Has Nepal reaped any benefit by protecting China's security interests and working as a natural buffer in the border area adjoining Tibet?
--BY RUPAK D SHARMA
Like many traders who import goods from or export goods to China via land, Bed Bahadur Shrestha has become accustomed to a slew of problems at the Nepal-China border crossings. These problems range from wage hike demands made by porters who load and unload goods to intermittent disruptions in movement of cargo trucks due to landslides on rough Himalayan terrain. This time another problem has cropped up and it has persisted for far too long. This has made him deeply worried.
Shrestha, who started his trading career exporting refined wheat flour to China more than two decades ago, has been importing readymade garments and shoe soles from China for the last five years. His consignments arrive in Nepal through the Tatopani-Khasa and Rasuwagadi-Kerung border crossings. Both these cross-border trading routes were sealed in December 2019 after China saw a surge in Covid-19 cases. Since then, China, Nepal's second largest trading partner, has effectively contained the spread of the deadly disease. Yet it has only allowed partial movement of cargo trucks through its border.
"Today, only around 10 trucks carrying Chinese goods enter the Nepali territory per day via Rasuwagadi, as against 60 to 70 trucks in the past, while there is virtually no cargo movement from the Tatopani border crossing," said Shrestha, a 48-year-old resident of Sindhupalchowk. This disruption in trade has reduced Nepal's imports from Rasuwagadi customs point by 76 percent to Rs 5.1 billion in the first five months of the current fiscal year, which began in mid-July. Imports from Tatopani customs point also dropped 76 percent to Rs 797.6 million in the five-month period, according to a central bank report.
Traders like Shrestha have met government officials multiple times and requested them to exert pressure on Chinese officials to bring the situation back to normal. Everytime, they are told that Chinese authorities have been informed about the issue. "But we don't know what is taking so long to resume normal operations," said Shrestha, who is also the president of Sidhupalchowk Chapter of the Federation of Nepalese Chambers of Commerce and Industry, the largest private sector lobbying body.
The conspicuous silence maintained by China has wreaked havoc on businesses of people like Shrestha.
Shrestha owns a shoe factory and must receive consignments of soles, a crucial raw material to manufacture footwear, on time. In the last one year, he has placed three separate orders from a factory in Fujian. These goods left the Chinese factory in three different containers months ago, but only to be stranded in Lhasa, Khasa and Kerung.
Shrestha has been told many times that his consignments will arrive soon. "But those assurances have never turned into reality," said Shrestha. The short supply of raw materials has compelled the factory to cut back on shoe production by more than half, hitting earnings and putting jobs at stake. Many other manufacturing units in Nepal are grappling with the same problem.
Many traders, who no longer have patience to wait for the cross-border trade routes to open, have started redirecting consignments from China to India through maritime routes before bringing them into Nepal over land. Some are even relying on air cargo service. This has raised import costs–which are generally passed on to consumers–making Chinese goods like readymade garments and shoes expensive by at least 15 percent in Nepal. A sudden jump in prices of Chinese goods has added to the burden of ordinary people, who have lost jobs or seen their incomes stagnate because of the pandemic.
Prolonged disruption in cross-border trade has had a crippling effect on Nepal's exports to China too. Nepal’s exports from the two transnational trading routes have fallen to zero in the first five months of the current fiscal year, according to the central bank report. This news comes at a time when Nepali traders are complaining about Chinese customs officials' discriminatory behaviour towards Nepali exporters. Multiple traders said it is easier for Chinese nationals to export goods from Nepal to China, whereas non-tariff barriers, such as documentation and quarantine related issues, are created at Chinese customs office when Nepali traders export goods to China. Beijing has been informed about this problem, but it has not been resolved so far.
This is not the first time China has remained indifferent to problems faced by Nepal in cross-border trade. After the devastating earthquakes of 2015 that damaged a crucial bridge in Tatopani that links Nepali and Chinese territories, China unilaterally banned movement of cargo trucks to Nepal. That was when Tatopani-Khasa was the only major cross-border trading route and the customs office at Rasuwagadi had not come into operation. Complete shutdown of the border point at that time was akin to imposing economic sanctions on Nepal. But the issue did not get much attention.
