Foreign aid has been an important part of the development journey of the world's least developed countries. This journey of aid, which began with the Marshall Plan introduced by the United States to rebuild Western Europe after World War II, gradually expanded to poor countries in Asia, Africa, and Latin America.

During the Cold War, the competition for influence between the United States and the Soviet Union further boosted foreign aid. In Nepal, foreign aid has gained momentum with the start of planned development since 2013.

Foreign aid in Nepal is a necessity but not a compulsion; it should serve as a complement to our development journey, not as the main driver. The nature of foreign aid has changed over time. Aid that was in the form of goodwill and cooperation in the 1950s has been focused on capital investment for institution building in the 1960s, rural development in the 1970s, macroeconomic stability in the 1980s, humanitarian and social development in the 1990s, human rights, good governance and gender issues in the 2000s, terrorism and conflict control and peacebuilding in the 2010s, and climate change and disaster management in the 2020s.

 There are two main theoretical aspects of foreign aid . According to the complementarity theory, foreign aid fills the gap between savings and investment, helps in import substitution and export promotion, and fills the technology gap . According to the displacement theory, foreign aid increases aid addiction, causes economic distortions, and eliminates local initiative .

Current status of foreign aid in Nepal

Foreign aid in Nepal has a long history . This journey, which began with technical assistance from the then British India in the Pharping Hydropower Project in 1968, was formalized on January 23, 1951 with assistance of Rs 22,000 under the US Point Four Program .

According to the Development Cooperation Report (2020/21) published by the Ministry of Finance, Official Development Assistance (ODA) worth US$ 1,685 million has been mobilized in Nepal, of which multilateral assistance constitutes 73 percent and bilateral assistance 27 percent . The structure of aid is 66.9 percent in loans, 21.5 percent in grants, 11.4 percent in technical assistance, and 0.2 percent in goods. Foreign aid accounted for 15 percent of the total federal budget in 2080/81, with grants amounting to 49.94 billion and loans amounting to 212.75 billion rupees. Nepal's public debt has exceeded 2676 billion rupees (46.91 percent of total GDP), with external (foreign) debt accounting for 1360 billion and internal debt accounting for 1315 billion. The World Bank, the International Development Association (IDA), and the Asian Development Bank (ADB) account for more than 81 percent of the major multilateral donors. Grants are decreasing and loans are increasing in foreign aid. Nepal's major multilateral donors include the World Bank, the Asian Development Bank, the European Union, and United Nations agencies and are merging, while the United States, Britain, India, Japan, and Germany are the main bilateral donors. The sectors receiving the most aid are energy, road transport, education, health and reconstruction. Article 51 of the Constitution of Nepal, 2072 BS states that foreign aid should be based on national needs and priorities and should be made transparent. Article 59(6) gives the federal government the authority to receive and mobilize foreign aid for economic development. Schedules 5 and 6 give the federal government the authority to mobilize all types of foreign aid and the provincial government the authority to mobilize aid only with the consent of the federal government. Major policies and acts include the International Development Assistance Mobilization Policy 2076 BS, the Public Debt Management Act 2079 BS, the Standards for Mobilizing Foreign Aid at Provincial and Local Levels 2076 BS, the Foreign Investment Policy 2071 BS, the Foreign Policy 2077 BS, and the National and International Non-Governmental Assistance Mobilization Guidelines 2072 BS. The institutional arrangements include the High-Level International Development Assistance Mobilization Policy Implementation Committee chaired by the Minister of Finance, the Ministry of Finance’s International Development Assistance Coordination Focal Point, the International Financial Assistance Coordination Division, the Public Debt Management Office, and the International Financial Assistance Coordination Division’s Aid Management Information System.

The international community has made various efforts to make foreign aid effective. In 2000, developed countries committed to providing 0.7 percent of their gross national income as aid under the Millennium Development Goals (MDGs). The 2002 Washington Round Table stated that aid should be mobilized based on local demand. The 2003 Rome Declaration promoted ownership, involvement, and coherence. The 2005 Paris Declaration is considered the most important milestone in aid effectiveness, establishing five principles: ownership, involvement, coherence, management for results, and mutual accountability.

The 2008 Accra Agenda for Action, the 2011 Busan Commitment, the 2014 Mexico Meeting, and the 2016 New York and Nairobi Meetings have further contributed in this direction. The recent conference held in Spain in 2025 has emphasized issues such as mobilizing financial resources to achieve the Sustainable Development Goals (SDGs), climate finance, effectiveness and transparency of development aid, encouraging private sector investment, controlling tax leakage, and post-COVID-19 reconstruction.

Development partners and donors have identified a lack of government ownership and leadership in development projects, non-participation of stakeholders in program formulation, an increase in the number of projects beyond local capacity, weak institutional structures and low capacity, frequent staff transfers, public financial management systems that are not in line with international standards, lack of policy continuity and commitment, and lack of good governance.

