An open letter to the Minister

To:                              Mahesh P. Acharya
Minister of State for Finance
Ministry of Finance, Bagh Durbar, Kathmandu

From:                        Madhukar S.J.B. Rana

Subject:                   The need to reform foreign aid administration for a "New Nepal".


Shortly, like Ministers of Finance before your turn, you too will lead the Nepali delegation to the annual Nepal. Aid Group (NAG) Meet to be held in Paris — Europe´s metropolis par excellence.

Unlike Ministers of Finance before your time, you will be participating as the first post-revolutionary personage with the mandate of a sovereign people, to seek the "New Nepal" which your party and Government wishes so dearly for the kingdom.

No "New Nepal" is possible without an effective Nepal Aid Group mechanism when 60 per cent of His Majesty "s Government´s development expenditure and 40 percent of its total expenditure are derived from foreign aid. Also, there has to be a willingness in the donor community to accommodate within its development paradigm the Congress Party´s manifesto. Hence this letter.

The challenge before you is immense. Aid is becoming scarcer and more conditional. Longer and larger strings are being attached to foreign grants and bans. In an environment of globalisation, the aid dialogue appears to transgress upon the traditional concepts of economic and political sovereignty. With aid diplomacy becoming ever-more commercialised, diplomatic finesse yields to mutual benefit and frankness, which oftentimes could appear too personal and improper. And not least, of course, there is the world economic recession and hard times for all; and also the grave reluctance of the international commercial banks and transnational corporations to invest in the developing countries, especially the least developed ones like ours.

Challenges not only constrain. They also provide opportunities. The first and foremost opportunity emanates from what you said before the Local Level Donors´ Meet on 17February: "Ever dedicated to principles of democratic socialism, the government of the Nepali Congress is committed to uphold basic human rights, political pluralism and good governance." This suggests like-minded ideology between Nepal and the donors. Hence the climate for dialogue is optimal for both.

You also seem to convey to the donors locally that His Majesty´s Government of the Congress-variety is more "bold" and "committed" to the World Bank-IMF Structural Adjustment Programme (SAP) than was His Majesty´s Government of the Panchayat – yariety. Hence, not only is the ideological ambience in harmony but, the policy goals are equally in ´tune of privatisation, market-friendly approach, globalisation of the Nepali economy, liberalisation of the foreign trade regime, effective public expenditure management, rural development with "people in front" for poverty alleviation, meeting basic needs in agriculture, health and education, and last but not least, reforms in tint development administrative system.


As you prepare for the dialogue with the donors, I am inclined to believe many concerns will be uppermost in your mind: Will the donors provide more aid than ever before so that Mahesh Acharya outdoes Devendra Raj Panday, Bharat Bahadur Pradhan, Prakash Chandra Lokani, Yadhav Prasad Pant, Surya Bahadur Thapa (who, serving also as Prime Minister could not lead the delegation, which was led in turn by the Finance Secretary Devendra Raj Panday) and Bekh Bahadur Thapa? Will the donors´ programmes and projects conform to the Approach Paper for the Eighth Five Year Plan, 1992-1997, which only recently has been endorsed by the Congress Party Convention at Jhapa? In the era of competitive politics, how will the opposition parties evaluate the results of the NAG-92? Just how much synchronisation with the donors is good for "democratic socialism", or the Party´s entente cordiale with India? In the face of His Majesty´s Government´s lack lustre performance in the field of economic management, how does one reassure the donors of better "absorptive capacity´? Would it yield sympathy to put all the blame on the ancient regime for the structural weaknesses, graft and corruption, and unaccountability in aid management? And will it be wise to do so given die fact that these very donors (save Sweden) were development partners of the past regime?

You have raised many excellent issues about foreign aid. It can not, however, be said that they were not raised before by other Finance Ministers. One vividly recalls the Nepali presentation to the 1983 NAG Meet by Prakash Chandra Lohani who, it should be noted, was the first-ever elected Finance Minister. He came to hold that post after a historic vote of no confidence motion against an incumbent Prime Minister! Graft and corruption were one of the major charges for the change of government then. One should review the 1983 NAG document´s content and tenor and wonder why nothing came out of it? I had the privilege to be associated with its drafting, as Chief Economic Adviser. Even now I wonder if they were taken seriously by the donors as they know very well how hypocritical we in the developing, world are, specially the least developed ones.

One paragraph in your statement particularly struck me-I quote: "In the past, the commercial interest, rather than the needs of the. country, used to supersede economic and technical considerations in the selection projects and their design. The government is now determined to arrest the influence of the suppliers of goods and services and their agents indecision making process. I am hopeful that we will receive your full support in this regard."

