Mind the gap: Development Needs Vs Development Finance in Nepal

 

                           Mind the Gap: Development Needs VS Development Finance in Nepal

Ram Prasad Mainali *

 

 

Abstract

This study offers a descriptive analysis of the development finance that entails to meet the development needs. Development needs, in the other hand, is an ambiguous subject which depends on socioeconomic context and future expectation of a particular country. Considering this ambiguity, development needs in this study has been limited to the development objectives included in the plan documents as well as the additional policy announcements by sectoral Ministries which are not explicitly accommodated by the development plans. Therefore, development finance refers to the sum of finance required for achieving SDG, development goals associated with sixteenth periodic development plan together with policy announcement by sectoral ministries. Nepal’s commitment to Net Zero Emission (NZE) by 2045 and the Energy Road-map 2035 are included particularly in the latter category. Source of finance foreseen by the development plan may overlap with the finance purported in achieving sectoral ministry’s policies as some of them are cross cutting, i.e., Sustainable Development Goals (SDG). Considering this fact, finance gap in development is not estimated implicitly in this study but is critically reviewed existing studies from the viewpoint of its attainability. Additionally, source of finance described in the sixteenth plan has also been assessed aligning with the trend associated with respective sources. This study finds a significant gap between the development finance and development needs posing a challenge for achieving SDG. Objectives of NZE and Energy Road-map are believed to be unachievable within the stated schedule due to financial constraints. Moreover, this study shows that development policies in Nepal are pronounced without giving a proper attention in the available resource leading most of the development goals unmet.

Keywords: Development Finance, FDI JEL Classification: J01, J31.

* Mainali is a Senior Instructor at Public Finance Management Training Center (PFMTC) and holds a PhD in Development Economics from the City St. Georges University, London.

1             Introduction

Development finance is resources allocated to fulfill the social needs such as education, health infrastructure etc. which in turn causes a positive impact in the society. It is also known as an invisible glue that assembles private and public finances for projects such as infrastructure, waste management, social inclusion, clean energy, sustainable development to enhance the well-being of citizens (Alhasan and Zeka, 2024). Development needs, in the other hand, is a very ambiguous term. It varies across countries depending on the current socioeconomic status and future expectation associated with a particular country. Therefore, it is not evidently measurable. Considering this ambiguity, this article confines development needs up to the achievement of Sustainable Development Goals (SDG) as it is already owned by the state by accommodating in the policy document. Forgoing periodic development plan (2018-2023) basically stand on SDG (National Planning Commission, 2018). Investment projection in the sixteenth development plan has also been briefly reviewed to align with past trends. In addition to the achievement of SDG, some sectoral ministries have come up with extra programs and projects. For instance, Ministry of Energy Water Resources and Irrigation (MoEWRI) has pronounced an Energy Development Road-map, 2035. Furthermore, Nepal has inter- national commitment for achieving a Net Zero Emission (NZE) by 2045 which requires a huge shift in energy consumption from traditional to the clean energy.

These three dimensions should be taken into account to approximate the requirement of development finance at present ¹. However, these three dimensions together has not yet been analyzed at least in my knowledge. This has led policy circle in an illusion in penetrating development finance. Moreover, independently analyzed literature shows variation in costing in achieving these goals. Nepal’s recently completed fifteenth periodic development plan had estimated a total of NRs. 9.25 trillion investment required to attain its goals (National Planning Commission, 2018). Out of this, the private sector was expected to pour 55.5% whereas 39.1% was expected to be beard by the government. Remaining 5.4% was expected to be contributed by cooperative sector (ibid). Whether this expectation of investment had been fulfilled has not yet been examined scientifically.

A study carried out by the Nepal Planning Commission unveiled an investment required for whole SDG period as NRs. 2025 billion per year (National Planning Commission, 2017). It implies that a total investment of NPRs. 30375 billion is needed for achieving SDGs. It has to be NRs. 10.10 trillion for the fifteenth plan corresponding to .85 trillion deficits during the period 5 years. This shortfall will be further inflated

¹There are various plans and programs associated with sectoral ministries reflected in annual basis. However, distinct programs have been accommodated while estimating additional development needs

if the real expenditure in the fifteenth development plan is taken into account. Furthermore, these studies do not include the sectoral ministerial policy announcement i.e. NZE as well as the Energy Development Road-map in the costing. This article attempts to fill this gap.

