Localisation Of Foreign Aid In Nepal

Nepal has long depended on foreign aid for development and humanitarian efforts. However, despite consistent international financial support, aid effectiveness remains limited due to donor-driven agendas, tied aid practices, weak governance, lack of local ownership, and fragmented implementation. The Ministry of Finance's 2024/25 report on foreign aid reveals extensive international support but underlines challenges in localizing aid. Many projects continue to rely on external technical assistance and consultants, limiting opportunities for building local capacity. A genuine localization approach would require a stronger focus on funding and transferring skills to Nepali institutions. However, in Nepal, direct funding to government of Nepal, local NGOs and community groups is limited, with international contractors and International Non-Governmental organisations (INGOs) often leading projects. 

This approach hinders local ownership and alignment with Nepal’s development goals, while employment opportunities primarily favour foreign expertise over local organisations, resulting in underutilised potential for technology transfer and sustainable employment. Projects that are often managed by international organisations minimise local involvement despite local actors' deep understanding of community needs. Although international frameworks like the Paris Declaration (2005) and the Accra Agenda for Action (2008) emphasise aligning aid with national priorities and fostering local ownership, aid in Nepal often reflects donor interests over government needs, leaving many projects disconnected from national plans and limiting Nepal’s ability to address critical challenges effectively.

Donor priorities

The projects funded by the bilateral and multilateral donors in Nepal often operate in isolation, with objectives that are shaped more by donor priorities than by national agendas. This approach leads to fragmented efforts, poor coordination, and reduced sustainability. Local governments and communities, who are crucial to project success, are often excluded from decision-making processes, creating gaps in project design and implementation. Without strong local ownership, projects struggle to deliver long-term benefits, as national actors may withdraw once external funding ceases.  A significant portion of the funding is allocated to administrative costs and salaries for foreign experts, leaving limited resources for direct project activities.

 Moreover, exclusion of local institutions not only limits job creation within Nepal but also restricts skills transfer and capacity-building opportunities. Similarly, the challenges with foreign aid are visible in the funding to recent emergency responses to landslides and floods. The donors allocate resources to INGOs and consortia led by INGOs, thereby excluding local organisations from accessing funding directly.  A key factor hindering aid effectiveness in Nepal is the prevalence of tied aid, which occurs when donor countries allocate significant portions of aid budgets to contractors and firms from their own countries, thereby restricting local organisations' participation. Tied aid often inflates project costs, as foreign contractors charge higher fees than local firms. Moreover, this practice reduces the amount of funding that directly benefits communities, as a considerable portion flows back to the donor country. Consequently, Nepal remains locked in a cycle of dependence on external funding and technical support, undermining the sustainability of development efforts.

Another challenge to aid effectiveness is the widespread use of off-budget aid, in which donors manage funds outside of the Nepali government’s budget system. Although donors often argue that off-budget aid enables greater accountability, it weakens Nepal’s control over its development agenda and undermines national institutions. The lack of transparency and coordination associated with off-budget aid complicates the process of monitoring and tracking donor-funded projects, often resulting in duplicative efforts and overlapping initiatives. Tools like the Aid Management Platform (AMP) were introduced to enhance coordination, but donors do not consistently use these platforms, further complicating project alignment with Nepal’s national priorities.

Additionally, donors’ reluctance to channel aid through government systems often citing concerns over corruption and inefficiency contributes to governance challenges. Many donors establish parallel structures to manage aid, bypassing government institutions and further weakening the public sector’s capacity to oversee large-scale projects. This approach prevents local institutions from gaining experience in managing projects, reinforcing a culture of dependency on foreign contractors and management systems. Consequently, donors miss valuable opportunities to strengthen governance and build accountability within Nepal’s public institutions, ultimately impeding Nepal’s ability to achieve sustainable development

Ownership

Localization of foreign aid in Nepal is essential to ensure that development efforts are sustainable, culturally relevant, and responsive to the specific needs of communities. By prioritising localisation, Nepal can harness aid more effectively, building local capacity and fostering a sense of ownership that will enable communities to maintain and expand upon development gains independently. When projects are developed and led locally, they are better integrated into national plans, which strengthens coherence and reduces redundancy across different programmes. 

Furthermore, directing funds to local entities also increases accountability and responsiveness to community needs. Local actors have a vested interest in seeing projects succeed in their communities and are often more attuned to the cultural, social, and economic dynamics that influence project outcomes. This fosters greater transparency and enables faster, more effective feedback loops, ensuring that aid remains relevant and impactful over time. In summary, localising foreign aid is a pathway to sustainable development. By aligning with national priorities, investing in local capacity, fostering accountability, and building resilience, localisation offers a transformative approach that enables Nepal to take ownership of its development journey and achieve lasting progress. Needless to say that locally managed and nationally owned projects empower communities to lead their own development, reducing dependency on external actors and building a robust foundation for future resilience.

(The author, a former UN staff, is currently affiliated with Rural Reconstruction Nepal -RRN).