When the government is unable to maintain its expenses through its revenue, it has to borrow. This type of borrowing may take the form of loans or grants. Foreign aid does not need to be repaid; nevertheless, loans must be fully paid back, including interest. Grants are more lucrative than loans to the government. Until the fiscal year 2079-80 B.S., foreign debt accounted for 21.9% of GDP. That year, Rs 116.26 billion was received in foreign loans. Foreign aid made up 16.9% of total foreign aid. According to the 2080-81 B.S. economic report, foreign aid totaled Rs 23.30 billion in fiscal year 2079-080 B.S. The government expects to receive 11.66% foreign loans and 2.82% foreign grants in the current fiscal year.
Reduction in Grants with Increased Debt Repayment Capacity
The formal budgeting planning system started in 2008 BS in Nepal. The then Finance Minister Suvarna Shamsher presented a budget of Rs 52.4 million, which prioritized peace and security, maintenance of daily administrative expenses, and revenue collection. Out of the total, Rs 1.09 million in foreign aid was received. This foreign aid was received in the form of a grant from the British-Indian government. According to Eugene Brema Mahili's book Foreign Aid and Politics in Nepal, foreign grants totaled Rs 686.8 million between 2008 B.S. and 2020 B.S. The government began raising domestic debt in the fiscal year 2018/019 B.S., eleven years after the first budget was prepared, while international debt became part of the national budget in 2020/21 B.S. That year, a foreign loan raised Rs 1.34 million. According to the budget prepared by then-finance secretary Yadav Prasad Pant, the Ministry of Finance aimed to receive Rs 125 million in foreign assistance. America was scheduled to contribute the most, with Rs 84.5 million in foreign aid.
In 2017 B.S., the then-king Mahendra Bir Bikram Shah Dev paid a visit to the United States. During the visit, King Mahendra and American President Dwight D. Eisenhower reached a bilateral agreement to enhance efforts in the areas of economic and human welfare. As a result, the United States pledged to enhance funding to Nepal. The government aimed to receive Rs 20 million from India, Rs 10 million from China, Rs 7.20 million from Russia, Rs 500 thousand from New Zealand, Rs 200 thousand from Britain, Rs 1.4 million from the Ford Foundation, and Rs 100 thousand from the International Labor Organization (ILO) by 2020/021 B.S.
From 2020/021 B.S. until 2039 B.S., foreign aid had a bigger share than foreign loans. From 2040 B.S. onwards, the share of loans increased. In 2040 B.S., Rs 2.54 billion in foreign assistance was received, with 65.78% of that coming from loans and the remaining 34.21% from grants.The trend of relying more on loans than aid continues to this day.
Chart 1: Total Foreign Debt Obligation and Its Growth Rate
Source: Annual Report on the Debt of the Government of Nepal (2080) Public Debt Management Office, Economic Survey (2080/ 081) Ministry of Finance
Over the last decade, the national debt has grown at a 17% annual rate. Public debt fell in the early 1970s (B.S.), but the disastrous earthquake of 2072/073 B.S. reversed the trend, increasing the debt to 13.42%. The foreign debt liability climbed the highest in the fiscal year 2076/077 B.S., up 20.95%. Lockdowns were implemented throughout the year to prevent the spread of coronavirus. As a result, Nepal's tourism, hotels, air and road transportation, domestic and small businesses, trade, and other sectors suffered significant losses. The economic growth rate in 2076/077 B.S. was negative, at 2.37%. According to the Nepal Rastra Bank, the majority of foreign aid during the Corona outbreak was spent on public service delivery, economic activity, and health care. The economy has improved tremendously in the years since the coronavirus pandemic. The economic growth rate in fiscal year 2077/078 B.S. is 4.48%, while it is 5.61% in fiscal year 2078/079.
International Development Assistance Policy 2076 specifies the areas where international development help can be mobilized. Physical infrastructure development, education, health, drinking water, job creation, and poverty alleviation are the top priorities for credit mobilization. The strategy provides for the mobilization of foreign credit in climate change and disaster management. Instead of focusing on a specific sector, the government has spent foreign debt directly from the budget. Foreign aid is spent both within and outside of the budget. When foreign aid is disbursed through NGOs or INGOs, the documentation is sometimes less transparent than when foreign debt is managed in the government's budget. According to Nepal Rastra Bank, 70.19% of the total foreign debt in FY 2079/80 B.S. is spent on economic activities, 14.56% in the general public sector, 4.46% in education, 4.01% to improve rural communities, and the remainder in peace, security, health, and environmental preservation.
As the foreign debts started increasing, the donor countries reduced the portion of the subsidy.
Chart 2: Foreign Aid and its Growth Rate
Source: Annual Statement of Income and Expenditure of the Government of Nepal Part 1, Office of Auditor General, Twenty-Fifth Annual Report of the Auditor General, Economic Survey 2081, Ministry of Finance
Donor organizations expanded international help following the terrible earthquake, although it has since decreased dramatically (except the coronavirus pandemic). Over the last decade, the average annual growth rate in foreign aid has been less than 1%. Following Corona's devastation, when the national economy was barely afloat, the development partners raised subsidies for the fiscal year 2077/078 B.S. The utilization of subsidies in the health sector increased by 56.22% in 2077/078 B.S., compared to 2076/077 B.S. Every year, international economic development assistance commitments decrease. At the same time, committed partners failed to fulfill their promises. In the last five years, only 46.74% of target loans have been obtained. Likewise, 41.4% of the committed foreign help is being received.