The remaining sections are organized as follows. The section two demonstrates total finance likely to be short-fall for achieving SDG as well as sectoral ministry’s policy announcements, if its difference from SDGs. The third section gives a brief source-wise review of investment provisioned in the sixteenth development plan followed by overall financial deficit that Nepal may face to achieve these goals in the fourth section. The final section concludes.

 

 

2              Investment likely to short fall in achieving development goals

2.1           The context of SDGs

Table 1 in the annex-A, shows the investment requirement by major sectors in achieving SDGs. A study carried out by NPC shows a finance gap of NRs. 585 billion per year for the entire period, 2016 − 2030 in order to achieve these goals. This gap is shown to be constituted by NRs. 366 and 218 billion from private and public sector finance gaps, respectively (National Planning Commission, 2017).

However, this gap also seems to be underestimated. For instance, study anticipates NRs. 86 billion SDG financing from Non-Government Organizations (NGOs) and co- operative sector annually. As cooperative sector in Nepal appears almost in collapsed position annual investment expected from this sector is not likely to be realized. Private sector financing is expected to contribute for SDG an amount of NRs. 373 billion annually. Furthermore, this study agrees that 38%, NRs. 141 billion, of the total gap in this sector could be mitigated by mobilizing more equity, bank financing and FDI. The former two windows of investment may overlap with private sector investment as these are the instruments of private investment itself. FDI-inflows in Nepal is also disappointing. The accumulated FDI inflows so far accounts for NRs. 478 billion (Department of Industry, 2024). Nepal is able to utilize FDI as of Bhutan and Afghanistan and is in the lowest bottom in SAARC region. Therefore, Private sector financing gap is unlikely to be mitigated as per expectation in present circumstances.

Public sector financing comprises of tax and non-tax revenue, internal borrowing and Official Development Assistance (ODA). Table 1 in the Annex-A, depicts that it

requires to increase by 34%, 30%, 44% for the first, second and third tranches of SDG period, respectively in order to meet the expected investment from this sector. As it can clearly be observed that the trend of the ODA as well as revenue collection does not justify this expectation. ODA, particularly the grant, will further be limited once Nepal graduates from the category of Least Developed Country (LDC) in 2026.

Overall, SDG seems to faces a huge financial constraints for various reasons. First, financing gap estimated in the National Planning Commission (NPC) report turns out to be underestimated due to change in circumstances. The calculation was carried out by assuming three different economic scenarios: Optimal, Low and Normal scenarios. The first scenario is followed for the finance need assessment for SDGs which is based on ambitious assumptions. It assumes an average annual growth rate of 8.67% from 2016 − 2030 and revenue collection reaches to 27% of GDP by the end of SDG period. This has already became an unachievable dream for us. Additionally, FDI inflow is not accelerating and the contribution of NGOs and cooperative sector seems to be declining. Cooperative sector in Nepal is almost collapsed position and government has declared many cooperatives as problematic. Recent global political change has a detrimental effect on development cooperation inbound to developing countries. Secondly, recommended strategies for revenue mobilization as well as implementation partnership strategy has not yet been instrumented. This warrants a complete revisit of NPC’s report for a scientific estimation of SDG finance gap and to develop a strategic work plan so as to achieve SDGs.

 

2.2           Net Zero Emission - NZE

Net zero emissions (NZE) refers to a balance between Green House Gas (GHG) emitted into the atmosphere and the amount removed by perusing corrective actions. In other word, reducing emissions to the point where any remaining emissions are equalized by actions like carbon appropriation or elimination technologies is called carbon neutrality or NZE. This strategy aims to limit the global temperature rise to 1.5^oc (Climate Council, 2023). Removal of GHG, carbon dioxide (Co2), from the atmosphere is known as negative emission which is a crucial component of strategy to mitigate climate change. (ibid).

