China’s BRI rattles Nepal’s ruling coalition

China’s Belt and Road Initiative (BRI) has once again unsettled Nepal’s coalition government, formed in July. Prime Minister KP Sharma Oli is preparing for an official visit to China, but two key coalition partners—the CPN-UML and the Nepali Congress (NC)—remain divided on advancing BRI projects. While Oli, who leads the UML, advocates for BRI projects, the NC opposes taking loans under BRI, fearing it could lead Nepal into debt.

Since 2022, the NC has consistently communicated its opposition to financing BRI projects through loans, a stance championed by NC President Sher Bahadur Deuba during his tenure as prime minister. Conversely, the UML and other leftist factions argue that Nepal should make headway on BRI to balance its acceptance of the US-backed Millennium Challenge Corporation (MCC) and to maintain geopolitical equilibrium.

To reconcile these differences, Prime Minister Oli is negotiating with the NC. Currently, there are three major issues regarding BRI. First is the signing of the BRI implementation plan, which was drafted during former Prime Minister Pushpa Kamal Dahal’s visit to China in September last year.. Second, although Nepal has proposed four projects under BRI, the coalition partners have yet to agree on an investment model. Third, Nepal has requested China to waive the loan for constructing the Pokhara International Airport, where alleged corruption in the airport's construction has also become a point of contention.

To date, Nepal has only signed a BRI framework agreement in 2017, outlining general directions for the initiative. However, debates have since persisted, particularly around China’s claim that certain infrastructure projects, like the Pokhara airport, are part of BRI, a claim rejected by Dahal’s administration. Additionally, Nepal wants Chinese grants for BRI projects, but China’s official position states that BRI funding only involves loans, not grants, facilitated by the Chinese government. Nepal has proposed that, if loans are necessary, the interest rates should align with those of the World Bank and other international lenders.

The 2017 BRI agreement outlines cooperation in policy exchange, connectivity, trade, financial integration and people-to-people interactions. Although the agreement allows for flexibility in cooperation areas, the debate in Nepal has focused largely on infrastructure and financial arrangements.

A recent 2023 Chinese white paper describes BRI as a joint venture rather than a form of foreign aid, emphasizing collaborative development. “The principle of extensive consultation signifies that the BRI is not a solo endeavor by China, but a collaborative effort involving all stakeholders. The principle of joint contribution highlights that the BRI is not one of China’s international aid programs or a geopolitical tool, but a collaborative effort for shared development.” 

According to the  MoU  signed in 2017, , the BRI does not include grants and primarily involves loans, with a possible contribution from Nepal. Nevertheless, the framework agreement does leave room for mutual agreements on funding sources.

The document states: “Adaptation of appropriate modes of cooperation for mutual benefit to support development and implementation of major programs in the BRI and provisions of investment, financing and technological support for these programs through mutually agreed sources of funds, and strengthening of exchange and cooperation to ensure program’s sustainability and safety.” 

There is also contention regarding China’s integration of numerous activities under the BRI umbrella. However, the 2017 framework does explicitly include areas like cultural exchange, media, health, tourism, agriculture, parliamentary visits and cross-border exchanges—reflecting the current scope of China’s involvement in Nepal. Thus, while BRI has become a significant component of bilateral cooperation, other forms of collaboration can still occur outside BRI’s framework.

Comparing China’s current engagement with the BRI document, there is a common ground between the two countries. In that sense, it seems that Nepal is already a part of BRI and scores of programs are in progress under the BRI. But it does not mean that bilateral cooperation can happen only under the BRI. The document has clearly mentioned that even if the MoU signed in 2017 is terminated, it will not affect any ongoing projects between two countries.

As for the BRI implementation plan and project selection, officials indicate that these steps primarily signify another principle agreement, not one that includes financing details or loan agreements. A senior UML leader said, “It’s similar to the 2017 MoU, without raising the loan concerns voiced by the Nepali Congress.” Although a final investment structure may not be concluded during Oli’s visit, there could be a consensus to include specific projects under BRI, though the NC may resist finalizing these agreements.

The China factor is a sensitive issue that risks widening the rift between NC and UML leaders. Oli is actively engaging with NC and Foreign Minister Arzu Rana Deuba to manage these differences. Tensions between the NC and China have escalated recently, driven by the NC’s stance on alleged border encroachments in Humla and its critical position on BRI. Additionally, external pressures may be influencing the NC to limit Nepal’s engagement with China, complicating the situation further. NC leaders have openly stated that BRI should also  follow the model of MCC, which involves primarily US grants with minimal Nepali investment.