Decoding China’s BRI Agreement with Nepal

The Belt and Road Initiative (BRI) of China is its global endeavour that aims at promoting connectivity through the development of infrastructure facilities in different corners of the world, including in Asia, Africa, and Europe. In South Asia, Nepal signed a Memorandum of Understanding (MOU) with China in 2017, but then none of China’s projects could be launched in the country under the BRI. In an important development, however, the present government of Nepal under Prime Minister KP Sharma Oli signed the BRI agreement to implement BRI projects in the country.

In the course of signing the agreement for the implementation of BRI projects, Nepal and China identified ten projects to enhance infrastructure and connectivity needed for the development of Nepal. Such projects include the Tokha-Chhahare Tunnel, Hilsa-Simkot Road, Kimathanka-Khandbari Road and Bridge, Geelong-Kerung-Kathmandu Transborder Railway, Geelong-Kerung-Chilme 220 kV Cross-Border Transmission Line, Madan Bhandari University, Kathmandu Scientific Center and Science Museum, China-Nepal Industrial Friendship Park in Damak, Jhapa, Sports Academy in Damak, and Amargadhi City Hall in Dadeldhura.

The nation is widely divided regarding Prime Minister Oli’s move of signing the agreement for implementing the BRI projects in Nepal. Some people knowingly or unknowingly supported this move as they have a feeling that the implementation of projects under the BRI would generate opportunities for the development of infrastructure and cross-border trade between the two countries. They also think that this endeavour will not only help reduce the transport cost in trade between the two countries but also help build human capital because there are certain projects related to educational and cultural development in Nepal.

Among those who supported the framework agreement is Gagan Thapa, one of the prominent leaders of the Nepali Congress. He said that the BRI agreement was in Nepal’s larger national interest and that it would help develop infrastructure and bring about economic development in the country. In almost the same tone, Dr. Arzu Rana Deuba, Nepal’s Foreign Minister, said that if Nepal does not want to take loans under the BRI agreement, it will not be forced to do so. Furthermore, Prime Minister KP Sharma opined that the loan component in the BRI agreement was not even considered.

However, in the 12-point agreement on the BRI that Nepal signed with China, there is ambiguity surrounding “aid assistance financing,” which does not rule out the possibility of a loan component in BRI projects. The general notion that prevails in the country is that the language in the agreement is vague and also that there could be potential hidden costs involved in the projects under BRI. Because of the lack of transparency in the agreement, it is feared that the projects under BRI in Nepal could prove to be white elephants in Nepal in the same way as the Gwadar Port in Pakistan and Hambantota Port in Sri Lanka, which could be more a liability rather than an asset. In such a situation, the country could fall into a debt trap if some of the projects under the BRI are implemented.

Certain intellectuals in the country are also concerned about the way the BRI projects were selected for implementation in Nepal. Initially, Nepal had proposed twelve projects, but then two projects—one the Kathmandu-Hetauda Tunnel and the other Kathmandu Valley Transmission Line—were dropped in the course of the negotiation process.

In the past, Nepal does not seem to be comfortable with its deal with China. In the wake of the inauguration of Pokhara International Airport on January 1, 2023, China declared that the airport was part of the BRI. But soon afterward, Nepal refuted this assertion and made it clear that the construction of the airport had begun much before the BRI agreement in 2017, and it was not a part of BRI.

In certain quarters, it is questioned why the Nepali Congress, the largest political party in the country, which was outrightly against taking loans under the BRI agreement with China, all of a sudden changed its mind and became ready to accept “aid assistance financing,” perhaps knowing it well that “aid assistance financing” does not necessarily rule out the possibility of loans in BRI projects to be implemented in Nepal.

At one time, the Nepali Congress viewed that the debt burden of the country is already too high and, therefore, there was no rationale as such in accepting loans for the projects under BRI. So much so that Sher Bahadur Deuba, former Prime Minister and now President of the Nepali Congress, is on the record to have said in 2022 that his party was in no mood to accept loans for the implementation of BRI projects.

Govind Raj Pokhrel, former chairperson of Nepal’s National Planning Commission, therefore criticized the government for deviating from its earlier stance of opposing loans for the BRI projects. Another prominent figure, Rameshwar Khanal, chair of the Economic Reform Commission, also echoed that “aid assistance” encompasses both grants and loans and, therefore, the projects with questionable economic viability could impose significant financial burdens on Nepal.

Considering China’s implementation of projects under the BRI at the international level, it becomes quite clear that it has, in most cases, created “debt traps” simply because the participating countries were burdened with loans tied to economically unfeasible ventures. Learning lessons, Nepal at this stage needs to be careful in the selection of projects and financing arrangements.

Though the BRI offers Nepal certain opportunities to modernize its infrastructural facilities by strengthening its economic relations with China, it poses challenges that cannot be overlooked. What is required for Nepal at this stage is to prioritize transparency, focus on grant-based financing, and remain committed to its financial sovereignty while implementing projects under the BRI with China. The success of Nepal’s engagement with the BRI depends on its ability to balance national interests with the opportunities and risks presented by this ambitious global initiative.

(The paper is the author’s individual scholastic articulation. The author certifies that the article/paper is original in content, unpublished and it has not been submitted for publication/web upload elsewhere, and that the facts and figures quoted are duly referenced, as needed, and are believed to be correct). (The paper does not necessarily represent the organisational stance... More >>