It was later learnt that China had wanted to permanently shut down the Tatopani-Khasa border crossing. Yet it could not do so due to pressure from Nepal. Trading from Tatopani-Khasa border crossing finally resumed after over four years in May 2019. But by that time the damage had been done, as millions of rupees of private investment that had gone into setting up hotels and restaurants in the border area to cater to the growing numbers of traders went bust due to lack of clients.
China has not made any official remark about its 2015 decision to shut down the Khasa border crossing, but Nepali government officials say China had expressed security concerns over the use of the route.
China has always shown interest in Nepal to protect its security interests, which include restricting movement of Tibetans into Nepal and containing anti-China activities carried out mostly by Tibetans in exile or those sympathetic to Tibetans on Nepali soil.
Tibetans started moving into Nepal after the 14th Dalai Lama fled Lhasa for India in 1959 following the annexation of Tibet by China. Today, Nepal, which shares a 1,414-km-long border with the Tibetan Autonomous Region of China, officially hosts over 20,000 Tibetan refugees, although some estimate that over 30,000 Tibetans live in Kathmandu alone. Many Tibetans also use Nepal as a transit hub before finding their way into India.
China has been particularly wary about Tibetan activities in Nepal after the March 2008 uprising in Tibet when Buddhist monks and other ethnic Tibetans clashed with Chinese security forces, leading to the deaths of dozens of people. The unrest, which took place at a time when China was about to host the Olympic Games, was the worst in Tibet in 20 years. Since then Nepal has entered into several security and intelligence-sharing pacts with China.
So far, Nepal appears to have done a good job in protecting China's security interests, as it has been swiftly suppressing Tibetan protests, ramping up checks on activities held by Tibetans in Nepal, and preventing Tibetans from gathering during occasions like the Dalai Lama's birthday. Nepal has also adopted a strict border control policy since 1989. And above all it has remained committed to 'One China Policy'.
But China wants more. This was evident ahead of Chinese President Xi Jinping's visit to Nepal in October 2019 when talks about Nepal and China signing an extradition treaty made the rounds. The plan to sign the treaty, which would have paved the way for China to take back Tibetan refugees from Nepal, did not materialise following criticisms from opposition parties and rights groups in Nepal. But both the parties were able to sign the Treaty on Mutual Legal Assistance in Criminal Matters, which allows Nepal and China to exchange criminal records, collect evidence, establish criminal connections, and deport Chinese nationals arrested in Nepal. The treaty had raised some eyebrows at that time, as it was signed when Beijing was pushing Hong Kong to pass a bill that would have allowed extraditions to mainland China, a move largely aimed at taming democratic protesters in Hong Kong. But Nepal did not wish to anger China.
Nepal, a landlocked country, has been cozying up to China after India imposed a months-long economic blockade on Nepal in 2015 after Nepal did not heed India’s calls to postpone the promulgation of the new constitution, which was supported by over 95 percent of lawmakers. The Indian sanctions were so harsh, Nepalis had to struggle to prepare meals because of a shortage of cooking gas. Many vehicles stayed off the roads due to a shortage of petrol and diesel. This not only affected commuters, but students too who had to take buses to go to school. There was also a shortage of food products and life-saving drugs, creating panic among the people. Businesses also suffered massively at that time as they could not fetch raw materials and capital goods, like machinery, while public construction projects failed to move ahead because of a shortage of construction materials. These factors tapered Nepal's economic growth to 0.6 percent that year–the lowest in 16 years. Nepal had to face this situation at a time when it was just starting to rise from the rubble of the devastating April 2015 earthquake of 7.8 in magnitude–the worst natural disaster to hit the country since 1934. This quickly generated anti-India sentiment in Nepal, which had to rely on Indian roads and ports to import almost all of the goods.
