Foreign Aid in Nepal : Issues and Challenges

What is a Foreign Aid ?

A foreign aid refers to the transfer of resources from a country that has a relatively high level of income to a country that has a relatively low level of income. It is also known as an international aid or official development assistance.

The basic idea behind this type of assistance is to help and assist those countries in need, and it can be done by either bilateral or multilateral means.

Why Foreign Aid ?

Foreign aid is a key factor in global development. It has been instrumental in helping developing countries to grow and prosper.

Foreign Aid is vital for global development because it helps developing countries to grow and prosper by providing them with the resources they need. It also helps them develop their own economy, infrastructure, and institutions so that they can become self-reliant and less reliant on foreign aid. Foreign Aid is also vital for the recipient countries because it helps them develop their economies and provide jobs for their citizens.

There are various arguments against foreign aids as well. The debate over whether foreign aid should be used as a tool of colonialism or as an act of generosity has gone on since the beginning of colonialism itself. There are various hidden political agendas in foreign aid which clearly dismisses the meaning of aid.

Nepal and Foreign Aid

Nepal’s first experience with foreign aid started back in 1951 when Nepal and the US signed a four point program. The US government provided the assistance of Rs. 22,000 under the four point program. Nepal has been receiving foreign aid mainly in the form of grant, loan, technical assistance, consultant mobilization and humanitarian aid since then.

In the 1960s and 70s, Nepal received foreifn aid mainly through grants and loans. During this period, grants made up 70% of the total foreign aid. Considering the present context, now Nepal’s foreign aid includes more loans than the grants.

As per the report by the Ministry of Finance (2017), the first Development Plan (1956-1960) was entirely funded by the foreign aid. Foreign aid has been regarded as a key source to bridge the gap between government income and expenditure in Nepal.

YearForeign Aid Disbursed (In USD)
Ministry of Finance (2022)

Nepalese Foreign Aid is regulated by the Ministry of Finance. There are two policies i.e. Foreign Aid Policy, 2002 and International Development Cooperation Policy, 2019. There are other various policies that guide the aids made available to Nepal but these above mentioned policies are major ones. These policies, more or less, guide the aid and advocates about the development efforts on the basis of national need and priority.

Nepal is receiving foreign aid under four headings of assistance:

  • Concessional Loan Assistance
  • Grant Aid
  • In-Kind Support
  • Technical Assistance

In 2021, the total disbursement of foreign aid in Nepal was USD 1,487,629,562. Of this disbursement, we get the following division on different heading of assistance:

In Kind SupportConcessional Loan AssistanceGrant AidTechnical Assistance
USD 19,670,000USD 860,649,261USD 419,594,640USD 180,122,996

All the foreign aids that we are getting in different ways are used in 50 different sectors as defined by the Ministry of Finance. All the donor countries and agencies are providing different assistance based on the need and priority, defined as our national interest. 

Channels of Foreign Aid Flows

Similarly, there are three approaches/channels from which aid is flowing in our country. These channels are:


Multilateral donors are international organizations or associations whose membership is made up of member governments, who collectively govern the organization and are its primary source of funds. United Nations, World Bank, Asian Development Bank, European Union, Organization of Petroleum Exporting Countries, International Monetary Funds and many more.

Bilateral donors are government organizations which give direct assistance to a recipient  country for development purposes. Aid assistance between Nepal and India is Bilateral aid. 

A non-governmental organization (NGOs) is a non-profit organization that furthers some social or humanitarian mission around the globe. German Development Cooperation (GIZ), Helen Keller International, Mercy Corps, Save The Children etc.

Foreign Aid Composition Dashboard

Donor Agency

Foreign Aid around USD 1.5 billion was disbursed in the year 2021 alone. Many donor agencies have been providing different types of assistance to Nepal for different sectors. The figurative demonstration of donation disbursed is presented as below:

Donor AgencyAid DisbursementDonor AgencyAid Disbursement
Asian Development BankUSD 594,874,990International Development AssociationUSD 592,317,511
International Development AssociationUSD 546,035,213Asian Development BankUSD 138,768,902
International Monetary FundUSD 214,000,000U.S. AgencyUSD 109,343,634
ChinaUSD 93,026,786European UnionUSD 90,398,103
Department for International DevelopmentUSD 87,652,659Department for International DevelopmentUSD 87,785,273

The donor agencies like Asian Development Bank and International Development Association have a largest contribution to Nepalese foreign aid. In 2021 alone, the International Development Association made assistance worth USD 592,317,511 which is 39.8 % of total aid disbursed. 

Similarly, China has been ahead in providing aid to Nepal when it comes to bilateral assistance. China has disbursed 7.5% of total foreign aid in 2019 and 43.% in the year 2020. Asian Development Bank, U.S. Agency for International Development, Development for International Development and International Development Association have been the leading donors to Nepal.