Chart 3: Foreign Loans and Grants Received (as a Percentage of the Budget Target)
Source: Economic Survey, 2080/081, Ministry of Finance
Grants and Loans from Which Development Partners and How Much
Nepal has been receiving aid, loans, and technical assistance from bilateral and multilateral donor agencies for development aid assistance. The following are the main multilateral development partners of Nepal:
- The World Bank
- Asian Development Bank
- International Investment Association
- Asian Infrastructure Bank
- Global Fund to Fight AIDS, Tuberculosis and Malaria
- The Global Alliance for Vaccines and Immunization
- SAARC Development Fund
- OPEC Fund for International Development
- International Fund for Agricultural Development
Similarly, Nepal has been receiving grants and loan assistance from bilateral development partners. Nepal's main bilateral development partners include: -
- Australia - India - Korea - UK
- USA - Saudi Arabia - Japan - Finland
- Kuwait - Switzerland - Germany - China
- Netherlands - Norway
Among the multilateral development partners, most of the foreign loans have been received from the International Development Association (IDA). By the financial year 2079-080 B.S., the debt share of Nepal with IDS is more than Rs 580 billion. Second on the list is the Asian Development Bank with loans of Rs 370 billion.
Table 1: Debt Obligations with Major Multilateral Development Partners over Five Years (up to Fiscal Year 2079/80) (Amount in millions)
Source: Consolidated Financial Statement 2022/023, Financial Comptroller General Office
Nepal has been receiving a large sum of foreign loans and grants from bilateral development partners. In FY2079 / 80 B.S., financial assistance of Rs 24.63 billion was received from bilateral development partners. Of this, Rs 8.85 billion was received in the form of grants and the remaining Rs 15.78 billion as loans. Japan is one of the leading development partners of Nepal.
Chart 4: Share of Loans Received from Main Bilateral Development Partners Over Five Years (up to Fiscal Year 2079/80) (Amount in millions)
Source: Consolidated Financial Statement 2022/023, Financial Comptroller General Office
According to the Nepal Rastra Bank's report on foreign aid utilization statistics for FY 2079/080 B.S., the majority of the grants received were used to fund general public services. The grant funds were used for health, economic development, education, income generation, and rural community upliftment. Foreign loans carry cheaper interest rates than domestic ones. Foreign loans have a longer payback time, making them more attractive than local loans. Experts have told the government that without definite and well-stated borrowing objectives, loans may be ineffective, even with cheap interest rates. According to data from the Public Debt Management Office, between FY 2070/071B.S. and 2079/080 B.S., the government repaid Rs 224 billion in foreign debt throughout this decade. Similarly, Nepal Rastra Bank figures show that Rs 71.59 billion in interest has been paid on foreign loans over the last decade (2070-2080 B.S.).
Policy Framework, Planning, Goals, and Effectiveness
Article 59(6) of the constitution permits the Nepal government the power to receive foreign help and loans. According to sub-article (7), the union, state, and municipal governments will manage their budget deficits and other financial discipline by federal law. The Development Assistance Policy 2061 has a long-term goal of changing the country into an affluent nation by establishing a self-sufficient economy through successful development assistance deployment. The International Development Assistance Policy 2076 outlines a strategy for increasing national output, promoting exports, replacing imports, balancing trade imbalances, and developing a self-sufficient economy. According to data from Nepal Rastra Bank, till the month of Jestha of the previous fiscal year, for every Rs 1 in exports, we imported Rs 9.7 worth of products and services.
The Public Debt Management Office, which reports to the Ministry of Finance, has been in operation since 2075 B.S. to keep track of public debt management, relevance, and achievement. The sixteenth plan aims to boost per capita income by leveraging internal and external financing in the infrastructure and manufacturing sectors. The Public Expenditure Review Commission 2075 B.S. report recommends using foreign aid for initiatives that contribute to economic self-sufficiency, boost production and productivity, build human and physical capital, and ensure sustainability. The 16th five-year plan targets 7.1% economic growth during the plan period. To fulfill this aim, an investment of Rs 9.462 trillion is expected by fiscal year 2085/86 B.S. The government expects to receive Rs 1.752 trillion in foreign aid throughout the plan period. 21.23% will be foreign grants, with the remaining 78.76% being foreign loans.
Conclusion
Before proceeding with foreign debt, the need and justification must be demonstrated. Before that, the country should have a defined development plan. A comprehensive macroeconomic model should be developed, with particular aims for moving those sectors ahead. For a developing country like ours, access to financial resources has always been an issue. In such a situation, it is not possible to boost the economy together. As a result, rather than choosing a budget for all sectors, the emphasis should be on identifying and investing in the top industries that would boost the country's economy.
When deciding where to invest, choose regions that may immediately improve individuals' living conditions through job creation while also achieving wide, sustained, inclusive, and quick economic growth. To increase the effectiveness of foreign aid mobilization, investments should be concentrated in certain areas. Care must be taken to prevent unbalanced development. Relying on loans to cover basic necessities or pay off earlier obligations does not help the economy. The government should seek to ensure that domestic resources are sufficient to cover the country's expenses. External resources should be employed to strengthen and revitalize the economy. While subsidies may give temporary benefits, the long-term goal should be to strengthen the internal economy and lessen dependency on them.