The government of that time, which was also headed by KP Sharma Oli, reacted to this situation by turning to China and signing a historic Trade and Transit Treaty in March 2016. This landmark pact provided Nepal access to four Chinese seaports in Zhanjiang (near Hong Kong), Tianjin (near Beijing), Shenzhen and Lianyungang, and three inland ports in Lanzhou, Lhasa and Shigatse. This has technically ended Nepal's reliance on India for the movement of freight to and from third countries and enabled the country to tap the central Asian markets like Kazakhstan, Kyrgyzstan and Tajikistan to secure its energy needs. But it took almost four years for the agreement to come into effect (in February 2020). "Unfortunately, we have not been able to use this facility, as no one, not even government officials, is aware of transshipment modality," said Rajan Sharrma, former president of the Nepal Freight Forwarders’ Association.
What people like Sharma, who have experience in freight shipping, can tell us for now is that trains coming from mainland China can now drop consignments bound for Nepal at the inland port in Shigatse. The cargoes are then transferred to trucks before they are ferried to Tatopani and Rasuwagadi. The entire journey, according to Sharma, takes 17 to 20 days, which is considerably less than 42 to 45 days that it takes for Chinese cargoes to arrive in the country through the maritime route via Kolkata. This is the only benefit of using this route because the cost of transporting goods via land from the Chinese mainland to the Nepal border is relatively high. It could cost up to USD 90 to move per cubic meter (CBM) of cargo from China to Nepal using trains and trucks, according to Sharma. If you use the maritime route via Kolkata to bring in the same quantity of Chinese goods, the cost could go down to USD 70 and USD 78.
Nepali traders are willing to ignore the cost factor, if there is assurance from the Chinese side on timely delivery of goods. They want this assurance because of the bitter experience. Right after the trade and transit agreement came into force, a private party from Nepal used the facility to import goods. "But the consignment, ordered during last year's Chinese New Year, recently arrived in Nepal after months of delay," said Sharma.
If delays in movement of goods become a permanent fixture, Nepal would not be able to reap much benefit from the trade and transit agreement.
China's Growing Influence
Since the time Nepal and China entered into a trade and transit agreement in 2016, Beijing’s clout has been growing in the Himalayan nation. For example, Chinese aid to Nepal has more than tripled over the years, making China the largest bilateral donor, a position previously taken up by western countries like the US and the UK. China disbursed USD 37.9 million in aid – USD 28.7 million in grants and USD 9.2 million in loans–in 2014-15. That assistance surged to USD 150.4 million – USD 106 million in grant and USD 44.4 in loan --in 2018-19, a Ministry of Finance report shows. Like many bilateral donors, China also uses a portion of the aid money to fund its pet projects in areas such as health, education and transport in northern parts of the country bordering Tibet. But it has funded transformative projects, like the Ring Road and underpass in Kathmandu, as well.
The Chinese government's interest in Nepal has been shared by its people as well. Chinese tourists, for instance, have been arriving in droves in the last few years, making China the second largest source market of foreign tourists for Nepal. The growing number of Chinese tourists in Nepal has opened up investment avenues for Chinese investors and they have cashed in on this opportunity by pumping in money to set up hotels and restaurants in popular tourist hubs of Thamel in Kathmandu and Lake Side in Pokhara.
It is true that lots of projects funded by Chinese investors in Nepal include hotels and restaurants. This sometimes raises suspicion, as Chinese nationals have been found to be using these projects as pretexts for obtaining business visas to stay in Nepal for a longer term. Nepali authorities are wary of imposters, as they are susceptible to committing crimes. In December 2019, Nepal Police arrested 122 Chinese nationals–who had entered Nepal on student and tourist visas–on suspicion of involvement in cyber and financial crime. They were later deported to China after the crime they allegedly committed could not be substantiated by Nepali authorities.
