As the government grapples with mobilising foreign assistance, aid disbursements from donors reached a five-year low in FY 2021/22.

BY NewBiz Team

Although foreign aid has historically been a key component of Nepal's development endeavors, the shrinking government capacity to mobilise such aid has resulted in a noticeable decline in contributions from donors in recent years.

The latest Development Cooperation Report of the Ministry of Finance reveals that aid disbursement from development partners reached a five-year low in fiscal year 2021/22. According to the report, development partners disbursed $1.4 billion in foreign assistance during this fiscal year, marking a decline of 17.64% percent compared to the previous year.

In 2020/21, there was a 15.88% decline in foreign aid disbursement compared to the previous fiscal year with the government receiving $1.7 billion in foreign aid from the donors during the period. Such disbursements hit a peak in 2019/20 when the country received $2 billion from donors, while the foreign aid that the government received in 2021/22 was the lowest since 2017/18. Government officials attribute this downturn to the government’s inability to fully utilise the capital budget, resulting in delays in receiving fund reimbursements from donors. Several factors contribute to the reduction in foreign aid disbursements, including a lack of clearly defined objectives in setting target goals, significant expenditures occurring in the third trimester without sufficient provisions for reimbursement within the same fiscal year, sluggishness in reimbursement systems, poor inter-agency coordination, and commencing projects without thorough preparation for implementation.

The government signed 20 financing agreements with 11 development partners, amounting to nearly $2 billion, in 2021/22. Despite these agreements, the government only received $1.4 billion in aid from donors during that fiscal year.

According to the report, disbursements from bilateral development partners decreased by 12.3%, while those from multilateral partners decreased by 19.4% in 2021/22. Bilateral donors refer to specific foreign countries or their agencies, such as USAID, while multilateral agencies refer to entities founded under multinational involvement, such as the World Bank (WB) and Asian Development Bank (ADB). However, disbursements from UN entities increased by 32.9% during the period compared to 2020/21.

In recent years, the proportion of foreign loans has been increasing while grants have declined, as multilateral donor agencies like the World Bank and Asian Development Bank have largely stopped providing grants to Nepal citing Nepal’s strong debt repayment capacity. Nepal witnessed a decline in the disbursement of foreign loans by 15.6%, while grants saw a decline of 25.7% in 2021/22 compared to the previous fiscal year. Over the last three fiscal years, there has been a steady decrease in both commitments and disbursements of official development assistance (ODA). Additionally, there has been an ongoing decline in ODA disbursements by international non-governmental organisations (INGOs), according to the report.

Over the last three fiscal years, there has been a steady decrease in both commitments and disbursements of official development assistance (ODA). Additionally, there has been an ongoing decline in ODA disbursements by international non-governmental organisations (INGOs)

Considering current trends, it is anticipated that ODA disbursements to Nepal will likely decrease over the next three fiscal years. “This shift can be attributed to development partners encountering domestic financial constraints, evolving geopolitical priorities, and a focus on post-COVID-19 domestic recovery within their own countries. However, this does not necessarily signify a reduced commitment from development partners towards Nepal's development, but rather reflects the complexities of global circumstances that necessitate the realignment of resources,” the report states.

Health sector highest recipient of ODA
The energy sector received the largest chunk of the aid money amounting to $241.5 million or 17% percent of the total ODA. The education sector was next with 12.1%, followed by financial services (10.2%), the reconstruction sector (10.1%), and the energy sector (8.9%).

Multilateral partners were ahead in terms of loans, contributing roughly $ 851.1 million, which accounts for approximately 89.5% of the total loan amount disbursed in 2021/22. In contrast, bilateral partners provided around $100.1 million in loans, representing only 10.5% of the total.

According to the data, multilateral organisations predominantly prioritise loan-based assistance which is typically directed toward long-term infrastructure projects. Conversely, bilateral partners display a more balanced allocation between grants and technical assistance with a more focused approach to specific sectors or challenges. Meanwhile, United Nations agencies primarily focus on grants and technical assistance.