Nepal has signed in an agreement of Net zero emission (NZE) by 2045. It is surprising that Nepal has declared NZE target quiet earlier than many other developed as well as developing countries. For instance, most of the European countries aim to achieve carbon neutrality by 2050. Other countries like Brazil, China, Russia and India declare target of carbon neutrality by 2060 (Galvez, 2021). In the one hand, Nepal aims to achieve NZE quiet earlier than the other countries. In the other hand, it lacks a credible financing arrangement to achieve this target. A huge investment is required to attain these ambitious target of GHG alleviation within the stipulated period.

The government of Nepal has estimated total finance required for achieving NZE target considering three different scenarios while pronouncing this policy. This policy document has estimated total cost conditioned on Reference, With Existing Measure (WEM), With Additional Measure (WAM) scenarios (Government of Nepal, 2021). This indicates USD 4.2, 7 and 17.5 billion in the period of 2021 to 2030, 2031 to 2040 and 2041 to 2050, respectively for the first category. In the WEM scenario, required investment is described as USD 42.8, 34.4 and 56.2 billion for the same periods. In the third scenario, the WAM context, it requires USD 46.4, 53.4 and 96.3 billion respectively for 2021 to 2030, 2031 to 2040 and 2041 to 2050 (ibid).

Preceding paragraph shows a total investment of USD 28.7, 133 and 196.1 billion for reference, WEM and WAM scenario, respectively. ² This equivalents to NRs. 3921.86, 18229.11 and 26797.07 billion, for three respective scenarios. It means, Nepal has to invest NRs. 156.87, 729.11 and 1071.88 billion per year for Reference, WEM and WAM scenario.

Table-4 in the Annex-A depicts total C^o2 emission data during the eight different point of time associated with three respective scenarios. REF scenario refers a total 63 and 79 mMt net emission by 2045 and 2050, respectively.  Similarly, WEM scenario corresponds to 24.0 and 29.5 mMt emission in the same period.  Finally, the WAM scenario shows -0.4 and -5.7 mMt emission respectively in 2045 and 2050. It implies that Nepal requires to peruse WAM scenario in order to fulfill the commitment of NZE by 2045 that corresponds a NRs. 1071.88 billion a year throughout the period of 2025-2050. Does Nepal’s economy permits to invest this huge amount a year only for the sector of climate financing?  This seems to be challenging with respect to recent trend of investment in our economy. NZE strategy paper suggests to peruse bilateral and multilateral funding sources including grants, soft loan, bonds etc. in order to achieve WEM and WAM scenario (Government of Nepal, 2021). However, it lacks in-depth analysis of potential source of financing considering the fact that Nepal has utilized such resources so far. Explicit actions to attract additional finance to break the history is also missing in the strategy paper.

 

2.3           Energy Road-Map-2035

The government of Nepal has approved the Nepal Energy Road-map and Working Guideline, 2035 which aims to reach 28, 500 installed capacity of electricity by 2035 compared to 2800 MW in 2023.  It is more than ten times that of current installed

²Nepali Rupees is converted applying the exchange rate published by Nepal Rastra Bank on 2082/02/10, which is at the 136.65.

capacity.  It describes percapita energy consumption to be increased to 1500 unit by the end of 2035. Additionally, it also includes an ambitious target of extension of transmission, distribution lines as well as the improvement of substations to match with the electricity generation. The former has to be increased to 17,446 crkm from 5742 crkm in 2023. Likewise, it intends to improve substations from 8867 MVA to 40,000 MVA by 2035. The Road-map has a comprehensive objective of not only to provide access to electricity for entire population but also to export 10,000 MG electricity a year in neighboring countries.

