During Financial Year 1977/78, revenue surplus had met 40 per cent of the development expenditure. The scenario is now totally changed. Revenue surplus cannot even meet regular expenditure compelling the country to resort to either financing through internal borrowing or external sources. Foreign aid is therefore indispensable in the foreseeable future.
Nepal receives the most concessional loan from more than 50 major donors with an average maturity period of 40 years, a grace period of 10 years and a per annum interest rate of less than one per cent. Low mobilisation of domestic resources, increasing dependence on aid, and failure to increase aid productivity have raised doubts among the development partners about ineffective debt planning and debt management. Outstanding debt is more than two-thirds of the GDP of the nation. Aid has thus failed to address wider inequality in income and mass poverty, threatening economic development instead.
Quality improvement and efficiency of aid was the major concern during NDF 2002 when the government had presented Nepalâ€™s draft Foreign Aid Policy (FAP). The commitment that was made during last Forum needs to be reviewed to consider future steps in the NDF 2004.
It was expected that the government formulates an economy-wide and sector perspective plans. By strengthening aid coordination, the government was supposed to ensure transparency and accountability and develop measures to enhance quality of returns on aid. The development partners were expected to avoid trial and error projects.
To meet the growth objective of the Tenth Plan, the investment need is NRs 609.82 billion. Since total national savings are put at only NRs 506.14 billion, the investment requirement of NRs 103.68 billion has to be met through external assistance. The increment in foreign loan during the last one decade has been scaled to three-fold. It reached to NRs 220 billion by 2001/02 from merely NRs 71 billion, a decade ago. This overview offers Nepalâ€™s increasing dependency on budgetary support from development partners. From this perspective, NDF 2004 is important event since the share of aid commitment from NDF is above 80 per cent of the total aid flow.
Some important conditionality was agreed during NDF 2002. Consensus was developed that the priorities should be realistic with their effective implementation; revenue and public expenditure management should be improved by ensuring economic growth as broad-based and equitably distributed; to assist HMG/Nepalâ€™s poverty alleviation and economic reform programs, it was necessary that public expenditure allocations be reflected in the budget; an enhanced poverty reduction strategy should be designed to establish a Poverty Alleviation Fund; and finally it was agreed that the government should take full ownership of Nepalâ€™s development agenda.
The implementation status of the agreed commitment should be explicitly given and investigation on actual commitment and disbursement be made for preparing dependable and predictable Medium Term Expenditure Framework (MTEF) in future. Therefore, if we assess the NDF 2002 conditionality categorically, the first condition is broad. It can be interpreted either way. In the second case, implementation of PRSP and elimination of low priority projects can be taken as an effort to bring out reforms in public expenditure management. Monitoring capacity of line agencies is not satisfactory since appropriate indicators are not developed to initiate performance-based release system. Thirdly, entire public expenditure allocations are not reflected in the budget. Fourthly, although Poverty Alleviation Fund (PAF) is created, in the absence of periodic and institutionalised impact assessment, service delivery has not improved. IFAD had voluntarily offered to provide technical assistance to manage PAF during the last Forum. A need-based request may therefore be made during NDF 2004.
Finally, Foreign Aid Policy has been brought out reiterating governmentâ€™s commitment to take up ownership in Nepalâ€™s development agenda. The participatory approach where the recipient takes lead with technical back-stopping from the donor agencies is the best means for creating ownership. If it is done, fostering ownership would entail an optimum utilisation of locally available skills and resources, guaranteeing benefit-sharing. Besides clearly spelt-out conditionalities, several other important issues such as implementation, service delivery and security were raised by development partners. The theme paper on the Reform Agenda should establish a link between implementation and security regime by presenting an overview of the state of operationalisation of US$500 million per year commitment made during NDF 2002 event.
A consortium of representative governments, international financial institutions, UN agencies and regional blocks who participated in NDF 2002 had made a critical appraisal of Nepalâ€™s reform agenda and its prospects of implementation. A separate paper by reviewing their observations is necessary to respond to development challenges and justify the need for budgetary support. Professor Pyakuryal is president, Nepal Economic Association