Policy paper

UK–Nepal development partnership summary, July 2023

Published 17 July 2023

Introduction

The International Development Strategy (IDS) places development at the heart of the UK’s foreign policy. It sets out a new approach to development, anchored in patient, long-term partnerships tailored to the needs of the countries we work with, built on mutual accountability and transparency. This approach goes beyond aid and brings the combined power of the UK’s global economic, scientific, security and diplomatic strengths to our development partnerships. The UK’s 4 priorities are to deliver honest, reliable investment; provide women and girls with the freedom they need to succeed; step up our life-saving humanitarian work; and take forward our work on climate change, nature and global health. The Integrated Review Refresh (IR23) reiterates that sustainable development is central to UK foreign policy and sets out how the UK will go further and faster reducing poverty and reinvigorating progress towards the SDGs. This Country Development Partnership Summary details how the IDS and IR23 will be put into practice with Nepal.

Country context

The UK has a long bilateral history with Nepal spanning over 200 years: the UK was the first country with which Nepal established diplomatic relationship in 1816. This year we celebrate the Centenary of the 1923 Treaty of Friendship. Beyond traditional military links that include the recruitment into the British Army through the Gurkhas, Nepal’s position at the heart of South Asia and on the border of China and India is strategically important.

Nepal and the UK have a strong development partnership spanning over five decades. The UK supports Nepal’s efforts to reduce poverty, improve the economic prospects of its people and businesses, advance human development outcomes and respond to humanitarian needs, including in response to frequent natural disasters.

Nepal is at a defining moment in its development journey. After a decade of peace following the 1996 to 2006 civil war, the country was hit by several generation-defining events. In 2015, a catastrophic earthquake killed nearly 9,000 people. The same year, Nepal transitioned to a federal republic with the agreement of a new constitution. In 2020, as Nepal reached Low Middle-Income (LMIC) status, the country joined the rest of the world in facing the COVID-19 pandemic and the related global economic crisis. These events tested Nepal’s resilience, undermining its impressive development gains. They complicated its path towards sustainable development and economic growth and amplified challenges such as social exclusion, limited access to basic services, and weak economic growth.

While Nepal is set to graduate from Least Developed Country (LDC) ^{[footnote 1]} in 2026, its economy remains vulnerable. Manufacturing contributes less than 5% of GDP, while remittances make up nearly a quarter of GDP – 17% of Nepalis are multidimensionally poor. Foreign Direct Investment is among the lowest in the region and corruption remains significant. With systemic barriers to economic growth, Nepal is also one of the most climate-vulnerable and disaster-prone countries globally.

Political instability has been a challenge. Short-lived governments detract from progress on vital reforms, including in UK’s priority areas of federalism, climate, business and investment environment, human development, justice, and inclusion. Incomplete restructuring and resourcing of local and provincial governments have stretched capacity and hinder efficient planning. This undermines the political legitimacy of local and provincial governments as they struggle to meet citizens’ expectations in basic service provision and or to bring in the private sector. Open civic space and active media have not yet delivered meaningful citizen engagement or improved rule of law.

Thanks in part to UK development assistance, Nepal has made significant progress in access to basic services, leading to human development improvements such as a reduction in maternal and child mortality and near-universal access to basic education. However, progress has stagnated in critical areas such as foundational learning outcomes and family planning. A quarter of Nepalese children remain stunted, and maternal and neonatal mortality remain excessively high. Exclusion based on gender, ethnicity, religion, and caste persists, and gender-based violence (GBV) remains a threat to a quarter of women of reproductive age. Many of these trends mirror regional ones, especially on climate vulnerability, macroeconomic challenges and opportunities, and broad governance issues.

Despite these challenges, Nepal has great potential for sustainable economic development. The country boasts remarkable biodiversity and abundant natural resources, including substantial hydroelectric power potential. This offers opportunities for investment, growth, and regional energy market positioning. The green economy provides a space for mutually beneficial economic relations between Nepal and the UK. Human development trends show promising foundations for successful human capital, aided by an improving dependency ratio ^{[footnote 2]}.

Why and how: the UK’s development offer with Nepal

The coming years are critical for Nepal to achieve its upper middle-income status ambition and meet its Sustainable Development Goals by 2030. Nepal must prioritise improving human development outcomes, strengthening the regulatory and policy environment for sustainable growth, and harness its economic comparative advantage in green energy, industries and services.