Total cost for the Energy Road-map is estimated as USD 51.2 billion which equivalents to NRs. 6.31 trillion (Republica, 2025). If it is stipulated equally for a decade it turns out to be 631 billion a year. However, projection of financing arrangement seems incredible since only USD 8 billion has been ensured from NEA refinancing. It is just a 15.68% of the total requirement (Government of Nepal, 2024). Ministry claims to arrange remaining investment through external and internal resources. A detail of proposed financial arrangement is depicted in Table 3.

 

3             Sixteenth Development Plan, 2024/25-2085/86

Nepal is currently running a sixteenth periodic development plan. This plan is crucial since it accommodates certain period of ambitious development objectives that Nepal aims to achieve ³. Few years of NZE period, Energy Development Road-map and whole five years of periodic plan overlaps with SDG. Therefore, viability of financial arrangement of this development plan closely relates with the achievement of these development goals. Furthermore, it is also crucial to estimate net investment required for these policy announcement by netting out investment described in the plan document.

This plan estimates a total investment of NRs. 9482.66 billion at 2081/82 constant price out of which NRs. 2853.76, 6372.35 and 245.55 billion is expected to be borne out respectively by public, private and cooperative sector. In terms of viability, cooperative sector may not be crucial since it’s share in total investment is only 2.6%. Private sectors investment in the economy is not straight forward. A study carried out by FNCCI (FNCCI, 2023) shows that almost a 74% capital formation in Nepalese economy is contributed by the private sector. However, private sectors investment in industry and job creation is not seen to be encouraging. Data from F/Y 2073/74 to 2077/78 unveils total of 2306 industries corresponding to the investment of NRs. 1212632.88 million and providing 1,23,559 jobs in the economy (ibid).

³Although, whole period of SDGs, NZE and Energy Development Road-map is not covered by the period of this plan certain duration of all these three goals achieving period overlaps with it.

Annual private sector investment in amount is not available. FNCCI (2023) claims almost 84% of capital formation in Nepal is contributed by private sector investment. In the other hand, government publication, i.e., plan documents states it being around 64%. Therefore, although private sectors investment plays a significant role in contributing Nepal’s economy, its actual contribution can’t be clearly defined.

Public sector investment comprises of government revenue, Official Development Assistance (both grants and loans) and internal borrowing. The sixteenth plan portrays NRs. 9530.60, 372.08 and 1380.22 billion to be borne out by revenue, international grants and international loan, respectively. These altogether sums up to NRs.11282.90 billion. Whether this resource achievable is under question. This study forecasts public sector resources for five fiscal years based on the 10 years passed records applying a simple mean average forecasting model. This simple model can be specified as;

 

y^_T +_h /T = y = (y₁ +....... y_T )/T

 

Where, y^_T +_h, is a short-hand for the estimate of y_t+_h conditioned in the historical

data y₁.............. ………y_T .

Estimated results are predicted in the Table 2. It shows that NRs. 6715.90, 87.72 and 962.23 billion can be utilized form the source of revenue, grant and external borrowing, respectively. It altogether accounts for NRs. 6765.84 billion. It implies NRs. 3517.06 billion short fall in the financial provision made by the 16th development plan (see Table 2 in the Annex for detail). Internal borrowing can lessen this finance gap by 1500 billion, if whole amount permitted by law is borrowed. However it may not be not be a prudent idea since it crowed out the private investment.

 

4             Overall Deficit in Development Finance

Previous sections demonstrate development finance gap in Nepal associated with sixteenth periodic development plan, NZE and the Energy Development Road-map. The sixteenth development plan likely to be deficit by NRs. 3517.6 billion in its whole period. NRs. 1500 billion can be compensated from internal borrowing. However, this will not be a prudential idea since it undermines the resource availability for private sector through crowding out effect. NZE requires a huge investment. NRs. 1071.88 billion is estimated to achieve the target as per commitment, that is attaining carbon neutrality by 2045 and negative GHG by 2050. Annual budget allocated to line ministries such as Ministry of Forest and Environment (MoFE), Ministry of Energy Water Resources and Irrigation (MoEWRI), Ministry of Land Management Cooperative and Poverty

