Development Finance and ODA in Nepal

Badri Prasad Manandhar

05 December 2015

A Fin4Dev Project

Objectives:• Analysis of development

finance and ODA‘s status & effectiveness in Nepal

• Issues and suggestions

A Fin4Dev Project

Target Audience:Anyone interested in understanding context and status of development finance and ODA in Nepal

1. Brief Background on Development Situation in Nepal

2. Development Finance and ODA in Nepal

3. Effectiveness of ODA

4. Some Issues and suggestions

Presentation Layouts

1. Brief Background

1.1 General Context:

A landlocked, culturally, ethnically, geographically and religiously diverse country

Political transition in 2006 to be recognized as a secular federal republic country

Population: Around 30 million (Growth Rate: 1.35)

Population below poverty line: 23.8% GDP: US$ 703 per capita per annum Public Debt per capita: US$ 195 Education/Health/Defence Expenditure per

capita: US$ 26/14/11 respectively Human Development Index: 0.54 (145th) Corruption Perception Index: 29 (126th) Economic growth negatively impacted by

recent earthquake and Indian blockade

1.2 Annual GDP Growth Rate

Because of earthquake and economic blockade, the GDP growth rate is expected to be half of the estimated rate in 2015.

1.3 Development Issues and Challenges

Mass poverty and Inequality: 23.4% of population below poverty line, Gini coefficient 0.46

Inadequate physical infrastructure Widespread unemployment Stagnation of agriculture:68% of

population in agriculture, but, contribution to GDP 34%

Economic dependency:>60% foreign trade with India

Political Instability and Poor Governance

Low level of Savings and Investment: Consumption to GDP ratio 93.3%

Under-utilization of Natural Resources Under-utilization of Human Resources Less Benefits from Globalization

2. Development Finance and ODA

2.1 Total International Resource Flow

• In 2011, total spending by the government was US$ 3.5 billion, which is equivalent to US$ 116 for each person

• In 2011, the government spent the must on the education sector followed by agriculture, health, social protection, water and sanitation

• All international resources that flowed to Nepal totaled US$ 5.4 billion.

2.2 Flow of Resources in Nepal (US$)

• There are a number of international resources flows reaching Nepal.• The largest international resources flowing to Nepal is remittances, the

total being US$ 4216.9 million followed by ODA of US$ 892.3 million

2.3 Share of ODA in National Income

• Resources from ODA are representing an increasingly small share of Nepal’s national income.

• In 2011, ODA represented 6% of national income.• Nepal received less ODA as a share of its national income than other

countries in south Asia.

2.4 Modality and Type of ODA in Nepal

Modality of ODA: • Programme Support: Programme-based

support having comprehensive programme and budget framework

• Project Support: Development projects which operate on a stand-alone basis

• Sector Wide Approach (SWAp) Support: Specific type of programme based approach covering a whole sector (e.g. Education, Health)

• Humanitarian Assistance: Designed to save lives, alleviate suffering and maintain and protect human dignity during and in the aftermath of emergencies

• Budget Support: The fund that is directly transferred to the Government’s treasury through development partners

Major ODA type:

• Grant: Transfers made in cash, goods or services for which no repayment is required.

• Loan: Transfers for which repayment is required.

• Technical Assistance: Assistance for capacity development including consultancy services and the cost of associated equipment.

2.5 Mode of Payment and Disbursements:

Mode of Payment:

• Cash: Money given in the form of cash.

• Commodity: In-kind grant given in the form of a physical item (e.g. food aid).

• Reimbursable: Money spent against the project by the government which will be reimbursed by the donor.

• Direct Payment: Payment from the donor, given directly to the providers of services and goods.

Disbursements:

Represent the international transfer of financial resources to Nepal

• Actual Disbursements: Funding which has been transferred by the donor to the government’s treasury.

• Planned Disbursements: Disbursements to be made during the life of the project. A 3 year forward schedule is entered on the agreement.

2.6 Composition of ODA in Nepal

• In Nepal, ODA is delivered through different instruments such as cash grants, loan/equity, commodities & food, technical cooperation etc.

• In 2011, 43% of ODA delivered to Nepal was cash grants followed by technical cooperation and commodities.

