Impact of Sectoral Aid on Economic Growth in Nepal
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This paper examines the impact of foreign aid on economic growth in Nepal, disaggregating it into four major sectors: social, economic, production, and multi-sector. Using the autoregressive distributed lag (ARDL) model and time-series data from 2002 to 2023, the study identifies a long-run relationship between foreign aid and economic growth. Aggregated foreign aid negatively affects economic growth in Nepal. However, sectoral disaggregation reveals varied outcomes: aid to the social and economic sectors positively influences growth, while aid to the production and multi-sectors has a negative, though statistically inconsistent, impact. These findings underscore the need for targeted strategies to maximize foreign aid benefits. Investments in social and economic sectors should be prioritized for measurable growth outcomes, whereas production and multi-sector aid require clear, well-defined plans to yield positive results. The study offers critical insights for policymakers and donors to enhance the effectiveness of foreign aid in fostering sustainable development.
Abstract
This paper examines the impact of foreign aid on economic growth in Nepal, disaggregating it into four major sectors: social, economic, production, and multi-sector. Using the autoregressive distributed lag (ARDL) model and time-series data from 2002 to 2023, the study identifies a long-run relationship between foreign aid and economic growth. Aggregated foreign aid negatively affects economic growth in Nepal. However, sectoral disaggregation reveals varied outcomes: aid to the social and economic sectors positively influences growth, while aid to the production and multi-sectors has a negative, though statistically inconsistent, impact. These findings underscore the need for targeted strategies to maximize foreign aid benefits. Investments in social and economic sectors should be prioritized for measurable growth outcomes, whereas production and multi-sector aid require clear, well-defined plans to yield positive results. The study offers critical insights for policymakers and donors to enhance the effectiveness of foreign aid in fostering sustainable development.
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