INTRODUCTION:
The history of mobilization of official development aid and development cooperation in Nepal is about six-decades long. Foreign aid was a major source of development financing until the late 1980s. For example, in the first Development Plan (1956-60), the entire development budget was funded by foreign aid. In the early 1980s, the foreign aid used to contribute some 75 percent of the development expenditure of each fiscal year. While foreign aid used to be channelized into the country predominantly in the form of grants in the early years, it was the loans that proved dominant in the later years. With the improvement in internal resource mobilization, the share of foreign aid has been reduced in relative terms over time. However, in absolute terms, the trend is on the upward direction every year, with few exceptions. While the share of foreign aid in the annual budget was around 20 to 22 percent in FY 2012/13 to FY 2014/15 AD, it jumped to 29 percent in FY 2016/17, largely because of the post-earthquake reconstruction activities. Foreign aid is contributing around 22 percent to the current FY 2017/18. Foreign aid contributions account about 25 percent on average in the total budgetary requirement every year.
The Government of Nepal (GoN) receives foreign aid to fill the resource gap in the country. The entire aid amount is mobilized in accordance with the Development Cooperation Policy (DCP), 2014. Aid is mobilized either for the stand-alone projects, for the program support or in the form of commodity support. All types of support are subject to the formal agreements reached between the GoN and the concerned Development Partners (DPs). The Ministry of Finance (MoF) is the sole focal agency to coordinate with the DPs. The GoN has delegated its authority to the MoF for coordinating, facilitating and mobilizing the foreign aid in the country.
After the promulgation of the Constitution in 2072 BS, the governance structure has changed. The country saw a momentous political shift from a unitary governance system into a federal setup. The Constitution has clearly provisioned for 7 provinces and 753 Local Governments. These provinces will act as State Governments (SGs). In March 2017, the GoN dissolved the then local bodies (District Development Committees, Municipalities and Village Development Committees) and replaced them with four types of Local Governments (LGs) – Metropolitan Cities, Sub-Metropolitan Cities, Municipalities and Rural Municipalities.
The Article 59 (6) of the Constitution mandates the Government of Nepal to leverage the foreign resources in order to maintain macro-economic stability in the country. The Constitution also has clear provisions on the role of Federal and State Government in foreign aid mobilization. Though the LGs are not allowed to mobilize any kind of foreign aid on their own, the SGs can receive foreign grants and assistance with the permission from the Federal Government (FG). The Federal Government can receive all kinds of foreign aid, be it the grants or the loans.
The Article 60 of the Constitution has provisions regarding the fiscal transfer from the FG to SG and LG as well as from the SG to LG. The FG transfers the resources to the lower tiers of government in four forms-Equalization, Conditional, Counterpart and Special Grants. The LGs also receive funds from their SG in the same manner. The SGs and LGs enjoy a leeway to use the Equalization Grant and Conditional Grant. When it comes to the other two remaining forms of grant, Counterpart and Special, no fund so far has been allocated. The GoN formulated the first federal budget for the current FY 2017/18 through which 18.6 percent of the total budget has transferred to the LGs. This portion contains foreign aid, as many of these programs and projects are funded by the international donors.
As per the Constitution, the SGs and LGs have clear mandates on the functions to be carried out by them. In fact, they are bound to suffer huge resource gaps while fulfilling their role and responsibilities. Although these governing entities can mobilize their own internal resources, this alone cannot adequately meet the development needs and aspirations. They may ask the FG for the required resources to execute development projects but the FG itself is not in a position to address such concerns. Therefore, foreign aid mobilization becomes necessary for carrying out development activities within their mandates. The FG needs to receive and transfer the foreign aid to fill the resource gaps. As there is no clear modality on how to mobilize the foreign aid in the federal set-up, the MoF has designed these guidelines for effective and efficacious mobilization of foreign aid in different tiers of the government.
OBJECTIVES:
The main objective of this study was to develop a prudent policy guideline for the foreign aid mobilization in the context of federalism in Nepal. The specific objectives were;
i. To draft an implementable policy for foreign aid mobilization guideline in Nepal in the context of Federal setup.
ii. To suggest a set of actions to implement the prescribed policy guidelines.
iii. To suggest the mechanism of foreign aid transfer from Federal to the State and Local Governments.
iv. To suggest the amendments to the current Development Cooperation Policy, wherever required.
FINDINGS:
Both the State and Local Governments are barred from taking foreign loan and the Local Governments, in particular, are not allowed to receive foreign grants directly. State Governments can receive foreign grants from the Federal Government or the DPs directly upon the approval of the Federal Government. The first phase of the resource demand can well be related with institutional setup, major resources mapping, profile preparation of local governments, delivery of inevitable services, promotional activities and trainings that help in social capital formation and so on. The State MoF will be in position to collect programs/projects from the LGs for establishing the State Project Bank under its purview. If shortages of the resources happen to implement the project programs, the SGs will request the Federal MoF through the State MoF to cover the resources gap. A State Government can reject those programs/projects which do not comply with the criteria. National Natural Resource and Fiscal Commission (NNRFC) is mandated to form, by Constitution, in order to determine existing ground and measure regarding the distribution of revenue from the federal consolidated fund to the federal, state and local governments, making recommendations according to law, on distribution of equalization grants, conditional grants and so on. Primarily, huge capital will be required to establish organizational structure at 753 LGs and seven SGs. The increasing demands in the country along will not cover by the domestic and internal resources; therefore, the need of foreign aid in Nepal will be increased substantially in the future.
RECOMMENDATIONS:
The below mechanisms have been recommended for Foreign Aid mobilization in Federal Context of Nepal:
a) Federal to State Government: Should hand over foreign grants to state governments under the conditional grants of the fiscal transfers for depositing the same into the State Contingency Fund to immediately cover the unforeseen expenditures.
b) Federal to Local Government: Should provide grants to multiple Local Governments directly if the major components of the projects fall under the purview of such Governments and the project is reviewed and approved directly by Federal Government.
c) State to Local Government: Should mobilize a portion of foreign grants for local level infrastructure development, institutional capacity development and delivery of humanitarian service.
d) Grant mobilization mechanism for lower tier: The Constitutional provision on fiscal transfer arrangement is silence when it comes to the foreign aid transfer to the lower tiers of government. Therefore, the Federal Government should adopt the below mentioned procedures in the mobilization of foreign grants.
• Should sign both financial and project agreements with the DPs and mobilize grants for both national and subnational level programs/projects that fall within the purview of multiple states. The same process can be applied in the case of national-pride programs/projects even though they fall under the jurisdiction of a Local Government.
• Should sign financial agreements on the projects by FG or facilitate the signing of both financial and implementation agreements on the projects between DPs and multiple local governments that will be affected by the project activities.
• Should facilitate the state/local governments to sign both the financial and implementation agreements on the local/state level, stand-alone projects that directly impact the economy of the respective governments.
• Grant fund will be mobilized by the respective upper tier governments either as Counterpart Grant or Conditional Grant in line with the Constitutional provision on fiscal transfer mechanism.
e) Amendments to the Development Cooperation Policy, 2014: As per the study, the following sections of DCP 2014 are recommended for amendments: Background. Opportunities and Challenges, Part I, Part II: Policy Framework, Alignment with National Policy, Aid Modality, Technical Assistance, Grants, Other loans, Consultants Mobilization, External Volunteer Mobilization, Civil Society and National/International Non-Governmental Organization, Humanitarian Aid, Inter-governmental Joint Economic Commission.