Sectoral Deployment of Foreign Aid

There were around 436 projects in 2020 and 374 projects in 2021 that was funded by foreing aids in Nepal. Nepal Government has identified 50 different sectors in which all these foreign aid are used. The sector where such assistance are used are:

AgricultureAlternative EnergyCommerceCommunicationEconomic Reform
EnergyDefenseTourismRoad TransportationHealth
Peace and ReconstructionPolicy and StrategyUrban DevelopmentWomen, Children and welfareYouth Sport and Culture
External Loan PaymentHydro ElectricityEducationIrrigation Industry

There are 25 other different sectors when the foreign aid is used. The following table presents the distribution of foreign aid based on the amount disbursed.

1Agriculture297,911,396Home Affairs251,621,273
2COVID-19 Active Response250,000,000Finance for Growth Development Policy Credit210,710,000
4Financial Reform217,272,578Local Development170,244,617
5Rapid Credit Facility214,000,000Fiscal Policy for growth, Recovery and Resilience149,060,000
7Health191,149,836Economic Reform118,457,151

Considering the flow of aid in different sectors, we can clearly say that the National interest of Nepal is agriculture, economic reform, health and education.

Issues and Challenges of Foreign Aid in Nepal

Despite the long history of receiving foreing aid, we cannot see the proportionate impact of the aid on Nepalese social and economic behavior. Every year we receive aid and various other assistance to support our development goals. We, as an economically backward economy, know the significance and importance of funds for our infrastructural and institutional development but yet we fail to utilize the fund in the truest manner. 

Every rich economy or every international association is obliged to uplift the world economy by supporting the struggling economy in the form of foreing aid. Despite such international exposure and regulations, we as a Nepalese face various kinds of issues and challenges with the funds available to us. We, as an economy, are not able to utilize the resources available to us. Some of the prime issues and challenges for effective utilization of foreign aid: 

Fiscal Indiscipline

With a well set financial laws, regulations and policies to instill the policy discipline, Nepal hasn’t complied such regulation properly and such laws and policies are poorly enforced. The annual reports of the Office of the Auditor General (OAG) have reported widespread financial irregularities  and indiscipline upto 21 times. This reflects the lack of preparedness of our implementing and executing bodies to manage the funds. Foreign aids are highly regulated and for effective utilization, Nepal needs to maintain a fiscal discipline. This is one of the major challenges and issues with the foreign aid in Nepal.

Disconnect Between Planning and Budgeting

Misappropriation of funds, spending in non-prioritized areas, over budgeting etc. are common problems with fund management. Recent surveys of various governmental bodies of Nepal reflected the mismanagement of funds and poor prioritization of projects and programs. This inconsistency is due to poor planning and disconnection between planning and budgeting and poor implementation and execution of projects and programs.

Such functional discrepancies do not match with the international standard of fund disbursement. Such ineffective and unprofessional work ethics of governing bodies are the reasons for more commitment of funds by donors but less disbursement.

High Fiduciary and Corruption Risks

Nepal stands among the weakest when it comes to administrative and institutional capacity to manage the funds, aid and assistance with optimal results. Nepalese governing bodies lack basic standard administrative operations. We do not have a modern work plan, a dedicated public financial management system, inadequate and inappropriate human and financial resources, insufficient or no knowledge management system, poor technical infrastructure etc. All this work culture inefficiencies increase fiduciary risk and promote corruption. It is prime for every problem and inefficiency in Nepal.


Corruption is not only a reason for other problems, it is the problem. Nepal is ranked 117th in the corruption index out of 180 countries (180th rank being the most corrupt). Donors, implementing and executing bodies, state government and local government are all victims of institutional corruption.

In a country like Nepal which is highly political and bureaucratic, corruption is natural and in many cases encouraged. Donors conditionalities like result-based management, effectiveness of service delivery, culture of transparency and accountability, civic sense over governing bodies, can reduce corruption. Despite such commitments, donors are facing a highly corrupt working culture in Nepal.

There are evident reports which reflect the situation of corruption in foreign aid. One of such reports is the news article published by BBC news with the heading “Where is Nepal aid money going?” This article highlighted the corruption over the foreign aid commitments for rehabilitation of Nepal from the massive Earthquake of 2015.

Policy Revision

Nepalese foreign aid constitution is guided by Foreign Aid Policy 2002 which needs revisiting. The purpose of foreign aid has changed  over time. The conditions by donors, the system required for reporting, the quantity of funds, the methods and channels of funds and also the challenges that come with all these changes require an update in the policy.  The outdated guidelines and policies, equally capable human and infrastructural commitments, lack of technical support etc. is the reason why planning fails in Nepal and why we don’t get the tangible result from such philanthropic assistance as foreign aid. This is another major issue and a challenge which donors face for effective utilization of foreign funds.


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