Foreign Aid Conundrum

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Foreign Aid Conundrum

BY Prof dr. Kamal Raj Dhungel

Unveiling the budget is a fundamental responsibility of the government. The budget document encompasses the income and expenditures of a country, including plans, programs, and policies. The government often commits to various tasks through its budget, but historical trends reveal that many of these commitments remain unfulfilled. The primary reason behind this is the lack of resources. Successful implementation of the plans and programs largely depends on the availability of uncommitted foreign aid which is uncertain.

Historically, foreign aid has played a pivotal role in the construction and expansion of infrastructure projects. Foreign aid has been a significant contributor to capital formation since the 1960s. Projects such as road construction and expansion, hydropower development, industrial estates, small and medium industries, airports, conference halls and and more were financed through foreign aid during the 1960s, 1970s, and 1980s. Recently, two large airports in Pokhara and Bhairahawa and Melamchi drinking water project were completed with foreign loans.

Since the restoration of democracy in 1990 and the abolition of the monarchy in 2008, foreign aid has been essential in boosting capital expenditure which is crucial for the nation's development. This underscores the importance of foreign aid as a key factor in expanding, generating, or accumulating capital. The government often includes commitments in its budget with the presumption of receiving foreign aid. Just as individuals, families, and communities may seek loans from financial institutions and moneylenders for various purposes such as buying land plots, or to finance the education of their children, the government also requires loans and aid to fund its development initiatives. It operates with limited funds and relies on internal and external sources to invest in large-scale infrastructure, social, and economic projects.

Over the years, data from the World Bank reveals a declining proportion of aid and loans to gross national income (GNI). For example, in the 1990s, foreign aid represented 8.2% of GNI, peaking at 11.4% in 1992 and decreasing to 5.8% in 1999. This proportion fell by nearly half in the decade of 2000 (2000-2009) to 5.1% of GNI. During the decade, the proportion of foreign aid to GNI peaked at 5.9% in 2004, and hit the lowest of 5% in 2009. These figures show the contribution of foreign aid to GNI has been declining with every passing decade.

Similarly, foreign aid's contribution to gross capital formation (GCF) has also declined over the years. Declining share of FA on GNI can lead the share of FA on GCF to fall. This is a common cyclical movement. In the 1990s, the average proportion of foreign aid to GCF stood at 37.6%. This was higher by 69%, compared to the proportion observed in the 2000s. Within this decade, the highest and lowest contributions of foreign aid to GCF were recorded at 55.2% in 1992 and 25.3% in 2000, respectively. The average proportion of foreign aid to GCF for the 2000s was 22.3%, representing a 75% increase when compared to the proportions observed in the subsequent decade, the 2010s.

Similarly, in the 2000s, the highest and lowest contributions of foreign aid to GCF were registered at 27.3% in 2002 and 16.2% in 2008, respectively. Transitioning to the 2010s, the average proportion of foreign aid to GCF further decreased to 12.7%. Within this decade, the highest and lowest contributions of foreign aid to GCF were observed at 15.4% in 2016 and 9.4% in 2019, respectively.

However, data from the World Bank suggests that foreign aid's share in government expenses has been increasing. During 2010-14, foreign aid contributed 22.5% to the average total government expenses, which increased to 26.4% during 2015-19. This shift indicates that a larger proportion of foreign aid is being utilised for regular government expenditure rather than capital expenditure.

It is evident that the share of foreign aid in Nepal's Gross National Income (GNI) and Gross Capital Formation (GCF) has been decreasing, while its proportion in government total expenses is on the rise. This shift indicates that foreign aid, regardless of its magnitude, has not only been utilised for capital formation but has also been diverted to cover the ever-increasing regular expenses of the government. This situation is a significant setback for Nepal's economic development. In light of these challenges, Nepal needs to reevaluate its approach and prioritise the utilisation of foreign aid for capital formation. This strategic shift is necessary to safeguard and promote the country's economic development. 

(Prof Dr.Dhungel is an Economicist)

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