Saturday, 2 December, 2023

Foreign Aid Vital For Development

Ujjawal Gautam


With the current discourse and quandary on Millennium Challenge Corporation (MCC) endorsement, the effectiveness and ramifications of aid has raised prominent concerns than ever. Further, the issues of reconstruction, the COVID-19 management, and Sustainable Development Goals (SDGs) demands effective aid for the aid-dependent country like Nepal.
Foreign aid has been an indispensable part of Nepal’s development landscape for seven decades. Economic surveys show that foreign aid has contributed 44.67 per cent in total periodic plans of the country. Until the 1990s, some 60-80 per cent of annual development budget was dependent upon foreign aid as revealed by Institute for Integrated Development Studies. In FY 2018/19 alone, Official Development Assistance (ODA) made up 24 per cent of the national budget. However, Nepal remains one of the poorest countries with meagre per capita income of US$ 1,047 and 18.7 per cent per cent in absolute poverty whereas 28.6 per cent falls under the multidimensional poverty as per the 15th plan. It lags far behind in development outcomes with comparatively higher transaction costs. In line with the Paris Declaration, 2005, the effectiveness of aid in Nepal is dismal but we are not able to say what would have happened in the total socio-economic development devoid of aid.

Effective utilisation
For the effective utilisation of aid, Nepal devised separate foreign aid policy and adhered to the Paris Principles and its subsequent declarations but the degree of compliance at operational level is far from satisfactory.
The predictability of development cooperation in Nepal falls below the global average as highlighted by Development Cooperation Report, 2019. The aid envisaged under the agreements is disbursed mostly. But the government has largely been unable to translate the pledged commitments to agreements. For instance, on June 25, 2015, the International Conference on Nepal’s Reconstruction (ICNR) donors pledged $4.4 billion in aid but Nepal hasn’t been able to translate those pledged commitments to agreements. Further, maximum foreign aid has arrived through other mechanisms and the disbursement of aid to the spending unit is also unreliable. Usually, the first and second trimester gets lapsed creating difficulty in effective execution.
Regarding the ownership, most of the aids are not guided by a country-owned long-term vision linked to medium-term strategies. The journey so far has remained as donor-driven rather than beneficiary driven. Donors have the upper hand from drafting of the proposals to the implementation of those documents. One of the secretaries of the Government of Nepal said, “The donors who are funding our development projects make the entire project document for us and we just do some comments and additions. Therefore, by heart, we have little ownership of projects.” The 2018 Global Partnership monitoring results can further corroborate the degree of low ownership, which shows that development partners use government data and statistics only 46 per cent of time for monitoring. Moreover, the aspects of community engagement in the foreign-aided projects are rare and just for meeting formality.
In the case of alignment of aid, there are efforts to connect aid programmes with country policies and processes, and it is getting touched somehow in national programmes. As per Development Cooperation Report, 78 per cent of ODA in FY 2018/19 was recorded on budget and has made improvements to its public financial management systems. Successive Public Expenditure and Financial Accountability (PEFA) assessments results are also the validation of the fact. Despite this, aid fragmentation in Nepal is still high, as demonstrated Herfindahl Index analysis.
In regard with harmonisation, the coordination has been improved at strategic level but the provision of joint monitoring and supervision, joint analytical review, and development of a single or integrated database is still lagging. As per the Development Cooperation Report, development partners in Nepal were engaged with, on average, eight different line ministries, with some engaged with up to 25 ministries in FY 2018/19. The capacity of ultimate beneficiary and recipients hasn’t been developed and it has been an escape point for the donors as well.
Various researches and studies have revealed numerous factors shaping the effectiveness of aid. The early days of Nepal were hampered considerably by political instability and incapability in planning and implementation whereas the later days are hampered severely by the interplay of various national and international factors, competing policies and mechanisms.
The major factors like the proper selection of aid, implementation modality, negotiation strength, adherence to foreign aid policy, consideration to the host country interests, strategic instruments, dedicated human resource, efficient funding, and reporting mechanism have a beneficial impact in the direction of aid effectiveness.
In stark contrast, the low absorption capacity of the country, lack of holistic approach from the donor side, non-alignment with the country system, high fiduciary risks, policy practice gap, various escape points, etc. have detrimental effects on aid effectiveness. Further, staff turnover, rigidity in reprogramming and remodelling, conditionality, parallel audits mechanism, drastic change in the fund, irregularities in financial transactions, disbursement delays, ignorance of donors policy, lack of common understanding, complex bureaucratic procedures, etc. are the major impediments in aid effectiveness.
From the past, it can be safely noted that the contestation among the actors and mechanism has led to ineffective aid whereas the adaptation of the actors to the mechanism has resulted in effectiveness. Similarly, legitimation and validation to the country’s systems, policies, and indigenous approaches have led to the effectiveness whereas de-legitimation has caused ineffectiveness of aid.

Way forward
As Nepal's own developmental resources are limited, most of them have to come from external assistance. In the present context, the country’s quest to exit the poor man club, achieve SDGs, smoothly complete post-earthquake reconstruction, strengthen federalism, and manage COVID-19 efficiently, inter alia, demand a huge amount of resources. The Ministry of Finance has estimated that an annual economic growth rate of more than 8 per cent is needed for meeting public aspirations from the new system.  Against this backdrop, we are not in a practical position to reject aid. This, however, doesn’t mean that we should accept any kind of aid and continue begging irrespective of its repercussions. The dependency should be reduced gradually towards the journey of economic independence. Here, MCC can play a vital role in rectifying the previous shortcomings and set a benchmark for effectiveness of aid to hit the bull’s eye.

(An M.A. in Public Policy and Governance from North South University, Gautam is a tax officer at the Ministry of Finance.