Alleviation (MoLMCPA) as well as the Ministry of Agriculture (MoA) overlaps with the finance related to NZE. However, such allocation cannot mitigate the significant portion of this finance gap. For instance, recent budget allocation to MoEWRI, MoA, MoLMCPA and MoEF is NRs. 86.01, 57.48, 7.49, 18.61 billion, respectively (Ministry of Finance, 2024). These sums up to NRs. 169.68 billion which is almost 15% of the total financing requirement. Energy Development Road-map demands a total investment of USD 51.2 billion equivalent to NRs. 7065.60 billion. It implies a 70.65 billion a year for whole decade. Out of this total requirement only NRs. 1104 billion is said to be ensured through NEA refinancing mechanism. Remaining investment is said to be channelized through external resources.

 

5             Conclusion

Nepal has already completed 15 periodic development plans and is now running the sixteenth plan. Those plans were intended to achieve different crucial objectives to respond contemporary issues. Some notable objectives outlined in the periodic plans are to maintain Asian standard of living, persuading poverty reduction strategy, achieving SDGs and attaining high, sustainable, wider and inclusive growth. Additionally, sectoral ministries every so often announce own policy agenda. NZE and Energy Development Road-map discussed in this article are some of its examples. These policy agenda sounds appealing. However, these were not properly aligned with available resources which ultimately led only to a partial accomplishment.

Overview of plan document as well as sectoral ministry’s policy papers show a very weak financing strategy. Sectoral ministry’s announcement seems further feeble in this regard. It simply presumes external resource of finance in order to achieve announced goals. A minimum aspect that may undermined external resources has not been taken into account. For instance, graduation from LDC could have detrimental effect on grant assistance that Nepal used to receive. It may also discourage soft loan receiving from bilateral and/or multilateral agencies. These all again can be guided from development partner’s financing strategy which depends on Nepal’s absorbing capacity, their obligation to other countries as well as contemporary political economy. USA has significantly cuts off funding to developing country in Donald Trump’s presidency. FDI inflow in Nepal is also disappointing in absolute term as well as relative to other South Asian countries. Such prima ficie aspects of availability of external resources have been ignored while announcing the ambitious goals by sectoral ministries.

Development goals are best achieved only if it is supported by a robust financial strategy. Nepal lacks it in most of development endeavors and thus many development    goals are

lagging behind. Unachievable policy announcements fuels dissatisfaction in people which sometimes even converts into social unrest. Additionally, it also diminishes the credibility of the government. Therefore, line ministries should stop competing for announcing unachievable development goals that could not be justified by financial strategies.

Annex-A

 

 

Table 1: Total Investment for SDG (NPRs. Billion)

Sectors	2016-19	2020-22	2023-25	2026-30	2016-30
Total investment	1055	1559	2046	3070	2055
Investment% GDP	43.8	48.8	48.8	49.7	47.8
Private Investment	259	443	736	1303	739
FDI	224	333	418	488	373
Private finance gap	35	110	318	815	366
Public Investment	702	979	1,134	1,505	1,111
Public resource	521	698	905	1,300	893
Public finance gap	181	281	229	205	218

Note: Adapted from NPC study

 

 

Table 2: Resource estimation for 16th Plan (NRs. Billion)

		Allocated			Predicted
Year	Grant	Loan	Revenue	Grant	Loan	Revenue
2082	50	210	1400	20.34	167.51	1194.25
2083	60	252	1635	18.94	179.98	1268.71
2084	72	302.4	1817.5	17.54	192.44	1343.18
2085	86.4	306.72	2155.88	16.14	204.91	1417.64
2086	103.68	309.10	2422.22	14.74	217.37	1492.10
Total	372.08	1380.22	9530.60	87.72	962.22	7615.89
Shortfall	284.35	417.99	2814.7
Total Shortfall			3517.06

Note: Predicted amount is estimated by author based on past ten year’s trend of respective resources.

