Foreign aid has long played a crucial role in Nepal’s development journey. From post-conflict reconstruction to infrastructure upgrades and health sector reform, donor support has been central to the country’s aspirations for inclusive growth. However, a combination of external shocks and internal inefficiencies has led to a sharp and sustained decline in foreign aid disbursements. This is a troubling sign especially since the country is preparing to graduate from the Least Developed Country (LDC) bloc by 2026.
According to the Ministry of Finance's latest Development Cooperation Report, Official Development Assistance (ODA) to Nepal fell to a six-year low in fiscal year 2022/23. The total inflow stood at $1.37 billion, a 3.5% decrease from the previous year and a steep 31.5% decline from the pandemic-era peak of $2 billion in 2019/20. This marks the third consecutive year of contraction.
Post-Pandemic Decline
The decline in foreign aid follows a brief surge during the COVID-19 pandemic, when donors increased support, especially for health and social protection. In 2020/21, Nepal received $1.7 billion in ODA, down from the pandemic-driven high of $2 billion. The trend continued into 2021/22 with a drop to $1.42 billion, and further declined to $1.37 billion in 2022/23. Prior to the pandemic, aid flows had been rising steadily, reflecting both donor confidence and absorptive capacity in Nepal.
The finance ministry attributes the decline to a mix of global and domestic factors, including shifting geopolitical dynamics, evolving donor strategies and persistent implementation challenges. “The reasons behind this decline include capacity constraints in mobilizing ODA and the impact of donor policy changes influenced by the political economy of aid,” the report states.
Consequences of Poor Project Execution
While global changes matter, much of the problem lies at home. Weak inter-agency coordination, delays in project execution and low capital budget utilization have consistently hindered the effective use of available funds. A growing reliance on third-trimester spending, often rushed and poorly planned, has only added to the inefficiency.
Dhaniram Sharma, Joint Secretary at the International Economic Cooperation Coordination Division at the ministry, said the delay in processing reimbursement requests is one of the major issues. “Sometimes, even after a project is completed, we fail to request reimbursements on time, which also affects the numbers,” he explained.
Former Finance Secretary Rameshore Khanal echoed these concerns, criticizing the government’s inability to execute projects efficiently. “The money is available, but our systems are not equipped to utilize it effectively. It’s a classic case of underperformance rather than undercommitment by donors,” he said.
Complicating matters further is Nepal’s planned graduation from LDC status. As the country moves to a higher income classification, its access to concessional financing, particularly grant-based aid, is expected to decline. “This could mean fewer grants or low-interest resources for development projects in the coming years,” the report warned.
Despite the downward trends of the past three years, finance ministry officials are cautiously optimistic that 2023/24 may show a modest recovery in aid disbursement. “While exact figures are yet to be finalized, the trend appears to be more positive,” said Sharma. He also added that donor commitments remain strong, even if actual disbursements have fallen.
Khanal believes the issue is not a shortage of financing opportunities. “Beyond the World Bank and ADB, many international institutions are willing to lend. Sourcing funds won’t be a problem,” he said. “The real challenge lies in execution and governance.”
On-Budget and On-Treasury Aid Decline
A closer look at the structure of foreign aid reveals an important shift away from government-managed channels. In 2022/23, aid disbursed through the national budget (on-budget) declined by 5.6% to $1.1 billion. Even more striking was the 37.7% drop in aid channeled through the government treasury (on-treasury), which fell to $428.1 million.
In contrast, off-budget aid rose modestly by 4.7% to $309.3 million, signaling a growing donor preference for bypassing government systems in favor of direct project implementation or third-party intermediaries.
Over the past four fiscal years, the share of on-budget aid fell from 83.5% of total ODA in 2019/20 to 77.4% in 2022/23. Off-budget support increased correspondingly from 16.5% to 22.6%. Similarly, on-treasury disbursements shrank from 66.6% of on-budget aid in 2020/21 to just 40.3 percent in 2022/23.
This shift raises critical concerns around aid effectiveness, transparency and national ownership. “In some large infrastructure projects, like those implemented by the Nepal Electricity Authority (NEA), donors are now making direct payments due to prolonged delays in our administrative processes,” Sharma said.
Growing Weight of Loans
Another emerging trend is the rising share of loans in Nepal’s aid portfolio. Multilateral development partners are increasingly favoring loan-based support, reflecting both Nepal’s improved creditworthiness and changes in donor strategy.
