Foreign Aid in Nepal: What do the data show?

From its modest appearance in the early 1950s, foreign aid has grown to form an integral part of the development process in Nepal, and it is amazing to note how remarkable this transformation has been. For the first five years, from 1951-1956, Nepal received NPR 95 million in aid, all in the form of grants. Four decades later, in fiscal year 1994/95, total foreign aid receipts stood much higher at NPR 12.3 billion. The latest budget, for fiscal year 1996/97, puts the estimated receipt of foreign aid at NPR 20.3 billion or 35% of total government expenditure of NPR 57.5 billion.

So far, Nepal has received more than three billion dollars in foreign aid (an average of about 92 million dollars a year since 1951). In what forms has this come, and how has it been distributed? The tables presented in the following page, with data culled from many different sources, attempt to give a clearer picture of the evolution of foreign aid in Nepal.

The first table contains data on the amount of aid received by Nepal since 1951. Using the exchange rate for mid-month of July of each year, as given in a 1995 publication of the Federation of Nepalese Chambers of Commerce and Industry (FNCCl), the figures from government documents (in Nepali Rupees) have been converted to US dollars. Official exchange rates have been used for most years. Since the FNCCl document has data for only as early as 1960, exchange rate has been assumed to be constant for the period before that; this is perhaps not that inaccurate, an assumption given Nepal´s fixed exchange rate policy at that time.

Total foreign aid receipts have increased over the years although there have been fluctuations. In his book Foreign Trade, Aid and Development in Nepal (1988), S.R. Poudyal identified the wars in the Subcontinent (Sino-Indian and Indo-Pakistan) for some of the dips in aid in the 1960s. Most of the other recent fluctuations have also had more to do with the external environment than with internal policies.

For each year, aid receipts have been broken down into loan and grant components (which are also similarly given in rupee and dollar terms). One obvious distinction is that aid given as loan has to be repaid (though most of credit offered Nepal have been at low rates with generous payment plans), while grants do not.

One of the most noticeable features of this table is the increasing share of loans in the composition of foreign aid. Initially, all of the aid received was in the form of grants. This pattern has changed since the early seventies, with almost two-thirds of foreign aid given so far in the 1990s being in the form of loans. In the latest budget, NPR 13.9 billion, or almost 70 percent of the total aid receipt projection, is in this form.

This increase in the proportion of aid given out as loans also matches closely the rise in the share of aid from multilateral, as opposed to bilateral, sources. As late as 1975/76, 65 percent of the aid that Nepal received was from bilateral sources (i.e. from other countries). Concurrent with the rise in the proportion of aid given as loans was a rise in aid coming from multilateral sources (i.e. from institutions like the World Bank and Asian Development Bank). An overwhelming proportion of the aid received from multilateral sources has been in the form of loans, which accounts for the trend seen in the data.

While the first table looks at foreign aid in the aggregate, the second table gives a per capita perspective. The data on population in this table is based the census conducted by Nepal´s Central Bureau of Statistics. Census data are available for 1941,1961, 1971, 1981 and 1991; population growth is assumed to be constant between two census exercises and population for the intervening years interpolated accordingly. The total aid has then been divided by the population for each year to give per capita aid for a given fiscal year. This figure can be interpreted as the average share of foreign aid for a person alive in that fiscal year.

This per capita aid figure is also rising. Even with a rise in the exchange rate (from NPR 7.6 to a dollar in 1960 to NPR 49.11 in 1994) and a massive increase in population from about 7 million in 1951 to more than 19 million in 1994/95, per capita aid receipt has increased from USD 1.56 in 1951 to USD 12.74 in fiscal year 1994/95. A hypothetical person born in 1951 can be said to have received USD 279.15 by the end of fiscal year 1994/95, at an average of USD 6.98 a year.

Nepal is thoroughly dependent on foreign aid; there is no ambiguity there. This dependence has also been rising over time. Foreign aid constituted about two percent of Nepal´s total output (the Gross Domestic Product, GDP) in 1974/75. This had registered an almost three-fold increase to about 6.5 percent of the GDP by 1993/94. A large proportion of development projects has depended on foreign aid; the First Five Year Plan (1956/57-1960/61) was wholly financed by external assistance. The figures for later plans remain considerably high.

Foreign aid also seems to be concentrated in certain sectors; social services have generally been ignored (relative to their importance) while capital-intensive sectors like power have been heavily funded. This is ominous in terms of debt dynamics. Even with the low rates on the loans, outstanding debt as a percentage of exports of the country (that is, the total amount the country owes as a percentage of what it earned from its exports) has increased from 38.91 percent in 1974/75 to 525.12 percent in 1994/ 95; outstanding debt as a percentage of the GDP has increased from 2.16 percent to 57.31 percent in the same period. Similarly, repayments (the amount the country has to pay back on its debts) rose from 1.26 percent in 1974/75 to 12.82 percent in 1993/ 94. Repayments have also been rising as a proportion of GDP, from 0.07 percent to 1.4 percent in the same period.