Nepal-China connectivity gains traction with BRI Framework

Can Nepal overcome delays and realise development potential?

 

Kathmandu, Jan. 11

It took seven years for Nepal and China to sign the framework agreement on Belt and Road Initiative (BRI) since the two neighbours inked a Memorandum of Understanding (MoU) on it in May 2017. They signed the framework agreement in December 2024 during Nepal's Prime Minister KP Sharma Oli's visit to China.

In these seven years, Nepal witnessed the changes in the government for six times with the leadership switched between KP Sharma Oli, Sher Bahadur Deuba and Pushpa Kamal Dahal Prachanda – chairmen of the three largest parties in the country for the past two decades: CPN (UML), Nepali Congress and CPN (Maoist Centre) respectively.

The discourse on BRI changed with the changes in leadership of the government with the leftists primarily lauding the benefits from China-supported development projects, and NC and a couple of fringe parties suspecting if such investment could lead to a 'possible debt trap'.

Meanwhile, Nepal signed a US$ 500 million grant agreement with the US government's Millennium Challenge Corporation (MCC) with an aim to develop high-capacity electricity transmission line.

These two projects polarised the entire country into two factions with each supporting one against the other. The debates on MCC concluded with the federal parliament of Nepal ratifying it with a couple of 'concerns' while the arguments were pacified with the signing of the framework agreement that included 10 projects proposed by Nepal to be developed under the BRI initiative.

But Nepal doesn't have short-term and medium-term plans for the execution of the proposed projects. A senior official at the Ministry of Finance (MoF) said that although Nepal proposed the projects to China which were accepted by the latter, it has not prepared the blueprint for their development which has created confusion about the construction as well as financing modality.

However, the MoF and Ministry of Foreign Affairs (MoFA) informed that the concerned agencies have begun discussions about the development modalities of the proposed projects.

According to the agreement, there will be project-wise agreements for the financing and execution approaches. 

 

BRI framework agreement

The projects included in the framework agreement are Tokha-Chhahare tunnel, Hilsa-Simkot road, Kimathanka-Khandbari road and bridge, Jilong-Kerung-Kathmandu cross-border railway, Jilong-Kerung-Rasuwagadhi-Chilime 220 KV transmission line, Amargadhi City Hall in Dadeldhura, Madan Bhandari University, Kathmandu Scientific Centre with museum, China-Nepal Friendship Industrial Park in Damak, and Jhapa Sports and Athletic Complex.

While it took Nepal years to bring down its project list to 10 from 35 in 2017, diplomats and development experts still consider that the current list of projects is not suitable as it includes less-important ventures like city hall, science centre and sports complex.

However, cross-border railway and transmission line projects can bring a radical change in Nepal's positioning and economic growth. "Although it’s not easy to develop the cross-border infrastructure across the mighty Himalayas, we can be hopeful about it in the long run," said Leela Mani Paudyal, former Ambassador of Nepal to China and former Chief Secretary of the Government of Nepal.

He said that Nepal should adopt a policy to minimise the weaknesses and maximise the benefits from the bilateral development projects. "We need to come out of the biasedness towards particular country or ideology. What we need is development of infrastructure and to address it we must reach out to every possible partner including countries and development agencies like the World Bank (WB), Asian Development Bank (ADB) and Asian Infrastructure Investment Bank (AIIB)," said Paudyal.

According to him, the recent discourse about not accepting loans even in the development projects is against the model that is in use around the globe. "It seems that the NC is more apprehensive about obtaining loans for development projects. The NC was also behind the delay in signing the framework," said Paudyal.

He suggested that Nepal should try for investment-mix where the institutions like WB, ADB and AIIB and other multilateral partners could make consortium investment in large infrastructure projects in Nepal.

 

NC didn't cause delay

But NC leader and former Vice-Chairman of the National Planning Commission, Dr. Govinda Raj Pokhrel, said that the party didn't cause any delay in signing the agreement but it was studying the scenario to reach conclusion about the type of projects that Nepal should accept the loan for.