Nepal has been dealing with Chinese criminals from time to time. Yet the government is circumspect about offending Chinese nationals in general, as they have emerged as top foreign investors in Nepal–a position previously held by India. Chinese investors expressed commitment to inject Rs 25.6 billion in 177 projects in the last fiscal year. Foreign direct investment commitments made by China in that year accounted for 68 percent of the total FDI commitment. Such a huge pledge made in the year when Covid-19 pandemic had upended businesses and human lives is noteworthy. A year before that, Chinese FDI commitment stood at over Rs 47 billion, or 85 percent of the total FDI commitment, according to a report made public by the Department of Industry.
It is not known whether the Chinese investors, who have pledged to invest in Nepal, have actually brought in the money. But a cement plant funded by Chinese investors has generated quite a number of jobs and helped Nepal to become self-sufficient in production of the key construction material.
Nepal is expecting more Chinese money to flow into Nepal following its May 2017 membership of China's Belt and Road Initiative, a Beijing-led multi-trillion-dollar infrastructure project that focuses on building maritime and surface trade routes, ports, railways and energy infrastructure in Asia, Europe and Africa. Some of the projects that Nepal has lined up under this initiative are: the Kathmandu-Kerung railway, Galchi-Rasuwagadhi-Kerung 400 kV transmission line, 762 MW Tamor hydropower project, 426 MW Fukot-Karnali hydropower project, and a number of road projects, mostly in northern parts of the country. China has not made any commitment to financially support these projects, but Chinese President Xi Jinping's commitment to turn Nepal into a "land-linked country" by creating an economic corridor under the Trans-Himalayan Multi-dimensional Connectivity Network, which also includes cross-border railway project, has raised optimism in Nepal.
Is China Sincere Towards Nepal?
Nepal has responded to these Chinese overtures by sometimes going out of its way, making one wonder whether the country is China’s pawn.
In September 2018, for example, Nepal barred its army from participating in a military drill, organised by India for BIMSTEC member states, apparently at the behest of China. Later during President Xi’s 2019 visit, the government of Nepal barred Tibetan refugees living in a camp at Ekantakuna in Kathmandu valley from exiting the premises. In the same year, the government launched an investigation into three journalists of the Rastriya Samachar Samiti, the national news agency, for posting a news item about the Dalai Lama.
Lately, Nepal has dragged its feet in accepting a grant of USD 500 million from the United States stating the money is tied to the US government's Indo-Pacific Strategy, which, according to China sympathisers, was devised to counter China’s Belt and Road Initiative.
There used to be a time when China used to go unnoticed in geopolitical games. Its policy of not interfering in politics of other countries did help it to advance its commercial interests worldwide. That’s no longer the case, thanks to its economic, technological and military prowess. Today, it can be heard and does not mince words while making statements. China is likely to become more vocal in the coming days, especially in Nepal, as the US has recently introduced the Tibetan Policy and Support Act. The legislation allows the US government to fund NGOs in Tibet, to put pressure on the Nepal government to provide legal documents to exiled Tibetans living in the country, and to appoint a special coordinator to encourage the Chinese government to address the aspirations of Tibetan people with regard to their distinct historical, cultural, religious, and linguistic identity.
Tibet is a very sensitive issue for China. Entry to Tibet is still restricted for foreigners. The Chinese government thoroughly screens those visiting the region, before issuing a special entry permit. Tourists are also not allowed to roam the region on their own and must purchase a special package, like in Bhutan, in advance before embarking on the journey.
But what China should understand is that the border that Nepal shares with Tibet is not porous as the one with India. This largely minimises security threats to China. Had Nepal not been there on the map, China probably would have to deploy thousands of troops and spend heavily on military equipment to secure its border. In that sense, Nepal works as a natural buffer for China.
