Nepal has long been a favoured recipient of international aid and development finance. Nearly every major bilateral or multilateral development agency has funded programs in this small Himalayan country. Billions of dollars later, we remain a country that lives off remittances, imports nearly everything we consume, and fails to create jobs for our restless youth. The economy remains shallow and the growth story fragile.
Meanwhile, other nations that started with less have leapt ahead.
In this piece, I’ve tried to take a balcony perspective of two countries that have leveraged foreign aid for economic progress to discuss a nuanced examination of Nepal’s predicament.
Bangladesh: From Basket Case to Export Powerhouse
Bangladesh was considered a basket case not so long ago. Today, it is a $450 billion economy - the second largest in South Asia. The secret? A relentless focus on its garment industry, which now exports more than Nepal’s entire GDP. That single sector employs over four million people, most of them women. While it may not be a good model to emulate given the lack of diversity, there is no denying that it set them on a high growth trajectory. Donors didn’t just fund scattered pilots. They tapped into large quasi-public institutions like BRAC and Grameen to scale programs in health, education and finance.
Bangladesh still grapples with governance challenges though. Corruption, political patronage, and elite capture persist. It is fair to say, Bangladesh did better than we have done not because it had clean governance, but because it had just enough functioning institutions in the right places to leverage on aid to spur economic growth.
Rwanda: Rebuilding from Rubble
52% of country's foreign aid went to province 3
Rwanda was left in ruins after the 1994 genocide. It is now one of Africa’s fastest-growing economies. GDP has risen nearly ten-fold since 2000. Unlike Nepal, Rwanda carefully choreographed the flow of aid: every dollar had to align with national plans like Vision 2020. Results-based financing tied money to outcomes in health and education. Corruption was not tolerated.
Critics call Rwanda’s centralized rule heavy-handed, but the gains are undeniable. From healthcare to infrastructure, Rwanda has shown what happens when aid reinforces a clear national strategy.
Nepal: Pilots without Flight
Nepal, by contrast, has learned to "manage development" without ever owning it. Although the country’s GDP has risen from $5 billion in 2000 to $43 billion today, the economy remains shallow and is driven by consumption and remittances, not production or exports. Nepal still lacks a robust platform to catalyze or sustain the next phase of economic expansion.
Agriculture, for example, has received substantial donor support for decades. From the Tribhuvan Rural Development Program of the 1950s to numerous interventions in recent years, aid has aimed to improve productivity. Yet we now import the very rice we once exported. Why? Because the key structural issues like irrigation, market access, land fragmentation, etc were never fixed as donor suport lived and died with project cycles because the government never owned the reforms.
Unlike Bangladesh or Rwanda, we never built virtuous cycles out of aid. We used aid as crutches, not capital, often to finance the deficit in the national budget. In certain cases, aid has been used for social welfare or even wealth distribution which did not encourage market building nor foster entrepreneurship. Time and again, we have seen well-designed projects fail to scale.
To be fair though, aid did help Nepal move forward on some social reforms. Programs funded by donors reduced maternal and child mortality, expanded immunization and lifted school enrollment. Gender rights and inclusion of marginalized groups are on the national agenda. Our constitution’s strong equality clauses reflect decades of external support. These are real gains. However, many reforms remain on paper rather than in practice. Women and minorities may now have seats in parliament, but power is still traded in old patronage networks. And, more importantly, while these reforms softened Nepal’s social fabric, they did little to hardwire economic transformation.
As a nation, we clearly lack strategic intent or institutional discipline to leverage foreign aid for economic growth. Ministries are more accustomed to managing donor checklists than leading reform. Consultants thrive but industries don’t. New governments often scrap or ignore programs tied to their predecessors. Meanwhile, droves of young men and women fly to the Gulf and elsewhere for work every single day.
The New Face of Aid
And now the rules of the game are changing.
Aid is no longer about poverty, it’s about power. China funds roads without asking questions. Western donors pivot to climate, security and migration. Washington looks for deals that also benefit American businesses.
Less grants, more loans. Nepal is scheduled to graduate from Least Developed Country (LDC) status in 2026. While this is a symbolic milestone of progress, it will also mark a significant shift in aid flow. LDC graduation typically results in reduced access to concessional finance, grants, and trade preferences. For Nepal, this may accelerate the ongoing shift from grants to loans, further increasing fiscal vulnerability. Donors may become more selective or reduce volumes of aid.
Blended finance is in. Donors now want to crowd in private capital, not just hand out cheques.
In this context, Nepal risks becoming irrelevant if we cannot absorb aid effectively, deliver results and co-finance our own ambitions.
The Way Forward
Nepal has no choice but to shift its relationship with aid (whatever little may still be available) from one of dependency to that of strategic partnership. That means (a) asserting national ownership over development plans and aligning donor funding accordingly, (b) investing in state capability, especially at the sub-national levels and (c) engaging effective partnerships with private sector actors because only markets and entrepreneurs can scale what aid seeds.
Instead of funding a bloated development bureaucracy and fragmented projects, aid should serve as transformative catalytic capital building industries, exports and resilience. Because clearly, development is not something that can be delivered from outside. It must be built from within.
If Rwanda can rebuild from genocide and Bangladesh can industrialize in spite of corruption, what excuse does Nepal have?
(The author is a former banker and now a private equity investor and ecosystem builder based in Kathmandu.)