"We must evaluate all the projects on the basis of our national interest. In the end, we signed the agreement showing our readiness in accepting the loans," he said.

Dr. Pokhrel said that Nepal shouldn't accept any economic cooperation or project that attaches other strings with it.

The NC has been the part of all major agreements with China. While the MoU on BRI was signed in the presence of Dr. Prakash Sharan Mahat, then Foreign Minister, the framework agreement on BRI was signed in the presence of incumbent FM, Dr. Arzu Rana Deuba.

 

Need for development support

As a Least Developed Country (LDC), Nepal needs huge amounts of funds to finance its development projects including road and energy infrastructure. While it needs more than Rs. 500 billion in physical infrastructure this year alone, Nepal's federal development budget is just Rs. 352 billion.

According to a study conducted jointly by the Confederation of Nepalese Industries and Institute of Integrated Development Studies in 2019, Nepal needs to mobilise 8.47 per cent of its Gross Domestic Product to infrastructure if the country wants to achieve the growth rate of 7.5 per cent.

Dr. Pokhrel of the NC said that Nepal should obtain technological excellence, especially in agriculture, from China that has an advanced level of development in almost every field of technology. "We need to create an ecosystem of attracting Chinese investment in agricultural technology and exporting the products to the Chinese market," he maintained.

Likewise, Paudyal said that Nepal should have a workable project bank including development projects selected objectively on the basis of cost-benefit analysis basis, not on the whim of political leaders and donors. "It's up to us (the government) to decide whether a project would be developed with internal resources or grant support or loan facility. After finalising the financing model, development agencies or friendly countries can be approached for their support in the project," he said.

He is also of the view that Nepal should include strategic and game-changer projects under the BRI.

Economist and former head of the Central Department of Economics at the Tribhuvan University, Dr. Resham Thapa, suggested that Nepal should seek Chinese investment in industrial sector especially in manufacturing and service industries.

"Recent debates and doubts were partly sprouted on the confusion about the source of Chinese investment whether it's public or private. To streamline it, Nepal should sign a Bilateral Investment Promotion and Protection Agreement (BIPPA) with China," he said.

According to Dr. Thapa, Nepal should try to forge investment and technical collaboration at the provincial levels of both the countries. "India has long been applying this modality. While the things at the central level become too politicised at times, investments made at the provincial level continue to expand. So, Nepal should seek opportunity to forge collaborations at the provincial or local level," he said.

Development experts and economists suggest that Nepal should seek support from China, India or any other partner in transformative projects. For smaller projects in enterprise development, forging collaborations among the private sector businesses or associations of Nepal, India and China could be a game-changer initiative, Dr. Thapa said.

 

Cross-border connectivity

Development economists and private sector entrepreneurs maintain that cross-border connectivity should be accorded top-most priority in the bilateral cooperation between the two countries. Nepal always wanted to diversify its trade and tourism and wanted to increase the export of goods to China and welcome more Chinese tourists.

This desire rose up to the topmost agenda for the country in 2015 when India imposed border blockade at a time when Nepal was struggling to overcome the impacts of a devastating earthquake - one of the worst disasters in decades that killed about 9,000 people and damaged property worth Rs. 600 billion.

With the very desire, the government led by KP Sharma Oli then assigned the Nepali Army to open a new road track connecting Betrawati and Syaphrubensi to shorten the distance to Rasuwagadhi – a Nepal-China border point. However, Nepal's trade with China has never been smooth since then, especially the exports have been more difficult to realise .

For example, according to the statistics published by the Department of Customs of Nepal, the country imported goods worth Rs. 298.77 billion from China but it could export goods worth only 2.58 billion, thus witnessing trade deficit of Rs. 296.18 billion. China is Nepal's second largest import and fifth largest export partner.

"We need better connectivity, including roads and aviation, smooth border operation and higher tourist influx from China," President of the Nepalese Chambers of Commerce and Industry (FNCCI), Chandra Prasad Dhakal, said. "We are also working to promote bilateral trade and investment." 

 Published in The Rising Nepal daily on 12 January 2025.