Nepal being a least developed country, has various challenges ranging from social and economic to infrastructural ones, therefore amidst limited internal resources foreign aid is essential to enhance such shortfalls. While increased foreign aid in the annual budgets have become an annual trend, absorptive capacity remains relatively low at just 57% on average over the last six years. The low expenditure of committed aid has created pressure on domestic sources and questions raised about our capacity and performance, which could deter development partners to divert funds or discontinue commitments. Therefore, for minimized gap between commitment and disbursement of foreign aid, it is essential to first strengthen our implementation and fund utilization capacities.
Foreign aid is utilized according to the government’s priority with the use of grants, loans and thresholds defined in the Development Cooperation Policy 2014. In keeping with the policy, the government currently intends to increase investments in capital formation and productivity enhancement programs which will aid in boosting productivity and generate additional economic activities. As higher internal borrowing by the government could adversely affect the private sectors access to capital, the government intends to mobilize higher foreign grants rather than raising too much internal loans.
While the government’s reliance on foreign aid was quite high until a few years back, it has remained below 30% in recent years. This is an indication that Nepal’s capacity to increase internal sources has increased. Despite relatively strong revenue base, foreign aid is still needed for capital expenditure. However, the government intends to gradually work towards a self-reliant economy by enhancing internal capacities and effectively mobilizing development cooperation. If the country continues to rigorously keep to its goals, gradually by 2030 Nepal will be keeping foreign aid as low as under 20% in its total expenditure.