China, Nepal and the BRI Dilemma

One major factor for the BRI that remains in limbo is the obscurity about its funding modality

Prashanti Poudyal | 14 September 2023
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Prime Minister Pushpa Kamal Dahal’s visit to China beginning September 23 has generated considerable interest as it will be a significant opportunity to strengthen Nepal-China ties. It is anticipated that the long-awaited Project Implementation Plan agreement under the Belt and Road Initiative (BRI) will remain a key item on the agenda. It has been six years since the signing of the BRI memorandum of understanding (MoU), and many wonder why a single project or provision has not been implemented yet.

Globally, BRI seems to have lost momentum as it continues to face backlash in different countries. China has attempted to address the issue by repackaging the initiative, dubbed BRI 2.0 by some. In Nepal, the ‘‘Silk Roadster’’ platform was launched in July 2023 under the same initiative, which focuses on practical cooperation and people-to-people exchanges among China and Southeast Asian and South Asian countries—marking the shift from large-scale infrastructure projects to soft arenas.

In the past few years, even as BRI lost steam, China launched quite a few initiatives—the Global Development Initiative (GDI), the Global Security Initiative (GSI) and the Global Civilisation Initiative (GCI). As of 2023, two projects under China’s Global Development Initiative have been launched: The Smiling Children Project and Support to Schools and Communities in Remote Areas for Pandemic Prevention and Green Recovery. Nepal hasn’t joined either the GCI or the GSI despite China’s persistent lobbying for it. However, a dragon boat competition held in Pokhara in June 2023 was dubbed under the GCI. China’s introduction of other initiatives, while the BRI-MoU’s implementation seems nowhere near commencement, raises concerns over the future of BRI.

The funding conundrum

One reason the BRI remains in limbo is its lack of clarity regarding its funding modality. In the MoU signed in 2017, there is no provision for the same, and no agreement has yet been reached. The BRI has a loan component, and projects are carried out with loans, not grants. According to AidData, a research lab at the College of William & Mary, Chinese loans for BRI projects typically have an interest rate of 4.2 percent with a grace period of fewer than two years and a maturity of fewer than 10 years.

In contrast, soft loans from multilateral donors, such as the World Bank and the Asian Development Bank, have a maximum interest rate of 1.3 percent and a longer repayment period. Nepal simply can’t undertake large-scale infrastructure projects with such commercial loans without a guarantee of return on investment. This should have been made clear to China before signing the MoU, but it was only after the Nepali Congress formed a government in 2021 that Nepal took a firm position.

The experiences of regional neighbours, such as Sri Lanka and Pakistan, with the BRI projects that were either indefinitely stalled or handed over on lease to the Chinese companies failing to repay the loans, served as cautionary tales for Nepal’s political leadership. Further, experts like Francis Fukuyama, among others, shed light on China’s opaque and imprudent lending processes, debt-trap diplomacy, hidden debts and other malpractices impacting the recipient countries adversely.

As the BRI’s global momentum slowed down and the narrative shifted for the worse, Nepal’s political establishment started getting cautious and even reluctant regarding the BRI’s implementation. In 2018, during the then Prime Minister KP Sharma Oli’s visit to China, Nepal had proposed 35 projects under this initiative. Upon China’s repeated insistence to reduce the number to a single digit, nine projects were subsequently proposed. However, during PM Dahal’s visit to India in June 2023, two projects proposed under BRI, namely the Tamor Hydroelectricity Project (756 megawatts) and the PhukotKarnali Hydroelectric Project (480 megawatts), were awarded to Indian companies.

Conversely, China has been portraying a more favourable image of the BRI, falsely claiming the Pokhara International Airport (PIA) a day before its inauguration as the flagship project under the BRI. Nepal’s Minister of Foreign Affairs, NP Saud, later clarified that no project had been implemented under the BRI, indicating that the PIA does not fall under the initiative.

Problems in the BRI MoU

Five years after it was signed, the full text of the BRI MoU was finally released by a Nepali news portal. A few contentious issues surfaced once the MoU was leaked, the most significant being the clause regarding the feasibility study on the Nepal-China Free Trade Agreement (FTA) and the provision of Policy Exchange. Research conducted by the Centre for Social Inclusion and Federalism on the BRI implementation’s prospects and challenges in Nepal revealed that both Nepal and China had conducted economic analyses to assess its feasibility before signing the MoU for the FTA. While the Chinese analysis concluded that Nepal would benefit from the FTA, the Nepali analysis showed the opposite. The Ministry of Industry, Commerce and Supplies had recommended that Nepal not move forward with the deal as it would lead to an exponential increase in imports, while Nepali exports would be unable to compete in the Chinese market.

Additionally, Nepal (along with other LDCs) has already been granted duty-free-quota-free access to 98 percent of China’s tariff lines, which has not been capitalised; an additional two percent access would not yield any substantial results in Nepal’s trade. The root problems are non-tariff barriers and a lack of investment in productive sectors, which FTA’s provision wouldn’t address.

The Policy Exchange provision is seen as equally problematic. While the MoU says it is intended to ‘‘carry out dialogues and exchanges in areas of major development strategies, plans and policies,’’ there is considerable ambiguity regarding what this actually entails. Given the authoritarian governance in China, such an arrangement may pave the path for China’s intrusive approach. This is problematic given China’s attempt to employ the Communist Party of China’s (CCP) party-to-party ties with Nepal’s Communist parties, expanding its influence.

For instance, in 2019, about 200 Communist party leaders were trained on “Xi Jinping Thought”, considered a blueprint for consolidating authoritarian power. Then, in early 2023, former Speaker of the House and a leader of the CPN (Maoist Centre), Agni Prasad Sapkota, led a delegation to China on a party exchange program. Furthermore, a CPN-UML delegation led by General Secretary Shankar Pokharel went on a goodwill visit to China recently. China’s consistent need to build friendly ties with Nepal’s left parties further emphasises its determination to exploit CCP’s ideological ties to flex economic and political muscle in Nepal—what China seems to call mechanisms of policy exchange.

Choose carefully

It is high time Nepal and China reevaluated the Nepal-China BRI agreement, prioritising a consensus on financing modality above all else. Equally important is reevaluating contentious provisions such as the Free Trade Agreement and Policy Exchange. Nepal, a capital-deficit nation, requires large-scale infrastructural investment, and BRI can be a good initiative to ensure the funding for such projects. Moreover, projects should be selected carefully, considering financial viability and return on investment. It is essential to ask whether Nepal requires a trans-Himalayan Rasuwagadhi-Keyrung railway, advertised as the flagship BRI project, and if so, whether Nepal has the resources to sustain it.

There could not be a better time to raise these concerns than PM Dahal’s upcoming visit to Beijing. Nepal should learn from the experiences of its regional neighbours who faced economic crises by taking up projects under unviable financing modalities and utilise this opportunity to negotiate a more favourable deal.

Poudyal is a researcher at the Centre for Social Inclusion and Federalism.

This article was originally published on The Kathmandu Post.
Views in this article are author’s own and do not necessarily reflect CGS policy.