It is nice to be ethical and moral. But let Us also not be naive. Are we really hoping that the donors, whether bilateral or multilateral, will come up with solutions to deal with this issue? Let me remind the Honourable Minister that while doing my stint with the Ministry of Finance, a proposal was formulated to involve the British Crown Agents for monitoring commission-taking, over- and under-invoicing of exports and imports, supplying goods and services contrary to contract terms and conditions, and so on. What happened to that file? I know that it moved reluctantly from the Finance Ministry to the Commerce Ministry and then the Nepal Rastra Bank and thus returned to the originating Ministry. Many of the presently incumbent senior executives are familiar with its content and routing, including a very senior executive in the present Cabinet Secretariat. Why was there no implementation? Perhaps, Your Excellency will deem it fit for yourself and the Administrative Reform Commission to find out? The people of both the donor and recipient countries are being cheated by nefarious commercial and bureaucratic alliances, which yet goes unheeded One recalls the expert from the British Crown Agents saying to the then Finance Minister that the introduction of this monitoring and surveillance system in Indonesia increased that country´s customs revenue by 50 per cent in the first six months of its implementation!

Those outside the Government consider the NAG Meet a useful forum. But not an effective one. Much room remains for improving its worth.

The Nepal Aid Group meet is useful because it is difficult to deal with each of the 36 or so bilateral and multilateral donors. Although most countries participating in the meet are like-minded in their perspective on development, yet co-ordination is needed because of the variances in their capabilities and interests.

It is useful since a dialogue is possible between the highest levels of technocracy among the donors at one time, which saves much cost, time and effort In the international aid business it is always an opportunity to meet and hear the major decision-makers so as to hone national bargaining skills. And they are busy people having to deal with over 160 countries.

It is useful because it "disciplines our political decision-makers," says Devendra Raj Panday. The World Bank does provide an annual microscopic examination of the economy´s performance, policies and strategies based on a wide cross-section of views, data and information. At its own discretion, which should be changed, it decides on a "national need" for the year and then goes on to do an in-depth analysis on the subject matter. (For example, this year domestic resources mobilisation, at other times human capital formation, poverty alleviation, exports, women in development, and so on.) Further, it projects the three famous economic gaps, namely 1. Savings and Investment 2. Export and Import and 3. Government´s Deficit Financing. Based on the above analyses, the World Bank proceeds to estimate our "aid need". As it happens, Excellency, their estimate is always superseded by actual pledges, which makes us wonder as to its effectiveness when aid utilisation has remained constant over long periods, between 52 to 56 per cent of aid commitment? What is the gain from having an overloaded aid pipeline when the aid tap is dry and the bucket awaiting the aid flow is filled with the interest on the loans? We should henceforth move from measuring the success of aid diplomacy from its stock position to its flow and, indeed, its impact on the quality of our lives.

The aid group meet is ineffective because we, on our part, react to the World, Bank´s Country Memorandum rather than proacting. As you know, we prepare two documents: one, the so-called "Volume I", which primarily is a defensive expression of our (poor) performance, policies and strategies; two, the so-called "Volume II", which is a shopping list of projects and their size of investment arranged by sectors.

It is said that David Hopper, former World Bank Vice President for Asian affairs, had mentioned at the time of the first NAG Meet held at Tokyo in 1976 that the occasion marked Nepal´s "maturity as a developing country". Indeed, if one considers that the "lesser developed" Bhutan and Maldives only have Annual Round Table Meets chaired by the UNDP, it may be so by comparison. But it must not be forgotten that all our diplomatic efforts from the mid-1960s were given to having an aid consultative mechanism like that for India, Pakistan and Sri Lanka, which, after all these years, clearly the NAG Meet is not. Our NAG Meet is an exercise in "co-ordination of projects". India´s Aid Consortium Meet, which can take place on a back-to-back basis with us, is an exercise in "dialogue over policies and pledging". What one wishes to emphasise is this: Nepal is yet, after 16 years, at the stage of the NAG Meet whereas in the meanwhile Bangladesh has "matured" even further to have its own Aid Consortium Group Meet on par with India, Pakistan and Sri Lanka.


One views the NAG Meet to be ineffective precisely because we have the worst features of both mechanisms, namely project-lending with macro-cum-sectoral policy conditions. As the parliaments of the bilateral donors decide on the allocations for each country irrespective of the World Bank meets, it is unlikely that more can be pledged. For Nepal the worse scenario is that it can regress into is, as Bekh Bahadur Thapa says, "An exercise in collective vanity among the donors." The NAG mechanism is ineffective for its cost effectiveness. Projects are donor-oriented and therefore highly capital-intensive involving inappropriate technology and excessive technical assistance components. As projects get bigger and bigger the conditions set have naturally extended themselves towards policy reforms and hence have programme implications (for example, change personnel policies in the irrigation sector, create health user associations, merge departments to form national authorities, revise pricing, and so on). As the experienced former Finance Secretary Lok Bahadur Shrestha says, "Often we find that it is the tail that wags the dog in aid negotiations."