 

 

Table 3: Resource Estimation for Energy Development Road-map

Source	Amount (USD billion)	Remarks
Government of Nepal	6.00	To be arranged
Internal (Private)	10.00	To be arranged
NEA (refinance)	8.00	Source ensured
Climate finance	2.00	To be arranged
NRN/Remittance	12.00	To be arranged
External (Loan and Grant)	8.5	To be arranged

Note: Adapted from Ministry of Energy Water Resources and Irrigation website

Table 4: Co2 Emissions (mMt) under different Scenario

				WAM Scenario
	2019	2020	2025	2030	2035	2040	2045	2050
Energy	12.5	12.4	12.0	12.11	10.2	9.1	6.5	1.7
Agriculture	0.2	0.2	0.2	0.2	0.2	0.2	0.2	0.2
LULUCF	8.4	-27.2	-22.6	-19.9	-12.1	-11.2	-10.0	-9.2
IPPU	1.9	1.8	2.3	2.9	3.7	3.5	2.8	1.6
Waste	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00
Net Emission	23.0	-12.9	-8.2	-5.8	2.1	1.6	-0.4	-5.7
				WEM Scenario
	2019	2020	2025	2030	2035	2040	2045	2050
Energy	12.4	12.5	12.9	12.9	14.3	16.5	19.2	22.3
Agriculture	0.2	0.2	0.2	0.2	0.2	0.2	0.2	0.2
LULUCF	8.3	-22.3	-13.6	-12.1	-3.6	-2.7	-1.5	-0.7
IPPU	1.9	1.8	2.3	2.9	3.7	4.8	6.1	7.7
Waste	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00
Net Emission	23.0	-7.8	1.7	3.9	14.6	18.8	24.0	29.5
				REF Scenario
	2019	2020	2025	2030	2035	2040	2045	2050
Energy	12.5	12.5	15.2	19.6	25.1	32.2	41.4	53.8
Agriculture	0.2	0.2	0.2	0.2	0.2	0.2	0.2	0.2
LULUCF	8.4	8.7	9.3	11.1	12.7	14.1	15.5	16.9
IPPU	1.9	1.8	2.3	2.9	3.7	4.8	6.1	7.7
Waste	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00
Net Emission	23.0	23.0	27.0	34.0	42.0	51.0	63.0	79.0

Adapted from Nepal’s Long-term strategy for Net-zero Emissions, 2021.

 

References

Alhasan, A. and B. Zeka (2024).  Development Finance: How it works, Where it goes and why its needed. Conversation https://theconversation.com/development- finance-how-it-works-where-it-goes-why-its-needed-227085.

Climate   Council  (2023).       WHAT   DOES   NET    ZERO                 EMISSION                MEAN?

https://www.climatecouncil.org.au/resources/what-does-net-zero-emissions- mean/: :text=’Net

Department of Industry (2024). Foreign Investment in Nepal. https://doind.gov.np/uploads/notices/Notices-20240828191948234.pdf.

FNCCI (2023). State of Private sector in Nepal. https://fncci.org/uploads/publication/file/Report_StatePSNepal₂0230519064735.pdf.

Galvez, J. R. (2021). List of countries with Net Zero Commitment and Climate account-

abilty Legislation. https://rosagalvez.ca/en/initiatives/climate-accountability/list-of- countries-with-net-zero-commitments-and-climate-accountability-legislation/.

Government of Nepal (2021). Nepal’s Long-term Strategy for Net Zero Emission. https://unfccc.int/sites/default/files/resource/NepalLTLEDS.pdf.

Government of  Nepal (2024).   Energy Development Road-map. https://moewri.gov.np/storage/listies/January2025/urja-bikash-margachitra- 2081.pdf.

Ministry of Finance (2024). Budget  Speech, 2024.

https://giwmscdnone.gov.np/media/pdf_upload/Webside

National Planning Commission (2018). Fifteenth Periodic Development Plan.

National Planning Commission (2017). Needs Assessment, Costing and Financing Strategy for Sustainable Development Goals. https://www.npc.gov.np/images/category/SDGs_Costing final version.pdf.

Republica (2025). Nepal’s Road map to produce 28500 MW by 2035.