18th June 2024 NIICE Commentary 9258
Shubheksha Acharya

The Belt and Road Initiative (BRI), launched over a decade ago by China in 2013, is a development strategy that proposes to enhance global connectivity through large-scale infrastructure projects. At present, approximately 149 countries, including Nepal, have signed agreements to participate in the BRI. The BRI includes two main components, the Silk Road Economic Belt and the 21st Century Maritime Silk Road, which spans across Asia, Europe, and Africa. The total cost of the investments is estimated at 1 trillion US dollars for developing transport, energy, and communication networks.

Benefits of BRI for China

One of the huge advantages for China in setting up the BRI is that BRI-compatible debt accounts for the use of the yuan. By boosting trade and investment via the BRI, China wants participating countries to use the yuan and not rely on the dollar for trade. It is facilitated by bilateral currency swap agreements and enables the financing of BRI projects in yuan. In turn, China is rapidly gaining more global acceptance as its currency, and more nations are starting to include the yuan in their reserves. This is beneficial for bringing stability to China’s economy and increasing its say in world trade and other monetary policies.

Why Are Countries Withholding Support for BRI?

The main worry for countries with China’s BRI is that the countries involved could end up with a huge debt bill due to the Chinese loan, which has higher interest rates charges and a strict repayment schedule. If these projects do not earn enough economic returns, borrowing countries may have more difficulty repaying the loans, and some may eventually fall into a debt trap. The ambitious project has met several other concerns, including environmental protests, Chinese strategic expansion, and opaque loan terms.

Projects Under the BRI in Nepal

As for Nepal, the visit of then-Prime Minister K.P. Sharma Oli to Beijing in 2016 resulted in a joint statement that included commitments to promote significant projects under the Belt and Road Initiative (BRI). However, it wasn’t until 12 May 2017 that Nepal officially joined China’s BRI initiative under the leadership of Prime Minister Pushpa Kamal Dahal to seek infrastructure investments. This was followed by the signing of the Memorandum of Understanding (MOU) between the countries. The main motive for Nepal to join the initiative was to improve regional connectivity infrastructure and cut its dependence on India, particularly highlighted after the 2015 economic blockade imposed by the latter.

China proposes that BRI projects in Nepal transform the country into a “land-linked” country, enhancing regional and cross-border connectivity and increasing the flow of trade and tourism. Since most imports in Nepal come through land or sea (via transit in India), the infrastructure development projects provide alternative routes through China (railway or road). One significant step toward this transformation occurred in 2020 when Nepal and China finalized the Protocol to Agreement on Transit Transport, granting Nepal access to seven Chinese maritime ports, which include four seaports and three land ports for third-country trade. These projects will give the people of Nepal direct access to Chinese markets and enhance export opportunities for Nepali goods.

During President Xi Jinping’s visit to Nepal in October 2019, several significant agreements and projects were emphasized, like the Trans-Himalayan Multi-Dimensional Connectivity Network. Under the Joint Implementation Mechanism (JIM), cooperation in the energy sector was prioritized, especially in hydropower and renewable energy.

One of the key projects is the Kathmandu-Kerung railway, which, if built, would connect Nepal with China’s Tibetan region. It is estimated that the proposed railway line would require an investment of approximately US $8 billion, representing more than a fourth of Nepal’s total GDP. However, in 2023, Nepal’s former Foreign Minister, NP Saud emphasized that even though Nepal officially joined BRI in 2017, the construction of the projects has yet to be implemented in Nepal.

Controversies Surrounding the Belt and Road Initiative (BRI) in Nepal

In 2017, Nepal initially identified 35 projects to be carried out. However, the number of projects was streamlined to nine, excluding the Pokhara airport from the final list. Controversies regarding the BRI projects emerged when the Chinese embassy in Kathmandu labelled the Pokhara airport a flagship BRI project, sparking media inquiries. Although the airport was not originally designated as a component of the BRI, placing Nepal in a dilemma. Furthermore, the need for more transparency surrounding the BRI’s funding mechanism is one of the primary causes of the initiative’s slow growth in Nepal. There was a need for clarity since the MOU did not identify financial arrangements.

China’s Concerns Regarding Millennium Challenge Corporation (MCC) in Nepal

China is concerned about the delay in launching its projects under the BRI in Nepal. This worry has increased since Nepal signed a new US-funded initiative called the Millennium Challenge Corporation (MCC) in September 2017. China had also opposed U.S. involvement in Nepal, even running a social media campaign against the MCC. However, Nepal’s parliament eventually approved the MCC with a solid two-thirds majority, which was a setback for China politically and strategically.

Status of the Belt and Road Initiative (BRI) in Nepal

In September 2023, after the controversy regarding the Pokhara airport, Pushpa Kamal Dahal travelled to Beijing to meet with the Chinese President and other officials. During the visit, both countries pledged to accelerate the implementation of the BRI in Nepal, and a total of twelve agreements were signed during the talks. However, in the meeting, Nepal’s primary concerns regarding the Pokhara International Airport were not addressed.

For the construction of the Pokhara International Airport, the Exim Bank of China had agreed to provide 25 per cent of the loan interest-free, while the remaining amount would have an interest rate of 2 per cent per annum with a payback period of 20 years. People in Nepal had anticipated that the Prime Minister would discuss waiving the interest rate and converting the loan for the airport into a grant during the visit. Nonetheless, no positive response was received from either side.

Conclusion

There have been various controversies and challenges that have surrounded Nepal’s BRI participation, such as project delays, financial transparency concerns, and disputes over project inclusion, exemplified by the Pokhara International Airport controversy. Also, the people of Nepal have expressed deep dissatisfaction regarding Nepal’s involvement in BRI and how it may lead to a debt trap.

Moreover, Nepal’s parallel engagement with the MCC has sparked geopolitical tensions, with China expressing concerns over perceived U.S. strategic influence. Despite these complexities, BRI offers Nepal several benefits, such as good infrastructure, increased connectivity, tourism, trade, and overall economic growth. In the coming days, clear and transparent communication, enhanced financial terms, and strategic alignment with national development priorities will be essential for Nepal.

Shubheksha Acharya is a Research Intern at NIICE and she is currently pursuing her BA. in Economics (Hons.) from Christ University, India.