Nepal, a lower middle-income country, relies on foreign aid to meet its resource gap. Foreign aid, in the form of loans and grants, catalyses development. However, a critical question looms: Has Nepal utilised its foreign aid effectively to achieve its development objectives?

A study by Nepal Rastra Bank (NRB) suggests that an ideal public debt-to-GDP ratio for Nepal should be around 33 to 35 per cent, while it stands at 44 per cent as of mid-October 2024.This financial matrix compares a nation's debt to its annual income. A higher ratio indicates a significant debt burden relative to income, making it challenging to repay, increasing the risk of default and limiting a country's ability to invest in public services, infrastructure and growth-enhancing activities. Conversely, a lower ratio signals a healthier fiscal position, allowing a country to allocate more resources to priorities like social programmes, education, and healthcare. Does this mean we should stop borrowing funds?

Countries like Rwanda have achieved an impressive economic growth rate of approximately 9.8 per cent despite a debt-to-GDP ratio of around 68 per cent. In contrast, Nepal's economic growth rate has been around 3.89 per cent. Reports from the Auditor General of Nepal highlight mismanagement of foreign aid in Nepal, with Rs 25 billion spent in 2021-22 on the unproductive sector instead of capital formation. Projects like the Prime Minister Employment Programme have diverted funds to low-impact initiatives and have not contributed to the development cooperation policy priorities. This raises concerns about the government's ability to channel funds into projects that yield returns. Nepal must adopt stringent project selection criteria based on its long-term plan to curb unproductive expenditures and enforce strong fiscal discipline.

In 2023-24, Nepal allocated 17 per cent of its budget on developmental activities, 65 per cent on recurrent activities and 18 per cent on interest and principal repayments. However, even the allocated development budget still needs to be utilised. Over the past four years, only 60 per cent of the capital budget has been used, with most spending occurring in the final months of the fiscal year. This last-minute rush has led to delays, poor-quality implementation and economic stagnation. It also raises serious concerns about corruption.

Incompetence and inefficiencies in loan negotiations, loan planning, implementation planning, project selection and financial management exacerbate these problems.

Pokhara International Airport, often dubbed a white elephant, has failed to generate sufficient revenue to sustain itself or service its loan and is a monumental reminder of policy planning ineptitude. Sri Lanka's Hambantota Port is often cited as a cautionary example for Nepal. While the project is commonly blamed on Chinese predatory lending, ignoring Sri Lanka's governance failures and corruption would be naive. These examples underscore the importance of thorough feasibility studies, cash flow analysis and return-on-investment assessments before committing to projects and the importance of public watchdogs with teeth to bite.

Nepal is strategically positioned in the shifting global order, making it a focal point for competing powers. Initiatives like the MCC and BRI have sparked media and chia-stand debates on whether these agreements represent opportunities or potential debt traps. Determining whether such initiatives are debt traps needs healthy disclosure with the people of Nepal. With each Nepali citizen carrying an average debt burden of more than Rs 90,000, it is their right to be informed about government borrowing and its attached strings. For instance, during the negotiations for the North American Free Trade Agreement and the Trans-Pacific Partnership in the United States in the '90s and 20s, town hall meetings allowed citizens to voice concerns about the impact of these trade deals on local jobs, wages and environmental standards.

As Nepal prepares to graduate to a developing nation status in 2026, it has focussed on attracting Foreign Direct Investment (FDI).NRB data reveals that only 38 per cent of the pledged amount has materialised. To attract investment, Nepal must demonstrate its ability to support profitable projects that can be implemented within the stipulated conditions. The Melamchi Water Supply Project, which began in 2001 and took over 23 years to complete, yet remains only partially functional, exemplifies the inexplicable challenges of project delays and budget overruns. The root causes include poor project management, the absence of disaster risk reduction plans and political instability.

In comparison, India has tried to improve its FDI climate by aligning with Doing Business indicators through measures like economic surveys and budget reforms. Nepal, however, has yet to undertake similar steps for improvement. As a result, Nepal ranks 94th in the Ease of Doing Business index, while India stands at 63rd.

External assistance for Nepal is indispensable, but managing it is daunting. Nepal must focus on accountability, merit-based governance and transparency for sustainable development. Public engagement and informed discourse are essential for fostering trust and alignment with national interests. By improving its investment climate, streamlining technology transfer and focusing on high-impact projects with measurable returns, Nepal can effectively utilise foreign aid to secure long-term economic stability and growth. This is all logical. The question is whether logic can beat corruption and check-make loans designed to entrap Nepal into perpetual poverty and a label of a failed state.

Rana is the Program Director at The Himalayan Dialogues, and his expertise lies in Crisis and Knowledge Management