Foreign Aid and Policy Making

Foreign Aid is the backbone of any developing country if properly utilized. It can play a crucial role in the infrastructure of development like roads, transport, health, education, hydropower, and information technology. To align with the development goals, foreign aid is vital as it provides passage for economic growth and prosperity. According to the World Bank, economic indicators like inflation, interest rates, exchange rates, monetary and fiscal policy, and balance of payments should be fair and sustainable to achieve economic stability and increase investment opportunities. The efficiency and effectiveness of foreign aid are directly proportional to the proper functioning of such macroeconomic factors.

Foreign aid refers to voluntary assistance from one country to another which can be in the form of a gift, grant, or loan. It can also be in the form of capital, food, supplies, and services like humanitarian aid and military assistance. In this globalized and competitive world, the foreign aid-receiving country should have diplomatic skills and utilize them in the development activities of the country. 

In this competitive global market, the country must be visionary and dynamic and utilize the aid and grants applying the principles of corporate governance focusing on the development of the country. When aid is provided by donor agencies, they have self-political and economic interests. In such a situation the donor-receiving country should tactically deal with the situation with ambassadorial abilities without hindering the relations with the neighboring countries.

Foreign Aid has always been an exciting topic regarding whether it is beneficial for the overall reform in the country. While segregating the aid, it can be disaggregated into loans and grants. Foreign loans have a competitive advantage as it is utilized in public investment and government spending in productive sectors. While foreign grants are disbursed to non-productive public consumption expenditures.

Apart from that, foreign loans help to collect the tax, reduce domestic borrowings and minimize the non –productive civil expenditures which significantly contribute to GDP growth. But, foreign grants assist the donor countries during disasters, natural calamities, pandemics, and other critical situations. It has a minimum impact on the economy of the country but helps to fulfill the short-term needs of the country.

Nepal, a South Asian country has always been fascinated by the provision of foreign aid. The country has a unique location lying between the two Asian powerhouses of the world with no direct access to the outside world. The geopolitical situation enabled the country to develop, maintain and prosper diplomatic relations with India and China. Since the country has never been colonized and ruled by others, it has been a sovereign state and has historical experience in maintaining diplomatic relations apart from its geographical settings.

In the long history of Nepal from the Shah Dynasty to the Federal Republic of Nepal, the priorities and importance of the international stage have changed and the nation should fulfill those responsibilities quite responsibly and decisively. Nepal has the target to graduate to a list of developing countries and to meet those objectives, it should conduct development activities rapidly bringing changes in the life of people. 

Apart from promising geographical locations, abundant resources, god-gifted natural beauties, and hydroelectricity potential, Nepal has failed to attract Foreign Direct Investment (FDI), which is a pillar of economic prosperity. The country is fully dependent on foreign aid and grants. As mentioned earlier, foreign loans are necessary for the development phase but the widespread disinclination towards them has raised questions about their proper usage.

Along with that, the political system of Nepal has exceeded the level of frustration. The appointment of foreign ambassadors is based on political linkage rather than their skills and competency in international relations. The nepotistic society has deteriorated the image of Nepal in the context of the external world. At a time when Nepal should think strategically and act smartly, it is losing the trust and faith in the neighboring countries and the international society.

In the recent case of the US Millennium Challenge Corporation (MCC), $500 million donations to Nepal for enhancement of road quality, availability and reliability of electricity, and facilitating the cross-border electricity trade between Nepal and India was the topic of debate and created delusion in the mind of the general people. The political parties were also in a dilemma and could not elaborate on the risk associated with it. Such a controversial deal was passed with ratification from parliament without realizing its long-term impacts on the country.

It is perhaps the lack of economic diplomacy among the political leaders. Economic diplomacy is considered a key vehicle for the promotion of tourism, directing foreign aid and investment, and advancement of trade and tourism. The incompetency of leaders created a negative impression of Nepal in the verse of foreign aid and grants. It will impact the country in future endeavors in terms of foreign relations and foreign diplomacy.

While accepting foreign investment, Nepal should critically analyze the scenario without deteriorating its relations with neighboring nations. The recent acceptance of MCC by the Nepalese government raised Chinese concerns over the American grants. In such a scenario, diplomatic expertise was required to deal with the situation without hampering the historic relationship with China. Rather than polishing the tense situation, Nepal seemed unconcerned and uninterested in the massive aid by China named the BRI (Belt Road Initiative) project during the state visit by the foreign minister of China.

The foreign policy of Nepal’s objectives is to reinforce the dignity of the state by safeguarding sovereignty, territorial integrity, and independence, and promoting the economic well-being and prosperity of Nepal. Article 51 of the Constitution (2015) guides Nepal to pursue independent foreign policy and adhere to the principles of the UN Charter, non-alignment, Panchsheel, international law, and the norms of world peace. The concept of Federalism and the division of the state into Federal, Provincial, and Local levels have added challenges to the management and utilization of foreign aid and grants in the productive sector.

Even though the constitution of Nepal has mentioned the provision of pursuing independent foreign policy, it is still not relevant seven years after the promulgation of a new constitution. Foreign policy changes with the change in the power of the political leaders. They should have a common interest while dealing with international aspects and should stay united. But the self-centered political interest and lack of diplomatic knowledge have created a negative impression in the external society. The Indian blockade of Nepal in 2015 is an example of Indian supremacy and unclear foreign policy in Nepal.

Even though foreign aid surged to $2 billion in the last fiscal year 2019-20, the one-fourth of money is received from the country’s development partners amounting to 23.3 percent of the national budget. This shows the dependency of the country on external factors with the poor and vulnerable state of the country. The youths are flying abroad in search of job opportunities, the value of Nepalese currency is diminishing, inflation is at its peak and the country’s foreign reserve is in a declining state.

The weak governance structure has created trouble to attract foreign direct investors, entrepreneurs, skilled human resources, industrialists, and patriotic Nepalese to work in their homeland. The bureaucratic hassles, lack of technical skills, and sense of responsibility towards the job have troubled the country increasing the dependency on foreign aid and loans.

Most of the donations target the infrastructure of development like that of USAID, which signed a $659 million deal for five years (2022-2027) focusing on the priority sectors like education, health, and the strength of democratic institutions and framework.

Rising above this context, the unplanned urbanization and increased settlements have deteriorated the quality of air with the Air Quality Index (AQI) of the capital city crossing the level of expectation and has troubled the life of the people. The AQI of Kathmandu reached 500 as per US Embassy measuring station in January 2021. The air quality recorded the Maroon hazardous level in the country.

Also, Nepal occupies 0.03 percent of land in the world, which has serious implications for climate change due to its unique geographical distribution. It is the land of the Himalayas with the majority of the highest mountains in the world. The donor agencies should also focus on these relevant factors.

Apart from disbursing the aid and loans, the donors should review the success factors and project completion rate to reimburse in the future. They should be completely dependent on the transparency and accountability of the utilization of grants and also rely on the impacts on the life of the general citizens. The success rate of those projects depends on the transformation in the life of poor, underprivileged, and inclusive people of society who are deprived of their basic rights. The foreign policy of the country should be tight and intact such that the grants and aid should set a positive perception in the mind of people leading the country to a happy and prosperous Nepali.


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