Nepal should not always depend on foreign aid

MAY 20 - Haoliang Xu, UN Assistant Secretary General, UN

DP Assistant Administrator and Director, Regional Bureau for Asia and the Pacific, was in town last week to release the Nepal Human Development Report. The Post caught up with Xu for a little discussion where he emphasised the need to set national priorities for foreign aid and investment. Excerpts.

What do you make of the development challenges Nepal faces?

Nepal still needs to complete the transition from conflict to development. The current situation seems to be very encouraging. We can’t have a stable and peaceful environment to focus on development without completing this transition. One of the challenges is to draft the constitution so that all the parties and society can focus on long-term development. I don’t feel that Nepal at this time has a longer term development vision and plan. The most important policy objective for Nepal is to graduate from the LDC status by 2022.

Nepal is to graduate from the Least Developed Cou-ntry (LDC) status by 2022. Is that target achievable?

Yes, it is possible. It requires a high growth rate for which we need more investments from both domestic and external sources and public as well as private investment, including direct foreign investment. If you want to attract investment, you have to improve the environment for investment. Investors consider mainly governance and red tape. The physical infrastructure and software (internet connection and legislative environment) are equally important to attract investors. People also invest if they find the kind of human resources they need, be they unskilled or skilled labourers or management personnel. The government should also invest in developing human resources. It is important to build the national capacity.

How will the low investment in human capital affect Nepal’s plan to become a middle-income country?

It will be difficult for the country to achieve the goal. The country’s income level is low, the size of the economy is small and government revenue is limited. To invest in human resource development is to compete with investment in infrastructure and other social sectors. Here, the government has harder choices to make. Our argument is that you cannot choose one over the other. You have to mobilise donors to support your objective. I have been arguing that the best way to attract international support is to have a well designed national development plan. Then you can decide in which areas you use domestic resources and external resources.

There is a lot of criticism about aid dependence and foreign aid in Nepal. Do you think it really needs foreign aid?

Ordinary citizens will see no difference after having graduated from the LDC status. However, it is a noble objective, the right thing to pursue. Policymakers need to understand the implication in terms of aid and trade. Being an LDC, you have a lot of preferential privileges in terms of access to trade and facilities and in terms of grant assistance to Nepal. Once you become a middle-income country, donors will reduce aid immediately. And you will not be eligible for certain preferential treatment for trade. Nepal should not always depend on aid. It is better to prepare for the exit, for which you have to build your capacity, deal with the complexities of trade agreements and deal with more effective management of limited resources.

Regarding the criticism of aid, I think the government has some legitimate concerns. The donors are fragmented. On the donor side, we need to coordinate much better.

They should always support the national development objective, which should be the national objective. If the government comes up with a development plan outlining a clear priority, that will help everybody to coordinate the aid and spend the aid according to the national plan.

There is a lot of talk about the effectiveness of development aid. UN agencies, including the UN DP, appear to be very scattered. Why is there this degree of fragmentation?

I have already mentioned some elements. I would like to see a national development framework as per which donors and the UN DP can work. Second, we need to have a more result-oriented management for aid effectiveness. We have a clear target, clear base line and clear indicators to measure success and have more accountability to improve aid effectiveness. The same goes for the government budget. The government should look at effective management.