The UK has a unique position to establish a modern, mutually beneficial development partnership that moves beyond traditional aid and built on shared interests. We are well placed to support Green Resilient and Inclusive Development and the strategic priorities in Nepal’s Periodic Plan.

Recognising the need for Nepal to access international financing, the UK will crowd in additional concessional finance for infrastructure and businesses via multilaterals, climate finance, BIPs and BII. We will be a responsible and reliable partner helping to strengthen and secure the federal political system that Nepal has chosen, and address barriers to economic growth and sustainable development.

Who we work with

The British Embassy in Nepal works at the nexus of diplomacy and development that makes the best use of the comparative advantages of all UK government departments and arm-length bodies at post. The Foreign, Commonwealth and Development Office, (FCDO), the Department for Business and Trade (DBT), British International Investment (BII) and wider British Investment Partnerships (BIPs) work together in an integrated way to deliver our four common objectives to enable growth and trade: fostering more effective economic institutions and policy; increasing the volume and quantity of investment; creating jobs and economic opportunities for disadvantaged Nepalis; and scaling-up UK trade, investment, and business partnerships creating an alternative source of honest and reliable investment for Nepal. MoD collaborates in the development space through the Gurkha Welfare Trust to provide financial, medical and development aid to Gurkha veterans, their families and communities. We collaborate with the British Council to strengthen civic participation, promote education for excluded groups and build awareness about climate change. We also collaborate with departments that have no presence at post, such as the Department of Health and Social Care (DHSC) in its executive agencies in the global health space, including initiatives to rationalise health workforce migration and support the global fight against antimicrobial resistance.

We maximise our footprint by leveraging our global investments through Centrally Managed Programmes and global initiatives, such the Global Partnership for Education, global health initiatives such as the Global Alliance for Vaccine Initiative (GAVI) and the Global Fund to Fight AIDS, Tuberculosis and Malaria. We prioritise strategic partnerships which capitalise on and ensure effectiveness of our core contributions to the World Bank and the Asian Development Bank, with a focus on green economic growth and investment climate, recognising that concessionary instruments will become the leading mechanisms to fund Nepal’s development. The UK also works in partnership with Nepal to achieve progress on regional and cross-border development priorities, for example building regional resilience to climate change through the Climate Action for a Resilient Asia (CARA) programme and by strengthening cross-border transport, trade and energy infrastructure through the Asia Regional Trade and Connectivity Programme (ARTCP) ^{[footnote 3]}.

We work collaboratively with the UN and other development partners to Nepal, such as the US, several European countries (Germany, Switzerland, Finland and Norway), and proactive players such as Australia, Japan and South Korea, in areas of good governance, human development, and women’s rights. We ensure that the voices of Nepali citizens are heard by engaging with civil society organisations, collaborating with both local and international NGOs, civic groups, citizens networks and public platforms of change. Most importantly, our main counterpart is the Government of Nepal, prioritising our bilateral partnership at all levels of the federal structure and aligning to Nepal’s development plans.

Key programmes

Throughout its decades of development support to Nepal, the UK has delivered reforms (subsidised maternal healthcare, major public financial management improvements, investment institution building and reform, legalisation of safe abortions), economic growth (facilitating large scale FDI and creating jobs), supported Millenium Development Goal (MDG) and SDG targets (in education, health, poverty metrics, inclusion and gender) and provided humanitarian and crisis support (2015 earthquake and COVID-19).

Just in the last 5 years, the UK has supported:

• investment facilitation through the Investment Board of Nepal (IBN) resulting over US$1.5 billion FDI and opening options to export power to India
• a Supervisory Information System for the Central Bank digitising the reporting and oversight of the banking system, a critical piece of digital infrastructure
• help-seeking (legal, clinical and psycho-social) for GBV survivors and a significant drop in support for harmful social norms
• the (re)integration of over 5,000 out-of-school girls from marginalised communities
• a 67.5km high-mountain road linking Humla, the last district without road access, to Nepal’s road network, adding to over 1,160km rural roads built with UK support
• the 2021 Census including quality assurance of census instruments and independent census observation, leading to improvements in Census quality
• helping hundreds of thousand people with critical response interventions in health, water, sanitation, cash assistance and nutrition support during COVID-19