Actually, one must objectively recognize, Excellency, that some progress towards programme lending had been made through negotiations between the Asian Development Bank and the Nepali side under the leadership of Bharat Bahadur Pradhan. The years 1987 till 1989 were good for the further "maturing" of Nepal in international economic relations, with agreements on the ADB Industrial Programme and the ADB-Finland-Germany Forestry Programme, We must continue with negotiating programme loans, and for this our priority target countries should be those dial meet the Pearson Commission Report of committing one per cent of their GNP for foreign aid (countries such as the Netherlands, Sweden. Norway, Denmark and Finland).

Under your leadership Nepal can move rapidly to program me lending and hence to the Aid Consortium status, if we can improve our "absorptive capacity". This calls for administrative reforms for sound financial management, good public audit and superior technical competence. So far, the professionals engaged in finance, audit and technology have been the backroom boys and girls of our development drama. They must now be brought to front stage as leading actors.

It is hoped that you will be successful in obtaining a Memorandum of Understanding (MOU) at the Nepal Aid Group Meet towards moving to an Aid Nepal Consortium. Some features of this MOU could Involve the following: termination of carry-over projects from one plan to another; intensive local-level dialogue to develop priority programmes for donor funding, based on the Approach Paper to the Eighth Plan; new modalities for standardisation of project and programme administration in the light of decentralisation to the sectoral ministries and local government institution s; policy and institutional support for project identification and appraisal by local consultants; joint audit of projects for propriety and impact; augmenting the role of the local aid agencies in the generation of baseline data, needs assessment and project identification by working with national institutions and consultants, and so on.


"When all is said and done, what it boils down to in simple language is that you must not be reluctant to say "No" to donors as it is not aid commitment which is important but disbursement and foreign debt. Because of your Party´s focus on village development the question is how to innovate with village-level planning and in so doing involve the donors.

Because of the extravagance and wastefulness of current foreign aid delivery, the other challenge is: how to curtail the cost of projects? Donors repeatedly call for empowerment of the poor and enhanced accountability to the poor. In the interest of these aims and also in the interest of project cost-effectiveness, why not transfer aid directly to the households to enable them, with money on hand, to demand the designated goods and services?

The World Bank itself admits that its Structural Adjustment Programme has not had a human face as the sufferers are the poorest of the poor. Can we in Nepal innovate on suitable mechanisms for not only our benefit but those of the world´s poor too?

For 41 years of aid history, the Government and bureaucracy have been "serving" the people through what I call "the mechanics of supply creating demand." Let us now reverse the process to have "demand creating supply," This can happen when money for the poor households´ education, health, agri-extension services, and so on, could be directly channeled to them. With money in the pockets of the absolute poor, there will be empowerment. There will also be accountability, as the middle class who provide the services now have to depend on the poor for their wages and salaries. There will result a competitive marketisation for the supply of services. Thus we would safeguard the rights and sovereignty of the consumer, which today stands compromised by the collusion of political and business interests—not least also by the attitude and behaviour of state welfarism.

Forums like the Nepal Aid Group are useful to donors, too. Interdependence means that the North cannot survive without cooperating with the South. Foreign private investors from the North also find such forums useful, since the IMF annual health of the economy certification, which takes place at the NAG Meet, informs them about a country´s investment climate.


Nepal is not seen by anyone as a hopeless case of under development. All or most donors are reasonably optimistic as to our future. It is for the development worker, consultant or the aid bureaucrat still one of the better places to be. As to whether or not we really have the trust and confidence of the donors to be able to move to programme-lending rather than remain in the realm of project grants and loans, one may conclude this epistle with a quote from Neal P. Cohen, which appeared in the USAID publication entitled Four Decades of Development: The History of US Assistance to Nepal, 1951-1991.It reads thus: "From the Ranas through the Panchayat years, officials were often "paid" in privileges. It was expected that officials would use their positions to increase their incomes. Government was essentially extractive; removing wealth from the economy to improve one´s personal position. The essence was control, not development."

I think, Excellency, this sentiment pretty well encapsulates the innermost feelings of the foreign aid establishment about Nepal.

Madhukar S.J.B. Rana is a development economist and management consultant. He has served as an UNCTAD official and as advisor to various Ministries of the Nepali Government.

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