Foreign aid is a bit like oxygen: invisible, indispensable and only noticed when it begins to thin. In Nepal’s case aid has been in the air for so long that few stop to question whether they might be breathing too much of it. Since the 1950s, when the newly post-Rana kingdom joined the Colombo Plan and invited in the Bretton Woods brigade, foreign assistance has shaped everything from irrigation canals in Chitwan to federal clauses in the constitution. The country’s road to modernity has been paved quite literally with donor cash.
The relationship has yielded gains. Life expectancy has shot up from 41 in 1960 to more than 70 today. Literacy has been boosted, maternal mortality has plummeted, electricity has finally lit up many a remote hillside, among others. These are not small feats for a mountainous, landlocked state. Yet aid has also entrenched a parallel political economy in which ministries chase donor preferences, not citizen priorities, and sovereignty is traded for seminars on “capacity building”. Were Nepal to reject aid altogether, it would not merely disrupt a revenue stream. It would shake the very foundations of its modern state.
That would be a radical experiment indeed. For all its donor fatigue, the country is deeply enmeshed in the aid economy. In the 2025-26 fiscal year it expects NPR 53 billion (around $400 million) in foreign grants: only 2.8% of its total budget but disproportionately influential. That money funds crucial services in health, education, infrastructure and climate adaptation. More important, it shapes policy and personnel as well as procurement. Remove it and the administrative logic might need rewiring.
To be clear the country is no aid junkie in statistical terms. Its grant intake pales in comparison to that of Afghanistan or South Sudan. But aid has outsized psychological and institutional weight. Successive governments have used it to finance politically convenient promises without expanding the tax base (which sits at 20% of GDP). Ministries routinely prepare “donor readiness reports” before undertaking domestic feasibility studies. Entire sectors from maternal health to governance reform are structured around donor funding cycles. The tail often wags the budgetary dog.
Foreign aid also distorts accountability. When a ministry answers more readily to visiting USAID delegations than to parliamentary committees, democratic oversight is compromised. Civil servants are nudged to become portfolio managers for projects conceived in Geneva or Washington. Consultants hired with aid money usually outnumber, and out-earn, the permanent bureaucracy. Add the proliferation of NGOs, many of which act as service delivery arms for donors, and you get a parallel governance system that competes with rather than complements the state.
The geopolitical calculus is even more fraught. Wedged between India and China, Nepal has become a theatre for soft power jousting disguised as development assistance. India funds roads and temples to project cultural and strategic intimacy. China favours large infrastructure—airports, highways, hydropower—delivered under the Belt and Road Initiative, often with tied loans and Chinese contractors. America, through USAID and the MCC, insists on democracy and market-friendly governance, all while nudging Nepal into the Indo-Pacific orbit. For Kathmandu foreign policy increasingly resembles a donor coordination meeting, except the minutes can trigger diplomatic incidents.
Nothing illustrated this bind better than the MCC saga. In 2022 the ratification of a $500 million American grant to upgrade Nepal’s electricity grid sparked street protests, parliamentary meltdowns and fevered speculation about military entanglements. Though eventually approved with a clarifying note that the country would not join any military alliance, the drama laid bare the growing public unease with aid as a vector of foreign interference. It also highlighted the political class is addicted to aid, but the public is growing sceptical.
This is not a uniquely Nepali conundrum. India weaned itself off bilateral aid in 2003 and has since rebranded as a donor. Vietnam leveraged aid to build a competitive export economy before trimming its reliance. Bangladesh still receives substantial assistance but its development narrative is increasingly driven by remittances and garments. These countries demonstrate a change is possible, provided there are policy discipline and an appetite for domestic reform.
Nepal’s prospects for such a pivot are mixed. On the plus side, remittances are a hidden strength. More than NPR 1.2 trillion flows in a year from workers abroad, more than 20 times the foreign grant budget. If channelled into infrastructure or small enterprise rather than real estate and consumption, this could substitute for aid-funded development. There is also untapped potential in tourism and hydropower, among others, provided the government can provide a credible, corruption-resistant business environment.
The downside, though, is cutting aid overnight would be economically jarring and politically destabilising. Many rural clinics, schools, climate adaptation programmes would collapse. Local governments, already struggling with limited capacity under federalism, would lose critical support. Civil society, much of which is donor-funded, would shrink. The state would face a fiscal reckoning and not necessarily emerge stronger.
Still, there is a case to be made for a strategic retreat from aid rather than a reckless exit but a planned tapering. This could begin with turning from project-based aid to budgetary support, thereby aligning donor contributions with national systems. The country could also set clearer conditions: use our procurement channels, report to our institutions, follow our priorities. Aid, after all, need not be a scaffold that stays forever. It can be a ladder, used then discarded.
At its core, the aid question is about political imagination. Can our leaders envision a state not defined by donor benchmarks but by its own ambitions? Can they tax, govern and invest with the seriousness that sovereignty calls for? Or will they continue to outsource development and blame the funders when results fall short?
Nepal’s aid debate is unlikely to be resolved by grand declarations. But it may, over time, be reframed. The goal should not be to reject aid for its own sake but to redefine the terms of engagement. Dependency is a choice, albeit one with historical inertia. Dignity, on the other hand, requires difficult reforms, and the courage to fail on one’s own terms.
As foreign patrons squabble and development consultants refine yet another “results framework”, Nepal might consider a simpler question: not what aid can do for it but what it might do without. ■