WB leads in disbursements

The World Bank maintained its position as the primary provider of ODA to Nepal, despite experiencing a decrease in disbursements, contributing 34.63% of all foreign aid disbursements in 2021/22. Disbursements decreased to approximately $484.9 million in 2021/22 from $794.6 million in fiscal 2020-21, marking a decline of approximately 39%.

In fiscal year 2021/22, the top five lenders in terms of loan disbursements were the World Bank ($474.4 million), the ADB ($264.8 million), the IMF ($110 million), India ($52.7 million), and Japan ($44.5 million).

The Asian Development Bank (ADB) was the second-largest partner in the review period, providing 20% percent of all ODA. Annual disbursements from ADB were recorded at $290 million which was 15.53 percent higher compared to 2020/21. The International Monetary Fund (IMF) came next with a disbursement totaling $110 million. Although the WB and the ADB emerged as the largest contributors to Nepal, their contributions primarily consisted of loans. Approximately 97.9% of the World Bank's and 91.3% of the ADB's total disbursements were in the form of loans.

The US aid agency USAID disbursed a total of $101.3 million during the period, with 87.3%, or $88.4 million, allocated to technical assistance. The United Nations, on the other hand, increased its support by approximately 32.9% from $56.4 million in 2020/21 to $74.9 million in 2021/22. Of its total disbursements, $39.9 million was in grants and approximately $34.9 million in technical assistance.

The government's International Development Cooperation Policy 2019 stipulates that all forms of development aid should be integrated into the national budget system, with auditing conducted by the Office of the Auditor General.

In fiscal year 2021/22, the top five lenders in terms of loan disbursements were the World Bank ($474.4 million), the ADB ($264.8 million), the IMF ($110 million), India ($52.7 million), and Japan ($44.5 million). In terms of grant disbursements, the UN led the list with a contribution of approximately $39.9 million in 2021/22, closely followed by the United Kingdom with $30.8 million, Norway with $30.3 million, the European Union with $28.2 million, and GAVI (vaccine alliance) with $25.5 million. The combined grants provided by these five partners totaled approximately $154.6 million, representing around 57.5% of total grant disbursements.

Surge in off-budget spending

As the government's capacity to utilise donor funds diminishes, the trend of spending foreign aid outside the government's budgetary framework, known as "off-budget" spending, is on the rise. In 2021/22, approximately 20.8% of Nepal's total foreign aid was disbursed through mechanisms outside the national budget system, while the remaining 79.2% was channelled through the national budget, also known as the Red Book. In contrast, in 2020/21, only 15.71 percent of foreign aid was expended outside the budget system, with 84.29 percent funnelled through it. The government's International Development Cooperation Policy 2019 stipulates that all forms of development aid should be integrated into the national budget system, with auditing conducted by the Office of the Auditor General. Despite this policy directive, the practice of allocating a substantial portion of foreign aid outside the budget system persists. In 2021/22, $1.1 billion was allocated through the budget system, while $295.5 million was spent outside it.

Of the on-budget ODA, only $645.3 million (approximately 57.4%) was mobilised through the government’s treasury system, representing a decrease of 31.8% compared to the fiscal year 2020/21. “The remaining on-budget disbursement was sourced from avenues outside the government’s treasury system, a trend that necessitates scrutiny,” states the report. The decline in spending through the government treasury system is partly due to payments related to turnkey projects, India-supported Line of Credit (LOC) projects, and other direct payments, which also fall under off-treasury accounts, according to the report.

Donors like the World Bank, China, India, and the Kuwait Fund disbursed their entire aid allocations through the on-budget modality. Similarly, the ADB and JICA heavily relied on this approach, with on-budget percentages accounting for 95.8% and 86.9%, respectively. Other bilateral donors, such as Finland, the EU, Switzerland, and the UK, primarily channelled their aid through the on-budget modality as well. In contrast, several development partners, including WFP, GIZ, KOICA, UNFPA, Australia, UN Human Settlement, ILO, the Netherlands, and FAO, exclusively utilised the off-budget modality. Notably, USAID provided all of its assistance off-budget.