Friday, February 8, 2008

Is foreign aid helping Nepal?

'No' according to this news story. It says that foreign aid, in all its forms, has not made any significant contribution to reduce poverty and support income generation activities in Nepal. Note that it does not say aid is all ineffective; it is just not making 'significant' contribution. So, will Nepal be better off not being dependent on foreign aid and give herself a comfortable space in policy autonomy rather than unnecessarily yielding to donor pressure?

Generally foreign aid, which constitute almost one quarter of expenditure budget, is being used to bridge resource gap in yearly budget. It has neither contributed to generate sustainable income generating activities nor has helped increase productivity in the struggling sectors. This is evident from falling production in the manufacturing sector. Moreover, its neutral effect in poverty reduction is quite surprising. The eleven percentage point reduction in poverty in a decade is attributed to remittances, and growth in agricultural productivity. The new report states that donors are predominant in shaping domestic policies. This led economists like Dr. Pant to question the future role of donors in Nepal. Pretty immature questioning at this moment, but there is definitely a need to harmonize national priority with donor's priority, with emphasis on the former backed by the latter.

Another issue that comes up with this is transparency and accountability. It is said that almost one-third of aid is neither audited nor properly recorded. The monsters of commission, leakage of funds, and fund diversion to other projects come into the picture.

A warning from the authors of the report:

"Unless foreign aid strategies and donors’ behaviour are changed following an overhauling approach, the debt trap situation will perpetuate accompanied by continued dependency on aid with some zero sum game type effect"