Foreign aid regarded as the flow of finance, human and technological resources from developed to developing countries is a hotly contested issue. Debate has cantered on whose interest aid actually serves — the recipients’ or donors’. In Nepal, it is publicly held that foreign aid has not brought about the promised social-economic development. On the contrary, aid is believed to have widened the gap between rich and poor. Foreign aid has also been charged with increasing corruption. It is said to have disembowelled the Nepali state, its people and government.

Nepal is passing through a critical phase characterised by mass poverty and stagnation. The national economy is manifestation of unemployment and subsistence farming with limited prospects for mechanisation. Nepali society is facing four-front crisis: political instability, poverty, threat to environment and resources base, and population growth, the areas where foreign aid can play a vital role.

The issue of grant vs loan in their effectiveness to promote development of recipient countries has been a matter of great debate. Grants are favoured because of resource poor status and low repayment capacity of poor countries. On the other hand, it is criticised on the ground that grants being free money is spent unproductively. Loan is favoured on the ground that it requires repayment and recipient countries will be compelled to use it productively. In Nepal’s case, the component of grant has been smaller than loan for the past few years. Loans are mainly from multilateral agencies with long repayment period, grace period and nominal interest. Multilateral assistance is replacing bilateral assistance.

A crucial question is whether foreign aid should be continuous or should be stopped after crossing a critical phase. There is no doubt though that foreign should be used properly at appropriate place. Donors and recipients should be careful about the problems of recipient country. In spite of reported huge aid flows, there remains a large gap between the need and aid availability due to mis-targeting, emergency situations, aid diplomacy and unfair trade. Donors’ political and economic interests coupled with their disharmonising aid policies have made aid inadequate, inefficient and ineffective. But provided the recipients ensure good governance and donors are democratic, altruistic and provide good terms of trade, aid has immense potentiality.

Adequate aid with healthy intension, coupled with favourable domestic institutions, has the potential of being an efficient and effective tool for bringing about the desired changes in recipient countries. Donors should have few conditions, provide better terms of trade, ensure aid harmonisation, and address emergencies. The major challenges for proper utilisation of foreign aid include absence of transparent and clear-cut vision about foreign aid policy and time boundary, low aid disbursement in comparison of commitment due to low administrative capacity, corruption, insurgency, political and business motive of donors, inefficient bureaucracy, lack of proper record keeping, challenge for implementation according to commitment, lack of good governance and political instability.

The problem of poverty is an outcome of socio-economic instability. Despite the various efforts of Nepal through periodical plans, development efforts have fallen short. This is mainly due to the national savings and investment gap. To bridge this gap, foreign aid is crucial. Foreign aid provides for the bulk of national budget and helps meet the gap between imports and exports. Indeed, no economic activity of government is free from the influence of foreign aid. Significant political, social and economic policy making itself is planned and conducted with the help of foreign aid. This horizontal and vertical pervasiveness in national economic management transcends into non-economic spheres of Nepal too, including social, political and regional dimensions. Hence, grant element in foreign aid needs to be enhanced.

Since the emerging concept of development embraces four basic dimensions of growth, distribution, survival and self-reliance, the role of foreign aid should be examined in terms of these indicators. Foreign aid has played a significant role in removing transport and communication bottlenecks, industrial vacuum and agricultural backwardness. Almost all highways and communication networks, most public industrial enterprises, agricultural and rural development projects and development institutions are utilising foreign aid.

But most development projects financed through foreign assistance are neither able to accomplish the targeted goals nor establish the ownership of government and Nepali people. Debt liability is on the increase. It counts for more than 48% of GDP. Hence overall rational utilisation of foreign aid should be the real matter of discussion, not if it’s needed or not.

Dr Karna is an associate professor of Economics, TU