Impact of Foreign Aid on Economic Growth of Nepal: An Empirical Evidence

Christina Pradhan,Ram Kumar Phuyal

doi:10.11648/j.ijfbr.20200603.12

Abstract

This paper examines the impact of foreign aid on economic growth in Nepal by considering time series data of the last forty years from 1975/76 to 2015/16. Foreign aid's impact on Nepalese economy was explored with Gross Domestic Product (GDP) as the dependent variable against few selected independent variables such as foreign aid, remittance, investment, labor force and lagged GDP. The study used partial adjustment model to analyze the impact of foreign aid on economic growth and further applied Chow test to examine whether there is a structural breakthrough in the economy. The results indicate that foreign aid has a positive relationship with GDP. However, the relation is not significant since higher volume of foreign aid seems to be used in humanitarian and social welfare rather than production activities in the real sectors. From the Chow test, it was found that foreign aid- GDP relationship has not undergone a structural breakthrough in Nepal over the last forty years' period. In light of such empirical findings, it is suggested to the government policy makers to allocate the foreign aid on productive sectors and human capital formation activities with special focus on capital expenditures to achieve the high rate of economic growth in order to meet the periodic plan and long term development goals.

Highlights

Foreign aid to developing countries has been an important source of development finance in the form of grants, concessional loans for development projects, and assistance for meeting humanitarian needs and emergencies for more than half a century [1,2,3]
The findings of the study shows that there is a positive but not significant relationship between foreign aid and economic growth since foreign grant is increasing in lower rate than that of foreign loans
This study observed that foreign aid priorities has shifted from production to non- production i.e. humanitarian and social service sector contributing less to Gross Domestic Product (GDP) as compared to other macro- economic variables as investment and remittance

Summary

Introduction

Foreign aid to developing countries has been an important source of development finance in the form of grants, concessional loans for development projects, and assistance for meeting humanitarian needs and emergencies for more than half a century [1,2,3]. Over the last 60 years, donors have provided more than $2.3 trillion amount of foreign aid to poor countries for their developmental activities [4, 5]. Since after getting such huge significant amount of foreign aid, nearly 3 billion people still live on less than $ 2 a day; 840 million are suffering from hunger, 10 million children die from various kinds of preventable diseases and 1 billion adults are still illiterate [6, 7]. Nepal has been one of the aids receiving country aid for more than 60 years through foreign Governments, multilateral agencies and INGOs, collectively referred as external developmental partners (EDPs). During 1995-2001, foreign aid to Nepal, as a percentage of the GDP, averaged 8.68 per cent higher than that of Sri Lanka and Pakistan, who received 3.06 per cent and 2.09 per cent respectively during the same period [9, 10]

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Conclusion