The World Bank’s study on Assessing Aid: What Works, What Doesn’t and Why states that aid can be effective but only in a good policy environment. It is true foreign aid has mixed results — effective in some countries and totally ineffective in others. Nepal did not have foreign aid policy for almost five decades but even the clear-cut policy formulation could not guarantee aid effectiveness either. The absence of the linkage between the policies, goals and priority and acceptance of foreign aid seems to be an important reason for ineffective aid utilisation.Some efforts were made in defining foreign aid vision where aid utilisation was emphasized for the short term, policy enhancement was focused for the medium term and reduction of aid dependency was advocated for the long term. This had even encouraged the government to advocate loan assistance in projects that have higher degree of recovery and in investments especially directed to infrastructure development. Grant aid in human resource development, capacity enhancement, institution building and technical back ups was considered worthwhile to boost aid productivity. Are not these enough reasons for justifying Nepal’s good policy environment? If yes, what are intervening factors that have undermined the spirit of Nepal’s Foreign Aid Policy which was so proudly brought out officially after the 2002 Nepal Development Forum meeting?

A good policy regime unless supported by accountable institutional framework can not yield expected result. Nepal’s policy regime has been influenced by non-economic issues by failing to address aid effectiveness on the basis of: How far did aid help to increase productivity and economic opportunities to the poor? How far it helped to develop human resources by implementing social investment policies? How far State could promote the access to the civil society for productive activities. And how far it helped enhance institutional capability and promote good governance?

From these perspectives a good policy environment has not made Nepal’s aid effective which can be justified from observed policy impact. Low per capita income has restricted investment in social sector and poverty programmes. The policies have failed to reduce the cost of public irrigation. Policy intervention has not been able to divert more investments to labour and skill-intensive sectors. Efforts have not yet been successful to involve private sector in the generation and distribution of energy.

A study conducted by Shantayanan Deverajan, David Dollar and Torgny Holmgren on Aid and Reform in Africa identifies three different phases in terms of foreign aid policy regime that a country passes through. A pre-reform stage where there is a low-key assistance for policy learning, has to take place at country’s own pace. In the second phase of rapid reform, where stabilisation, price liberalisation, devaluation is exercised, the government is committed to reform. During this stage, technical support is important. Aid increases confidence in the reform programme and calls forth greater private investment. The third phase is stable policy that leads to second generation reforms, including institutional changes, public sector reform, privatisation and civil service reform.After reinstating democracy, Nepal initiated policy reform aggressively in early 1990s. The country according to Devarajan’s report can actually be leveled at the second stage where policy reform has been pursued. Considering the khai ke garne (what shall we do?) syndrome, it is important to recall that the report states that at a time when government’s performance is in question mark and the country unstable, conditional loan may not be useful. Given Nepal’s vulnerability and unpredictable political process, the donor community, especially the World Bank, should consider alternative measures while balancing policy reform and the execution of conditional loan like the US $ 71 million for poverty reduction.

The second assumption of Assessing Aid considers economic reform can be supported but it cannot be bought also gives us some problem to compromise on its efficacy on the ground that if reform cannot be bought, structural adjustment lending since 1980s to improve policy environment has been fundamentally misguided.

The upcoming NDF meetign where “Donor Harmonisation and Foreign Aid Policy” will

be one of the important matters should consider these issues. The government, as per the chairman’s report during the NDF meeting in 2002, listed lack of ownership, lack of leadership and direction, proliferation of projects, resource leakages and misuse, as reasons for poor aid effectiveness.

From the government perspectives, the issues included mismatch of priorities, weak project planning, changing structure of foreign aid (i.e., grants to TA to credits), huge gaps between commitments and disbursements, weak accounting of some aid that does not go through the government system, and poor absorptive capacity. From both the perspectives, many problems still persist.

The debate will therefore provide opportunities to develop consensus on the efficacy to receive structural adjustment loan for policy reform and the justification for conditional loan in a regime of political uncertainties.

Professor Pyakuryal is president of Nepal

Economic Association