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By Dipesh Ghimire

Off-Budget Spending of Foreign Aid Rising in Nepal, Government Report Shows

Off-Budget Spending of Foreign Aid Rising in Nepal, Government Report Shows

Nepal is increasingly spending foreign development assistance outside its national budget and treasury systems, raising concerns over transparency, coordination, and fiscal oversight. According to the Ministry of Finance’s Development Cooperation Report 2022–23, more than one-fifth of the total development aid received by Nepal in the last fiscal year was spent outside the government’s budget framework.

In Nepal’s public finance system, funds included in the annual budget document—commonly known as the Red Book—are classified as on-budget, while expenditures not reflected in the Red Book are considered off-budget. Even within on-budget allocations, spending may occur either through the government treasury system (on-treasury) or outside it (off-treasury). The report indicates that both off-budget and off-treasury spending have been rising steadily in recent years.

During fiscal year 2022–23, Nepal received approximately USD 1.40 billion in foreign development assistance. Of this amount, around USD 1.10 billion (77.5 percent) was categorized as on-budget, while USD 309.3 million (22.5 percent) was spent off-budget. More strikingly, only 40.3 percent of the on-budget aid—about USD 428 million—was actually disbursed through the government treasury, meaning the majority of aid spending bypassed the state’s core financial management system.

A comparison with previous years shows a clear upward trend in off-budget spending. In fiscal year 2021–22, 20.8 percent of total development assistance was spent off-budget. This share increased by 1.7 percentage points in 2022–23. Going further back, off-budget spending accounted for 16.5 percent in 2019–20 and 15.7 percent in 2020–21. Within just four years since 2020–21, off-budget expenditure has risen by more than six percentage points, signaling a structural shift in how foreign aid is being utilized.

The report also highlights a broader concern: while off-budget spending is increasing, overall foreign aid inflows are declining. In fiscal year 2021–22, Nepal secured aid commitments worth USD 2.40 billion, but actual disbursements stood at only USD 1.40 billion. In 2020–21, the country received USD 1.70 billion, while in 2019–20—marking the highest level in the past decade—Nepal received USD 2.00 billion in development assistance.

Trend analysis suggests that foreign aid peaked in 2019–20, growing by 26.9 percent that year, but has been on a downward trajectory since. The simultaneous decline in aid volumes and rise in off-budget spending raises questions about aid effectiveness, alignment with national priorities, and the government’s ability to track and coordinate development financing.

The Ministry of Finance report points out that non-governmental organizations account for a significant portion of off-budget spending. In fiscal year 2019–20, when Nepal received USD 2.00 billion in aid, USD 1.67 billion (83.5 percent) was on-budget, while 16.5 percent was off-budget. However, only 52.8 percent of the total aid that year was spent through the government treasury system.

In fiscal year 2020–21, of the USD 1.70 billion received, USD 1.40 billion was on-budget and USD 264.7 million off-budget. Although 84.3 percent of aid was classified as on-budget, only 66.6 percent was spent through the treasury. The pattern continued in 2021–22, when 79.2 percent of aid was on-budget and 20.8 percent off-budget, with treasury-based spending limited to 57.4 percent.

By 2022–23, the situation had further weakened from a treasury perspective. Despite three-quarters of aid being technically on-budget, less than half actually flowed through the government’s consolidated fund. This indicates that even when aid is aligned with the national budget, execution increasingly happens outside the state’s direct financial control.

Analysts say the growing reliance on off-budget and off-treasury mechanisms may undermine fiscal discipline and reduce the government’s ability to ensure that development assistance aligns with national development priorities. At the same time, declining aid inflows suggest Nepal may need to strengthen domestic resource mobilization and improve aid coordination to maintain development momentum.

The report ultimately paints a mixed picture: while foreign assistance remains a significant source of development finance, its shrinking volume and increasingly fragmented spending channels present long-term governance and accountability challenges for Nepal’s public finance system.

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