic aid from both of its giant neighbors: China and India. India became a donor of aid to Nepal soon after the aid agreement was signed between Nepal and the USA. From the outside, India helped Nepal in the area of transportation, financing the construction of a highway from Kathmandu to Raxaul and an airport in Kathmandu. Not after a long time Nepal joined the 'Colombo Plan' in 1952. This accession provided Nepal a good forum to attract the interests of other friendly countries in the economic development efforts of the country. Under this plan, Nepal received many technical assistance since 1952. Later, Colombo Plan aid gradually evolved into support for capital projects.

Outside the Colombo Plan, the People's Republic of China began adding Nepal in 1956. With that Chinese support, Nepal became the first recipient country of Chinese aid out of other South Asian nations. In October 1956, China agreed to provide assistance worth 60 million Indian Rupees, comprised of 20 million in cash grant and the rest in the form of produces. Since then, China has been helping Nepal in the field of infrastructure development and in the process of industrialization.

Nepal has thus, received a significant volume of bilateral aid from USA, UK, France, India, China and many other rich countries. Apart from these donors, some other countries have also contributed to Nepal's development efforts. In 1976, the Nepal Aid Group was formed, with World Bank as the coordinator to mobilize external resources.

Trend of Foreign Aid in Nepal

The Point Four Program agreement signed between Nepal and the US on 23 January 1951 heralded Nepal's first experience of foreign aid assistance. The US Government's assistance of Rs. 22,000 provided under President Harry Truman's Point Four Program was soon followed by assistance from India in October the same year (Isaacson: 2001). It was then followed by China (1956) and the USSR (1958). However, the trend of foreign aid inflow began to increase continuously after 1956. The important factors contributing to increase in the inflow of aid to Nepal were as follows:

I. The expanding international relations of Nepal: i.e. Memberships of UN (1955), IBRD and IMF (1961) etc,

II. The introduction of the first Five-year Plan (1956) and increasing need for resources,

III. The bonus effects of the cold war and feeling of the competition among some donors to make their presence felt in the country in a significant way.

IV. Aid seeking policies for every effort to development of Nepalese government

Table shows the total foreign aid inflow in Nepal on the grant and loan basis. When we review the year-to-year aid inflow, the trend is quite erratic up to 1972/73. Then, it has been increasing trend, clearly shown in the following table:

Total Aid Inflow in Nepal (1988/89-1999/00)

(Rs. in million; percentage in parentheses)

Source: Economic Survey 2000/01, MOF, HMG/N

Above Table shows the massive increase in the inflow of aid on annual basis. The received total foreign aid since 1951/52 to 1999/2000 is Rs. 167617.5 million, which is the composition of Rs. 56999.7 million (34.0 %) in the form of grants and Rs. 110617.8 million (66.0%) in the form of loan. The loan portion is about almost double of grants amount. There is an increasing trend of total foreign aid.

Nepal received foreign aid mainly through grants in the 1960s and 1970s. Grants made up almost 70 percent of total foreign aid. However, the situation changed after the year 1980s, when she was asked to borrow. In the fiscal year 1999/2000, Nepal received 67.4 percent of foreign aid in the form of loans and 32.6 percent in the form of grants. The situation has been quite reversed from the earlier days. Loans are mainly from multilateral sources like IMF, WB, and ADB etc., while grants are received from bilateral sources. Compared to the old ages of 1950s and 1960s when loan was either nil or very insignificant, in 1999/2000, total aid has increased 34.7 times, grants by 15.9 times but loans by 81 times, compared to 1975/76. This shifting from grants to loans has aggravated the situation further in that the sizable amount of public saving is diverted towards debt servicing and burden of foreign debt is increasing. Though, Nepal received foreign aid from different sources both multilateral and bilateral, she has not been able to make good evaluation of foreign aid utilization in the course of her economic development.

(Excerpts of the paper presented at a seminar organized by Central Department of Economics, TU; Authors are associated with the Forum for Economic Studies, FECOST)

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