In 2022/23, the World Bank disbursed 97.3% of its assistance as loans, while the Asian Development Bank (ADB) provided 90.8% in the same form. Japan allocated 84% of its support as loans, with only 11.4% in grants and 4.6% in technical assistance. The International Monetary Fund (IMF), OFID, the Saudi Fund, and the Kuwait Fund offered their support entirely through loans.
In contrast, bilateral partners such as Norway, Australia, GAVI and the Global Fund provided all their aid as grants. USAID’s assistance was primarily in the form of technical assistance (87.4%), while the United Nations maintained a diverse mix: 55.1% in grants, 40.7% in technical assistance and 4.2% in loans.
This tilt toward debt-financed development began as early as 2013/14, when Nepal received $688.5 million in grants compared to $185.7 million in loans. By 2019/20, the situation had reversed: loans peaked at $1.4 billion, while grants fell to $375.9 million. The trend moderated slightly in 2022/23, with loans amounting to $911.4 million and grants to $272.5 million, reflecting an overall contraction in aid.
Technical assistance has remained relatively steady, with variations based on program needs. In 2022/23, it stood at $187.1 million, down from its peak of $263.4 million in 2016/17.
Budgetary Relevance Shrinks
With declining aid inflows, the relevance of ODA in Nepal’s national budget is also diminishing. In 2022/23, ODA made up just 16.6% of the total budget, down from 22.6% in the previous year. This is particularly worrying as Nepal grapples with a narrowing fiscal space, sluggish revenue growth and rising debt-servicing costs.
The finance ministry has warned that the current situation calls for a fundamental reassessment of Nepal’s development cooperation framework. “The data indicate the need to address the decline in ODA and to assess policies and strategies while promoting greater predictability and consistency in development cooperation,” the report said.
Economic Reform Surges
A sector-wise analysis of aid disbursement in 2022/23 reveals some notable shifts in donor priorities. Leading the list was the economic reform sector, which received $202.1 million, or 14.7 percent of total aid disbursements, driven largely by a one-time budgetary support payment linked to specific policy reform conditions.
The health sector followed with $171.1 million (12.5%), maintaining its post-pandemic relevance, though at a slightly reduced level. Energy, traditionally a major recipient due to Nepal’s hydropower potential, received $143.2 million (10.4%). Environment, science and technology drew $104.3 million (7.6% percent), reflecting a growing focus on climate resilience and innovation.
The Others category, which covers sectors such as transportation, agriculture, urban development, drinking water and reconstruction support, received $579.8 million (42.3%)—the largest share of aid. This wide distribution highlights the multi-sectoral nature of Nepal’s development needs, with resources now spread across diverse priorities rather than concentrated in a few key areas.
From 2020/21 to 2022/23, health, energy, education, road transportation and reconstruction consistently ranked among the top sectors. Health sector aid peaked at $241.5 million in 2021/22, before tapering off. Energy support was highest in 2020/21 at $297.4 million. It sharply dipped in 2021/22 and made a modest recovery in 2022/23.
Education aid declined steadily, from $218.9 million in 2020/21 to $170.6 million in 2022/23. Road transportation funding plummeted from $253.2 million to just $87.9 million over the same period. Reconstruction aid also fell sharply, from $142.7 million to $58.3 million, as post-earthquake recovery projects wound down.
Top Donors
In 2022/23, five development partners accounted for the majority of foreign aid disbursed to Nepal, highlighting the country’s reliance on a small group of donors. The World Bank led with disbursements of $386.8 million, followed by the ADB at $334.4 million. Similarly, Japan ranked third with $146.2 million, while the IMF and USAID contributed $110 million and $105 million, respectively.
Together, these five donors made up nearly 78% of total aid disbursed during the year. This concentration reflects the dominant role of large multilateral institutions and key bilateral partners, but also highlights Nepal’s vulnerability to changes in their funding priorities or policies.
Enhancing Capacity to Deliver and Absorb
As Nepal approaches LDC graduation, its aid landscape is undergoing a fundamental transformation. The shift toward loan-based support, increased off-budget implementation and a declining share of grants present both opportunities and risks.
The country’s ability to navigate this evolving environment will depend on urgent reforms in public financial management, procurement and project execution. While short-term aid disbursements may rebound, long-term sustainability hinges on the country’s capacity to effectively deliver, absorb and account for development finance. Without such improvements, Nepal risks falling short of its development goals just when it needs to accelerate progress the most.
(This report was originally publihsed in August 2025 issue of New Business Age Magazine.)
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