Striking a balance between two neighbors

Prime Minister KP Oli’s China visit has stirred the pot, with some experts terming it as a diplomatic maneuver aimed at counterbalancing India and fueling speculations that India was not too keen on extending an official invitation to him. Additionally, the two major ruling coalition parties, the CPN-UML and the NC, have differing interpretations of the Belt and Road Initiative (BRI), such as viewing it as grants versus aid. These differences, along with their political and ideological leanings toward either China or India, have sent out mixed signals regarding Nepal’s relationships with its neighbors.

Many Indian politicians, media outlets and think tanks view the BRI as China’s key foreign policy tool aimed at influencing the signatory countries' domestic and foreign policies. For instance, a recent heated debate in the Indian Parliament focused on the perceived shift of India’s neighbors toward China and India’s failure to build trust with them. India’s Member of Parliament Manish Tewari questioned the efficacy of Prime Minister Narendra Modi’s ‘Neighborhood First’ policy even as Nepal and China signed on the BRI cooperation framework during Prime Minister Oli’s recent visit to China, triggering considerable debate in India’s nationalistic media.

India’s relationship with Bangladesh and other neighbours is on a rough patch. Bangladesh’s popular movement, which toppled the regime of Prime Minister Sheikh Hasina in August this year, has created friction between the two countries, with Bangladesh asking India to extradite the former PM. Sri Lanka, the Maldives and Nepal have tried to strengthen their relations with China often creating friction with India. In South Asia, critics also argue that the appeal of BRI funding and other assistance to India’s neighbours is less about China’s efforts to contain India, which accounts for almost 80 percent of the region’s economy, and more about these countries’ desire to counterbalance or challenge India’s Monroe Doctrine-style regional dominance.

Global politics also plays a significant role in South Asian geopolitics. Military conflicts like the Russia-Ukraine war and trade tensions, such as the US chip embargo and reciprocal tariffs coming from the US and China, underscore the renewed great power competition involving the US, a rising China, and a revisionism ambition of Russia. India’s fast economic growth, coupled with rising global influence, is also reshaping alliances and the world’s political and economic orders. 

In this context, the Quadrilateral Security Dialogue (the Quad) comprising India, Australia, Japan and the US seeks to counter China’s growing military and political influence in the Indo-Pacific. Recently, the global economic landscape is shifting in India’s favour, with 69 percent of companies, up from 55 percent in 2022, planning to leave China, and 39 percent favouring relocation to the Indian subcontinent, according to Fortune Magazine.

India’s reservation toward Nepal’s closeness with China through the BRI also emanates from the fact that in global power competition, superpowers and rising powers are likely to use military, economic, diplomatic, intelligence and technological tools to influence other states and reshape the world order by leveraging foreign assistance in all forms—military, economic and development. For example, China has invested billions in African infrastructure projects and established a military base in Djibouti, with plans for another in Gabon. A key lesson for Nepal is to carefully assess each form of assistance or alliance, accepting or rejecting them based on national interests.

At the technical level, Nepal should be aware of risks and opportunities associated with BRI fundings under which China has provided an estimated $1.34trn to more than 20,000 projects based in 165 countries in the form of grants and loans. 

The top three recipients of BRI funding over the past two decades have been Russia, Venezuela and Pakistan. China has provided nearly $170bn in development loans to Russia for multi-sector projects, including industry, mining and construction, budgetary assistance to Venezuela for stabilizing the economy and funding of more than $67bn to Pakistan (almost 20 percent of its GDP) whose economy continues to struggle.

Chinese loans have been a major source of sovereign default risk in countries like Pakistan, Sri Lanka, Ghana and Zambia, prompting some to label it as China’s ‘debt-trap diplomacy’. According to World Bank estimates, in 2022, one-third of debt service payments by the 74 poorest countries in the world were owed to China, with many borrowers unable to repay. This has led Beijing to reduce spending on infrastructure projects under the BRI and focus more on rescuing countries in financial distress to help them repay their loans. China is also increasingly focusing on smaller-scale strategic projects, such as green technologies, political party training and cultural exchanges.

The key question is not whether to accept BRI funding, but to assess whether proposed projects are financially and technically viable and offer a high rate of return. Fitch's credit rating recently highlighted Nepal’s strong debt affordability, with more than 40 percent of government debt being external and highly concessional. This suggests that accepting BRI loans is less challenging for Nepal than for countries like Sri Lanka or Pakistan. However, the projects must be transformative for Nepal’s development; otherwise, they risk becoming ‘white elephant’ projects.

China has recently been scaling back funding for large-scale projects, making it increasingly difficult to secure substantial grants. The challenge for Nepal now lies in its ability to develop projects with high rates of return and secure adequate fundings. Otherwise, submitting a list of projects without concrete funding agreements would amount to little more than a symbolic gesture aimed at counterbalancing India.

Most importantly, Nepal should prioritize what is beneficial for the nation while improving its communication of priorities. Nepal must clearly explain why development assistance from its neighbors, including BRI, is not only crucial for its own economic growth but also contributes to regional and global economic integration. This can be achieved by dispelling common myths, addressing information gaps and building trust with both India and China. Countries like Singapore and Mongolia have successfully crafted foreign policies that serve their national interests by earning the trust and confidence of rival powers. 

At the same time, Nepal should adopt a balanced approach, maintaining strong ties with both neighbors to secure financial support for infrastructure and development projects, without becoming overly reliant on large loans from either country. Such a strategy would encourage healthy competition between the two regional powers, enabling Nepal to negotiate more favorable terms for its development. As long as Nepal clearly communicates to both India and China that accepting BRI promotes Nepal’s stability, growth and prosperity, maintaining close economic ties with China may not be as sensitive an issue for India as often perceived.

Given a divided national political landscape, Nepal needs a consensus on how to handle foreign development assistance and decide which projects to accept or reject. While the US Millennium Challenge Corporation (MCC) funding sparked political division, it also led to a more open debate. In contrast, discussions on the BRI have been less transparent, with limited public information, making the call for parliamentary debate and oversight both valid and reasonable.

Most importantly, a national consensus is crucial on the principles for accepting foreign assistance, including inclusion (with civil society participation), transparency (openness about projects and funding), parliamentary oversight (for broader legitimacy) and honest communication with donors on Nepal’s approach and position. While parliamentary approval for each foreign funded project may not be necessary, it is essential for larger projects like the BRI or the MCC Compact.

The author is a member of the board of directors at the Institute of Foreign Affairs,Nepal. Views are personal