LDC Upgrading: New Challenges and Opportunities

Nepal is being upgraded from a Least Developed Country (LDC) to a Developing Country in November 2026. Nepal had achieved the required scores in the Human Assets and Economic and Environmental Risk Index in the Triennial Review of 2018 and 2021. The 2024 review also shows that the per capita income (GNI) criteria have been met.

The National Planning Commission has formulated a comprehensive smooth transition strategy to upgrade from the status of least developed country. The strategy aims to make the transition irreversible and sustainable by focusing on six pillars. It is necessary to focus on macroeconomic stability, trade and investment, economic transformation, productive capacity, climate change/disaster management and social inclusion and structural reforms. This is because the current progress towards the Sustainable Development Goals (SDGs) set for 2030 is only 41 percent.

The impact on trade after the upgrade is significant. Nepal is currently receiving trade concessions including the European Union's 'Everything But Arms' (EBA), which will be lost after the upgrade. According to the International Trade Center, Nepal could lose $59 million worth of exports due to the increase in customs duties after the upgrade, which will especially affect the clothing, carpet and synthetic textile sectors. Employment will also be affected - according to the study, a 4.3 percent decline in exports could lead to the loss of about 11,395 jobs, with women workers in the garment sector being most affected. According to the ILO, Nepal's exports could decline by 4.2 percent by 2030, putting about 132,000 jobs at risk.

In the area of ​​aid, multilateral donors (World Bank, IMF, ADB) may not see a significant reduction in aid flows, as they provide aid based on income criteria. However, the nature of aid will change - some grants may be converted into concessional loans, which could increase Nepal's debt burden. International support will also be affected - Nepal's contribution to the United Nations will increase, travel assistance for participation in international meetings will not be automatically available, and LDC-specific scholarships will be reduced. There are also challenges such as the loss of 25 special and discriminatory arrangements of the World Trade Organization, the obligation to reduce agricultural subsidies, and the loss of exemptions on intellectual property rights.

Recent international developments and their impact

Recently, following the executive order of US President Donald Trump, 70 US aid projects (equivalent to about 2.66 trillion rupees) operating in Nepal have been immediately stopped. Of these, 15 cash grant projects, with a total value of 1.32 billion US dollars (about 178 billion rupees), have been suspended. This has affected sectors including health, agriculture, forestry, education, and economic affairs.

The $500 million in aid under the Millennium Challenge Corporation (MCC) agreement has also been affected. This incident has exposed the terrible reality that foreign aid depends on the interests and policies of donor countries and can be stopped at any time. Due to the Russia-Ukraine war, European countries have reduced aid elsewhere and focused on Ukraine. They have increased their defense spending. The UK has informed the Nepalese government in writing that it will reduce its aid. This has created great uncertainty in the development plans of aid-dependent countries like Nepal.

There is growing skepticism among Western countries towards multilateral bodies, including the United Nations. Some countries have started adopting a policy of reducing their contributions, demanding institutional reforms, and putting national interests at the center, which has raised questions about the future of multilateral development aid.

The uncertainty of foreign aid and the scenario after LDC upgrading point Nepal to a harsh reality—a country cannot develop with foreign aid alone. For this, it is necessary to work on other structural aspects as well.

First, to mobilize domestic resources and increase revenue, it is necessary to increase the income tax base, mobilize non-tax revenue, and maintain frugality in public spending. Second, by encouraging the private sector, an investment-friendly environment should be created to attract domestic and foreign investment, develop entrepreneurship, and emphasize Nepal's comparative advantage areas - hydropower, tourism, and information technology. Third, to produce skilled manpower, education and skills should be linked to market demand, which will help create employment not only in foreign employment but also in the country.

The 'National Action Plan for Employment and Social Security' being prepared by the National Planning Commission with the support of the ILO is a positive step in this direction. Fourth, we should ensure proper utilization of both development assistance and internal resources by controlling good governance and corruption. Fifth, we should promote regional cooperation and trade to increase the access of Nepali products to large neighboring markets like India and China and promote exports.

Many countries in the world have achieved development and prosperity on their own. Many countries have made significant progress through its use. Some countries have received significant amounts of aid but have not made much progress. Nepal is considered a country that has not made much progress from it. But if this had not happened, it can be naturally assumed that Nepal's infrastructure and socio-economic conditions would have been even weaker.

Even though significant work has been done through development aid, the general public, media and civil society in Nepal are critical and do not have such a positive opinion about it. There is an understanding that development aid has not only increased dependency, but it is also used indiscriminately. It is also understood that some of the aid, which has increased the cost of work, has been used to disrupt Nepal's social, religious, cultural identity and community unity.

The issue of negotiators including activities that are in their personal interest in the context of negotiating and making provisions for receiving aid is also a major subject of criticism. ठूला परियोजनाहरूको सहायता प्राप्तिमा मुलुकी हितभन्दा पनि परामर्शदाता तथा विकास साझेदारकै हितले प्रश्रय पाएको मालसामान तथा विज्ञ परामर्शदाताको सम्पूर्तिमा पारदर्शिता नभएको विषय पनि उठ्ने गरेको छ ।