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What kind of financial help are we getting from China?

Kamal Dev Bhattarai

Kamal Dev Bhattarai

What kind of financial help are we getting from China?

On each of the nine projects Nepal has shortlisted under the BRI, it has to negotiate loans with Chinese banks

Chinese Foreign Minister Wang Yi arrives in Kathmandu on March 25 on a three-day visit, with project-selection under the Belt and Road Initiative (BRI) among his top agendas. 

But with the Nepali side unprepared, the visit, however, is unlikely to be fruitful on the BRI front. Discussions are underway to forge an understanding for its implementation. But even such an understanding does not guarantee selection and implementation of specific projects.

A senior foreign ministry official requesting anonymity told ApEx that the ball is in Nepal’s court. 

“First, we have to identify the projects. Then we have to conduct feasibility studies and prepare detailed project reports (DPRs) before proposing them to China. If the Chinese side agrees to our proposals, negotiations on investment modality can begin,” says the official who is also involved in bilateral negotiations.

On each of the nine projects Nepal has shortlisted under the BRI, it has to negotiate loans with Chinese banks—not the Chinese government. (But the Chinese government can instruct those banks to offer loans on lower interests or even, in rare cases, interest-free.)

“There is a misconception here, even among our top politicians, that once we make a list of projects, the Chinese will do the rest. That is not so,” says the official. 

According to him, the BRI is a broad program, but in Nepal, it is often—and wrongly—thought of as synonymous with specific development projects.

In the past five years since the signing of the BRI framework, negotiations between the two sides have focused on preparing legal documents. The only other achievement in this period was the inclusion of Nepal-China Trans-Himalayan Multi-Dimensional Connectivity Network, including a cross-border railway, in the joint communique of the second BRI conference in 2019. 

“So far, we have focused on the blueprint and legal documents. We are yet to enter real negotiations on specific projects,” says the official. 

The BRI is basically about taking loans from Chinese banks to build infrastructure. But Nepali leaders who are in conversation with Chinese leaders have been emphasizing grants for the BRI projects. For instance, in 2018, the KP Sharma Oli-led government negotiated with the Chinese on the Keyrung-Kathmandu railway. The Oli government reportedly told the Chinese side to provide a grant for the railway project. 

“China is not ready to build such a big project on grant-basis as it entails a big financial commitment,” says the government official. 

Prakash Saran Mahat, former foreign minister who signed the BRI framework, says Nepal plans to mainly improve road connectivity with the Chinese money. 

“We cannot afford projects under commercial loans. We should thus emphasize grants and soft loans,” he says. 

There was no discussion on investment modality when the framework agreement was signed. However, global trends suggest grants under the BRI projects are hard to come by.

“You have to keep in mind that the BRI projects in Africa, Latin America and Southeast Asia were built with loans from the Exim Bank of China, the China Development Bank, and other Chinese banks,” says the government official. 

According to a report prepared by AidData, an international research and innovation lab, China Eximbank and China Development Bank led a major expansion in overseas lending in the pre-BRI era. 

“However, the country’s state-owned commercial banks—including Bank of China, the Industrial and Commercial Bank of China, and China Construction Bank—have played an increasingly important role during the BRI era. Their overseas lending activities increased five-fold during the first five years of BRI implementation,” says the report.

The specifics of such deals are hard to find in the public domain. But government officials say loans under the BRI should not be frowned upon as we need all the money we can get to build big infrastructures and spur economic growth. In any case, they say, Nepal is already taking loans from other international financial institutions. 

“In the past, many multinational financial institutions snubbed our request for infrastructure loans. So we can use Chinese loans to build desired projects if we get the right rate,” says the official. 

For instance, Nepal has built Pokhara International Airport with a Chinese loan at two percent interest.

Officials say multinational financial institutions like the World Bank and the Asian Development Bank work in ways that are distinct from how the Chinese operate. These institutions themselves conduct feasibility studies and prepare DPR for a proposed project, and they offer loans only if they find the project feasible. On BRI projects, however, all these tasks are undertaken by the loan-recipient countries.

Over the past decade, China’s policy on loans has undergone a sea-change. Initially, they provided loans without considering the pay-back capacities of recipient countries. As a result, many countries could not pay back, resulting in what has often been portrayed in Western media as ‘debt-trap’.  

Government officials say China has learned its lesson and is now more cautious while providing loans under the BRI projects. 

“Unlike in the past, the Chinese are not pressing poor countries like Nepal to take loans for development projects. They are also asking us to consider our pay-back capacity and come up with feasible projects,” says the government official. 

Chinese loans constitute only three percent of Nepal’s total foreign loan portfolio. The Ministry of Finance seems reluctant to take out a loan under the BRI, owing to its high interest rates. This is one reason for the BRI’s slow progress in Nepal.

To move ahead, it is vital that political leadership offer policy-guidance to the bureaucracy. 

China is already providing large grants to Nepal. Officials say it is obvious to expect more grants from China, but it is better to ask for bilateral grants instead of grants under the BRI.

Suresh Chalise, a former Nepali ambassador to the US, says it is illogical to ask for a BRI grant just because we have gotten a grant under the Millennium Challenge Corporation compact. “China is already giving us other grants,” he says. 

But Kalyan Raj Sharma, a China expert, does not rule out the possibility of BRI grants. “There are many ways the two countries can cooperate financially under the BRI,” he says. 

China offers three categories of assistance to other countries—grants, interest-free loans, and concessional loans. It has also canceled debts of some hard-pressed countries.

According to a 2019 World Bank report, most Chinese loans are concessional, but with terms that may not be favorable for low income developing countries (LIDCs). Most Chinese loans to LIDCs have fixed interest rates, with a median rate of two percent, a grace period of six years, and a maturity of 20 years, according to the report.

Da Hsuan Feng of the Center for Asian Studies at the University of Texas at Dallas, says China wants prosperity for its neighbors, even the poor ones, through the BRI vehicle. 

He says the 10 ASEAN nations, especially poorer ones like Cambodia and Laos, are showing signs of economic vitality thanks to the BRI.  

“Under the BRI, China and Laos collaborated in constructing 1,000km high-speed rail from China’s Kunming to Laos’ Vientiane,” he says. “Clearly, by itself, Laos could not and would not have the financial and technological means to build this vital rail-line.”

The new railway could transform the future of this landlocked country, he says.

He says leveraging the BRI to collaborate with Nepal must be a high priority for China, just like collaborating with Laos is a high priority. “A prosperous Nepal will be a tremendous plus for China in the same way that a prosperous Laos is a plus for it,” he says.