Taking our learning and reflecting on Nepal’s development trajectory, the UK in Nepal went through a prioritisation exercise for its ODA in late 2022. This agreed that we will focus on three sectoral areas (local infrastructure; security and justice; human development & social services), 3 priority ‘approaches’ (governance, inclusion and resilience), and an overarching focus on sustainable growth. These are underpinned by an ambitious evidence and learning framework. Recent programmes approved under this new framework include:

• Nepal in Business (NIB): a £36.2 million, 6-year programme generate economic growth, expand businesses, addressing income poverty in Nepal, by supporting and financing small and medium sized enterprises and improving their productivity
• Local Infrastructure Support Programme (LISP), a £90 million, 7-year programme supporting Nepal’s subnational governments to address local infrastructure needs through inclusive governance processes
• Green Growth Nepal (GGN), a £38 million, 6-year programme to help Nepal attract Foreign Direct and Climate Investments and private sector investment to resilient cities.
• Security & Justice Programme (SJP), a £35 million, 7-year programme supporting the modernisation of Nepal’s police services and building the capacities of local judicial committees and actors, including on GBV

New programmes focused on governance, human development, resilience and disaster preparedness are in development, as well as a new programme consolidating past evidence and knowledge successful workstreams.

As mentioned above, the UK in Nepal will leverage regional and global initiatives to ensure a coherent HM Government development offer to Nepal.

Financial information

Initial allocations have been set internally to deliver the priorities set out in the International Development Strategy (May 2022) and the Integrated Review Refresh 2023, based on the FCDO’s Spending Review 2021 settlement.

The department’s spending plans for the period 2022 to 2023 to 2024 to 2025 have been revisited to ensure HM Government continues to spend around 0.5% of Gross National Income (GNI) on ODA. This was in the context of the significant and unexpected costs incurred to support the people of Ukraine and Afghanistan escape oppression and conflict and find refuge in the UK, and others seeking asylum. The Government provided additional resources of £1 billion in 2022 to 2023 and £1.5 billion in 2023 to 2024 to help meet these unanticipated costs. The Government remains committed to returning ODA spending to 0.7% of GNI when the fiscal situation allows, in line with the approach confirmed by the House of Commons in July 2021.

The country development partnership summaries include the breakdown of programme budgets allocated to individual countries for 2023 to 2024 and 2024 to 2025. These allocations are indicative and subject to revision as, by its nature, the department’s work is dynamic. Programme allocations are continually reviewed to respond to changing global needs, including humanitarian crises, fluctuations in GNI and other ODA allocation decisions.

It should be noted that these figures do not reflect the full range of UK ODA spending in these individual countries as they do not include spend delivered via core contributions to multilateral organisations, or regional programmes delivered by the FCDO’s central departments. Other UK Government departments also spend a large amount of ODA overseas. Details of ODA spent by other UK government departments can be found in their Annual Report and Accounts and the Statistics for International Development.

Thematic breakdowns

Figure 1. 2022 to 2023 Provisional: Climate, Nature and Health, 44%; British Investment Partnerships, 29%; Humanitarian, 10%; Women and Girls, 6%; Other Key Themes, 11%. Figure 2. 2023 to 2024 Estimates; Climate, Nature and Health, 38%; British Investment Partnerships, 24%; Humanitarian, 8%; Women and Girls, 10%; Other Key Themes, 20%

FCDO ODA allocation

Allocated ODA budget financial year 2023 to 2024: £28.7 million.

Indicative ODA budget financial year 2024 to 2025: £66 million.

Supporting information sources

• British Embassy Kathmandu
• DevTracker
• D-portal
• FCDO Evaluation Repository

1. LDCs are low-income countries with severe structural impediments to sustainable development. They have exclusive access to international support measures in development assistance and trade, such as preferential market access, debt relief and access to development financing. Countries graduate based on a set of socioeconomic criteria, this may see a reduction in exports due the removal of concessional tariffs and can limit opportunities to access development financing (notably grants). ↩

2. The dependency ratio is a measure of the number of dependents (normally those aged zero to 14 and people over the age of 65) compared with the total population aged 15 to 64. Decreasing rates point to an increase in the share of the working age population relative to the total population, a positive driver for economic growth. ↩

3. For more, see the separate summary of FCDO’s Indo-Pacific Regional Department. ↩