A Study of the Impact of Aid on Nepal’s Economy

Foreign aid has been one of the most controversial subjects of economics and international relations in recent years. It has been attacked by both radicals and conservatives alike for the failure in fulfilling the development and foreign policy objectives. The impact of aid on the economy has also been critically examined by economists but without any commonly agreed results. The main purpose of this paper is to examine the role of aid on Nepal’s economy. This study focuses on the performance of aid during 1961-1990, the years in which Nepal was ruled by an absolute monarchy. It is an analytical study which examines the macro economic performance of aid. It is concluded that despite Nepal’s heavy dependence on foreign aid, the role of aid in improving the level of incomes, investment and savings has not been significant. Although aid has created socio-economic overheads at a high economic cost, it has failed to generate enough domestic savings. The failure of aid in other sectors of the economy is also very evident: despite significant amount of aid invested in the agricultural sector, Nepal has turned from a net exporter of foodgrains to a net importer. The paper suggests that in the past the government has depended too much on aid (almost every sector of the economy received some form of aid) which was one of the reasons for sapping local efforts. Aid should be used in those sectors that have high absorptive capacity and should be adequately backed by institutional mechanism not only to increase its effectiveness but also to monitor and control its impact on the economy.