Nepal has always respected China's territorial integrity. But China has not reciprocated favourably. For example, during Indian Prime Minister Narendra Modi's China visit in May 2015, the two countries signed an agreement to include Lipulekh, a Himalayan pass in far-western Nepal, in the bilateral trade route between India and China. The pact was signed without consulting Nepal although Lipulekh belongs to Nepal. Nepal had then sent diplomatic notes to both India and China condemning the decision. India, as expected, did not respond as it also lays claim to the territory. But China has also remained mute on the issue despite holding discussions on it with India in 1999, 2005 and 2014. Foreign policy wonks view this silence as tacit approval given by China to India to annex Nepali territory–an indication that China could go to any extent to protect its commercial interests.
Many view China and India as staunch rivals. Yes, they seem to be, especially if you take into account the growing number of skirmishes between the border patrol forces of the two nations. But one area where their interests converge is trade. China wants to penetrate the second largest consumer market in the world to maintain its status as economic superpower, whereas India wants to emulate China's success story by grabbing a piece of the world's largest consumer market.
This is where China’s plan to extend its Qinghai-Tibet railway to Nepal's border fits in. The network of the high-elevation railway, which is sometimes referred to as an engineering marvel, has come up to Shigatse in Tibet and is soon expected to run to Kerung, located around 25 kms from Rasuwagadi in Nepal. From Kerung, the railway network will have to be extended approximately 72 kms to connect to Kathmandu. But from Kerung there is also the possibility of expanding the railway network to Raxaul in India.
Although the Kerung-Raxaul railway network is in the ideation phase, talks of linking Kathmandu and Kerung with a railway line gained momentum in the last few years. The Kerung-Kathmandu railway project is ambitious and is very difficult to build, as tracks and tunnels will have to be developed over steep terrain to push the train from an altitude of about 1,300 metres in Kathmandu to around 4,000 metres in Tibet. But even if the engineers are able to overcome the technical challenge, there are questions over whether the project would be commercially viable as Nepal’s economy and trade volume are still very small. So, China is unlikely to build the railway network unless there are assurances that the train would promote its trade with India.
Perhaps, because of this reason, China has proposed to build a 51-km highway to link Kathmandu with Rasuwagadi. An agreement to build this road, which includes a 4.17-km tunnel way, was signed by Nepal and China during Chinese President Xi’s visit to Nepal in 2019. Yet the Nepal government is pushing China hard to build the railway network, as it has captured the Nepali imagination.
A Kathmandu-Tibet railway can become a game-changer for Nepal’s budding economy, as it could attract droves of Chinese tourists, pave the way for the country to embark on a long-delayed journey of industrial development, and turn Nepal into a transit hub for India-China trade. But the possibility of the same Chinese train dumping cheap Chinese goods in Nepal cannot be ruled out. This could further erode Nepal’s competitiveness and make the country even more dependent on imports.
The pros and cons of building the railway project are a matter of serious discussion and if Nepal is able to negotiate wisely it may not have to lose much. But the crucial question is who would foot the bill of the project? So far, Nepal has asked the Chinese government to provide financial grants to build the project, which is likely to cost at least USD 3 billion–around 10 percent of Nepal’s gross domestic product. China has not agreed to this proposal, because the project is being built under the Belt and Road Initiative. Under BRI, China generally offers loans. This has raised the specter of Nepal falling into China’s debt trap like Sri Lanka and African countries.
Nepal is not saddled with Chinese debt so far. But two of the loans that Nepal has obtained from China are likely to become the cause of future headaches for the government.
The first is the loan that Nepal has obtained to purchase Chinese aircraft. Nepal’s state-owned Nepal Airlines Corporation signed a deal with AVIC International Aero-Development, a Chinese government undertaking, to purchase six aircraft–two 56-seater MA60s and four 17-seater Y12es–in November 2012. China gave one MA60 and one Y12e, valued at Rs 2.94 billion, for free. The remaining aircraft were bought for Rs 3.72 billion with a concessional loan from China’s EXIM Bank. These aircraft arrived in Nepal between 2014 and 2018. But the first planes that arrived here remained grounded for months for lack of trained pilots.