• Nepal is a country receiving grants as biggest proportion of ODA among other south Asian countries.

2.7 Sector-wise ODA Allocation

In 2011, the infrastructure sector attracted 18% of ODA to Nepal, followed by governance and security sector (17%), education 17%), health (12%), agriculture and food security (10%)

2.8 Sector-wise ODA instruments

Different sectors in Nepal attract different types of ODA. For most sectors, cash grants are the main components of ODA. In the infrastructure sector, ODA was delivered as loans (29%). In health sector, the share of technical assistance was 17%.

The volume of ODA in FY 2013-14 reached a total of US$ 1.112 billion, of which 51.6% was by multilateral donors, while 39.8% was by OECD-DAC bilateral donors and 8.6% was by other partners.

The World Bank Group remained the top multilateral ODA provider followed by the Asian Development Bank, the European Union, the United Nations Country Team and the Global Fund.

The United Kingdom remained the top bilateral ODA provider followed by India, USAID, China and Japan.Education sector (16%) continues to be the largest ODA receiver followed by local development (14%), health (11%), energy (5%) and road transportation (4%). Grant (66%) continues to dominate the total ODA followed by loan (18%) and technical assistance (16%). ODA portfolios in Nepal are relatively fragmented.INGO contribution increased from last fiscal year.

2.9 Some recent trends as of FY 2013/14:

3. Effectiveness of ODA

3.1 ODA and Decline in Poverty

The share of ODA that Nepal receives for each person living in poverty is increasing, while the number of people living in poverty has decreased. In 2010, there were 7.4 million people living in extreme poverty in Nepal.

3.2 Remittances and Decline in Poverty

The amount of remittances that is reaching Nepal is increasing while the numbers of people living in poverty has decreased. In 2010, remittances to Nepal reached US$ 4 billions compared to ODA of US$ 0.89 billion received in the same period.

3.3 Corruption is increasing......

From Corruption Perception Index point of view, Nepal is a country with rampant corruption. Political parties, civil service, police, parliament, judiciary and private sector are most corrupt institutions in Nepal followed by civil societies.

3.4 Unemployment rate still remains high......

Even though it reduced from 8.80% in 2001 to 2.90% in 2012, the unemployment rate still remains high at 2.90 % today.

• Despite the rises in ODA, Nepal is only country in South Asia that has not experienced any significant improvement in micro and macroeconomic aspects.

• The GDP growth rate: decreased from 6.1% (2008) to 4.6% (2010)• Unemployment rate: increased from 42% (2004) to 46% (2013)• The corruption: persistently increasing. • Institutional gap in mobilizing acquired resources including ODA.• Government mechanisms: not well functioning.

3.5 Conclusions:

• Effectiveness of ODA investment in governance reform and productive sectors is questionable.

• Domestic resource mobilization i.e. remittances has significant potential to finance development in Nepal. But, it is still underestimated and unexplored!

4. Some Issues and Suggestions

4.1 Some Issues:

• Political instability• Massive corruption and unaccountable and non-

transparent government mechanism • Bottlenecks to public and private investment• Difficult regulatory environment• Fragmentation of ODA portfolios of Nepal• Dependency on ODA• Lack of innovation on domestic resource generation• Donors’ unethical behaviour and weak commitment: too

frequented. • Donors’ less commitment to ‘country ownership’ and ‘use

of country system’.

4.2 Some Suggestions:

• Strengthening its governance and the management of its public expenditures

• Domestic resource attraction and improved taxation

• Reprioritization of expenditures i.e. to agriculture, infrastructures, energy etc.

• Investment of remittances in productive sectors

• More accommodating macroeconomic framework (e.g. tolerance to some inflation, fiscal deficit, borrowing)

• Using fiscal and central bank foreign exchange reserves

• Increased aid and transfers

• Effective corruption control mechanism

4.3 References:

• http://opennepal.net/sites/default/files/resources/

• http://www.aidflows.org/

• https://class.coursera.org/fin4devmooc/

• Development Cooperation Report (FY 2013/14), Ministry of Finance, GoN, 2015

Thank you for your patience!