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An intriguing fact about the whole trend is that with the onset of the
crisis, the gap between exports and gross foreign aid is consistently narrowed
down. Incidentally, in the PT years, foreign aid exceeds exports by a small
margin of 0.5 percent of the total foreign exchange receipts. What clearly
emerges is the fact that over the years and phases, foreign aid is turning into
less important sources of suppor� ng Nepal’s Balance of Payments (BOP).
Nepal’s external sector or BOP is ge� ng much more reliant on remi� ances
than any other sources. On the part of foreign aid, it is grant rather than loan
which is rela� vely growing over the years.
On the external debt burden, let us look into the stock and fl ow terms.
Nepal is ge� ng less and less indebted. The stock of external debt increased
from 2.8 years’ equivalent of total annual foreign exchange earnings in P
years to 3.1 years’ equivalent during the PD phase. It stagnated at 3.1 years’
equivalent during the LIC era and less than two years’ in the HIC. In the
ongoing PT phase, the total stock of external debt stands at less than a year’s
worth of total foreign exchange earnings. This is an outcome of two factors.
The fi rst and the foremost factor is the con� nuous surge in remi� ances; and
the other, though of lesser importance, is a turn-around in the composi� on
of aid - from predominance of loans in the earlier years to grants in the
successive years. While viewing external debt servicing in fl ow terms, the
scenario is consistently improving. Repayment of principal and interest on
foreign loans amounted to nine percent of total foreign exchange earnings in
the PD years. It started to decline steadily from LIC years; 9.3 percent in LIC,
6.2 percent in HIC, and to a further low of 3.8 percent in the ongoing PT years.
This means, Nepal can service a far higher volume or size of foreign loans,
thanks to workers’ remi� ances. Debt servicing amounted to 30 percent of
exports and 1.8 � mes of remi� ances in the P years (panel B of table 1.4).
It improved to a quarter of exports and 17.8 percent of remi� ances in PD
years. Currently it is 30.1 percent of exports and a meager 6.3 percent of
remi� ances. Even compared to gross ODA infl ows, debt servicing amounted
to 15.2 percent in phase P, 30 to 38 percent in phases PD, LIC and HIC and
stands at 29 percent today.
There are three major issues that Nepal should consider in the
management of the external sector of its economy. The fi rst and the
foremost important factor is the rela� ve decline of exports. For GDP
growth, employment genera� on and poverty allevia� on, export promo� on
should be encouraged by all. It seems the surging of remi� ances inculcated
complacency and iner� a on the part of the authority and the private sector.
Recently poor export performance has sounded the alarm to all. Secondly,
remi� ances are responsible for pushing up import supported consump� on
boom which is not sustainable. The authori� es and the private sector should
fi nd out produc� ve avenues for remi� ances. Third, the government and the
donors should con� nue to adhere to the recently unfolding grant-dominant
aid strategy. At the same � me, given a very comfortable debt servicing
burden and a very poor current status of harnessing abundant natural
resources, Nepal should not shy away from external borrowing. But this
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Changing paradigms of aid eff ec� veness in Nepal