When Nepal and China issued a joint statement at the end of Prime Minister KP Sharma Oli’s visit on December 3, there was nothing in it that suggested any deal regarding the Belt and Road Initiative (BRI).
But to the surprise of many, the Framework for BRI was signed early the next day, reaffirming Nepal’s commitment to implement the Chinese scheme (possibly to the displeasure of New Delhi and Washington).
Under BRI, the two countries have agreed to implement 10 projects including a cross-border railway, cross-border transmission line, roads and many other infrastructure projects.
Recall that Nepal had signed an MoU on the BRI as early as 2017, but Kathmandu’s complaint was that no project under the scheme was taken up for implementation (though China categorizes Pokhara International Airport in western Nepal as a BRI project).
The question was whether China would extend a loan on commercial terms or a grant as Nepal preferred, for BRI projects.
“Nepal had proposed ‘grant assistance financing’ modality under BRI,” a source involved in the negotiations with China told StratNewsGlobal in Kathmandu. During negotiations, the Chinese removed the word ‘grant’ and proposed the term ‘assistance financing’. Nepal was not comfortable with the idea as it also implied commercial loans.
“Then we proposed ‘aid assistance financing’ to which the Chinese side agreed,” the source said, adding that the word aid would mean grants, soft loans and technical assistance that Nepal has been receiving from multilateral donors including the World Bank and the Asian Development Bank.
Nepal’s communist parties including the ruling CPN -UML (Communist Party of Nepal-Unified Marxist Leninist) have had a soft corner for the BRI. But they are also against taking on commercial loans from Beijing. Its coalition partner the Nepali Congress (NC), has insisted on ‘grant only’ aid from Beijing. The disagreement cast a shadow over the coalition.
The NC’s insistence prevailed when Nepal proposed ‘grant assistance cooperation’ modality under BRI as Prime Minister Oli wanted to keep the coalition intact. But Beijing’s refusal to accept the ‘grant only’ proposal forced Nepal’s hand, either agree on the options of both loans and grants or give up BRI funding altogether.
“The latest agreement has paved the way for implementation of BRI projects,” the source said. “We have also set five principles on project selections to be implemented under BRI which are agreeable to Beijing.”
The five principles are Nepal’s needs and priorities be respected; the project should be environmentally sustainable, and technically, economically and financially viable; it should ensure value for money and grants or soft loans will be determined based on state priorities.
But the opening of the door for loans has pushed the NC into an uncomfortable position because it has favoured only grants. Important to note that the BRI agreement was signed when the NC leader and Foreign Minister Arzu Rana was also present in Beijing.
NC Spokesperson Prakash Sharan Mahat, who was foreign minister when Nepal first signed the BRI MoU in 2017, told StratNewsGlobal that he was not aware how this deal had been accepted.
“It may be because of the direct intervention of Prime Minister Oli,” he said. But in his view, opening the door for loans does not necessarily imply that Nepal would take loans.
“Nepal has the option to reject loans while negotiating for Chinese aid for certain projects,” Mahat said.
UML leaders also insisted that there has been no unilateral decision by Prime Minister Oli regarding the BRI deal.
“Foreign Minister Arzu representing the NC was there and negotiation took place under her leadership,” said Rajan Bhattarai, head of the UML foreign affairs department. “Everything was done based on consensus between the leadership of both ruling parties.”
In fact, leaders of both parties insist that Nepal’s priority would be receiving grant assistance.
“Nepal is not in a position to implement the project under loans. So, it is not our priority. Our capacity to take loans has been eroded because of the sluggish economy. it is not that we will never take loans for any purpose and from any country,” said Bhattarai.
In the recent years, Nepal’s public debt (domestic and external) soared sharply touching 44 percent of GDP in the first quarter of this fiscal year (2024-25) that began in mid-July, according to the Public Debt Management Office. But international agencies like the World Bank and the International Monetary Fund have been saying that Nepal is not in a situation where it could default on its loans.
Recently, the international credit rating agency Fitch, said Nepal had “Strong Debt Affordability”. It said over 40% of government debt was external and highly concessional with an average maturity of nearly 13 years and average interest of about 1%.
Sri Lanka’s situation in 2022, when the economy collapsed amid high external debt, of which a major chunk was Chinese, added to the sense of caution in Kathmandu.
Nepal’s law on public debt bars the country from taking on external loans exceeding one third of GDP, which is now 22.56 percent as of first quarter of this fiscal year. Nepal has the third largest debt liability to China after Japan and India among the bilateral donors, while almost 90% external debts are owed to the World Bank and Asian Development Bank.
Upon arrival from Beijing at the Tribhuvan International Airport on Dec 6, Prime Minister Oli said that he signed no agreement with China to take on loans. He also underscored that a separate agreement would be signed regarding the implementation of each project without mentioning whether it would be a loan or grant.
Bhattarai said China accepted most of Nepal’s recommendations regarding the BRI.
“The two countries agreed to develop connectivity projects including railway, transmission and road networks,” he said. “China also agreed to promote Nepal’s tourism in China and facilitate Nepal’s export to its market.”
What could be Oli’s next stop? Delhi? The view is Oli, by incorporating the disputed Kalapani territory into Nepal’s map in 2020, may have annoyed Delhi, resulting in no invitation to visit. In fact, UML insiders say Oli would have preferred to go to India first but after waiting four months for an invitation, he decided to make Beijing his first overseas stop, breaking tradition.
“Any foreign trip of the Prime Minister takes place when there is an invitation or when there is necessity,” said Bhattarai.
As for Oli, asked when he would visit India, he replied, “Now, it should be arranged.”
Prithvi Shrestha is the Executive Editor of Arthik Abhiyan Daily
