book1

can absorb a far higher level of debt than today. But even to harness and
transform these endowments into output, employment and welfare; the
country needs resources in the form of fi nance, technology, management
and market know-how; from ODA, from FDI and from Nepali investors,
including the NRN.
To briefl y touch upon foreign aid as measured in terms of the GDP, gross
foreign aid fell from 7.7 percent of GDP in the P era to 5.9 percent in PD and
5.7 percent in LIC. It dras� cally fell to 3.7 percent in HIC and slightly exceeded
4 percent in the PT (panel A of 1.6 ). The drop occurred due to a sharpe drop
in the loan component, par� cularly since the HIC period. Of the total ODA,
loan comprised 70.2 percent in P, 71.2 percent in PD, and 70.2 percent in LIC.
It sharply dropped to 40.5 percent in HIC and further down to 26.8 percent
in the PT. It is good that grant has overtaken loans as it mi� gates future
con� ngent liabili� es, that too in foreign exchange. But, what counts most
is the quality rather than the size of the grant. What one must look into is:
has it contributed to increase output, employment and exports? Has grant
contributed to lower down socio-economic inequali� es (seeds of confl ict)
across region, gender, class, caste and ethnicity? One should also look into
whether or not foreign aid, grants in par� cular, helped to forge strong social
bond and social stability.
Conclusion and Recommenda� ons:
This paper was intended to evaluate the behavior of foreign aid over
fi ve dis� nct poli� cal phases of Nepal. It covered a period of 24 years: from
fi scal year 1986/87 un� l 2009/10. The a� empt was made to evaluate the aid
behavior in terms of fi scal and BOP support and also with respect to its size
and role in the na� onal economy, through GDP. During this period, Nepal
passed through two events of far reaching poli� cal consequences. One can
call them paradigm shi� in Nepal’s poli� cal development. The fi rst was the
overthrow of the Panchayat system, a sin qua non for absolute monarchy, in
1990. And the other was the overthrow of the monarchy itself and ushering
in the republican era in 2006. In between, Nepal suff ered over a decade long
violent armed confl ict.
As almost all of Nepal’s donors, whether bilateral or mul� lateral,
subscribe to western values and philosophy of freedom of speech and
the press, periodic elec� on, respect for opposi� on, independence of the
judiciary and free market; a� er restora� on of democracy, a larger sec� on
of the popula� on expected a quantum leap in the volume of foreign aid and
a meaningful and sustainable improvements in the quality of their life and
livings.
Over the years, revenue, supported by domes� c borrowings, gained
prominence in fi nancing total budget. As a share of the total budget, the
size of domes� c resources increased from 61 percent in P to 78 percent
today, whereas the share of foreign aid fell from one-third to 13 percent.
Nevertheless, foreign aid s� ll remains a major source of fi nancing, much
needed developmental spending. Had the confl ict not swelled the size of
16
Changing paradigms of aid eff ec� veness in Nepal