Even after the planes took to the skies, they could not be effectively put to use, as Y12e was not fit to fly to high-altitude areas like Dolpa and Manang. Many of these planes also remained confined to airport hangars for months due to unavailability of spare parts. Finally, in July 2020, the airline decided not to operate the Chinese aircraft after losses of operating the planes, including insurance costs, mounted to Rs 2 billion. It is said the insurance premium for Chinese aircraft was 35 percent more than for other aircraft.
Now, the airline company, which is struggling to survive, has to pay an eight percent annual interest on the loan it obtained from the government to purchase the Chinese aircraft, which had been likened to the ATR-72 and Twin Otter. The government, in turn, needs to pay an annual interest of 1.5 percent and a service charge of 0.4 percent to China’s EXIM Bank for the loan it arranged for the state-owned airline company, and bear the cost of fluctuations in the exchange rate.
Had China not pressurised Nepal into purchasing the aircraft, which were rejected by Bangladesh and had faced problems in Indonesia, the money–both the loan amount and debt servicing costs–could have been put to productive use, like building classrooms or health centres. The aircraft's purchase is now referred to as a classic case of geopolitical maneuvering and sheer rent seeking.
Nepal is a country with meagre financial resources. In this fiscal year, Nepal’s domestic revenue is not even enough to cover its recurrent costs, such as salaries and pensions of civil servants and grants given to provincial and local governments. If Nepal starts injecting funds into projects that do not generate meaningful returns, it will have to look for funds beyond its borders to sustain itself, which will add burden on the taxpayers of the country, where tax rates are one of the highest in South Asia. This calls for financial discipline.
Unfortunately, Nepal does not seem to have learnt the lessons and is in the process of adding another white elephant. That project is the Pokhara International Airport, which is also being built with a loan from China’s EXIM Bank.
Pokhara, the gateway to the world renowned Annapurna Trekking Circuit in western Nepal, and districts in the vicinity attracted around 400,000 international and 600,000 domestic tourists in 2018. The revenue of about Rs 30 billion it generated from tourism is approximately 10 percent of the GDP of the Gandaki Province. The province does have enormous tourism potential and lots of luxurious properties have emerged, especially in Pokhara, giving a fillip to its reputation of being a low-cost travel destination. But can Pokhara afford an international airport whose operation cost runs into millions of rupees per day? It is not known because a proper study on the flow of international passengers has not been conducted, sources at the Civil Aviation Authority of Nepal (CAAN), civil aviation regulator said on condition of anonymity.
The airport is being built by China CAMC Engineering at a cost of USD 215.96 million using concessional loans provided by China EXIM Bank. The construction of the airport began in July 2017 and is expected to be completed by July this year. The cost at which the Chinese company is building the airport is three times more than the cost of Gautam Buddha International Airport in Bhairahawa which stands at around USD 70 million.
Sri Lanka and Laos' Experience
If Pokhara airport fails to attract international travellers it will meet the fate of Sri Lanka’s Mattala Rajapaksa International Airport in Hambantota, which officially opened its doors in March 2013. The airport, built to handle one million passengers a year, was initially operating seven flights a day. But in 2014, around 3,000 flights served just 21,000 passengers, meaning each flight, on average, carried seven people, generating losses of around USD 18 million per year. Today, the airport, built at a cost of USD 209 million–of which USD 190 came in the form of loans from China–has turned into the world’s emptiest.
When the plan was mooted to build the infrastructure, Sri Lanka was desperately in need of a second international airport. But it chose the location because it was the home region of President Mahinda Rajapaksa, not because of its commercial viability. Does this ring a bell? Pokhara airport is also being built not on the basis of commercial viability but because of political pressure and demand from residents and tourism entrepreneurs of Pokhara, according to CAAN sources.
Nearby this airport in Sri Lanka, there is a deep seaport built through Chinese loan. Sri Lanka struggled to pay back the loan installments of this project as well. Eventually, Sri Lanka had to convert Chinese debt into equity and lease the USD 1.5-billion port and 15,000 acres of land around it to China Merchant Port Holdings for 99 years. The transfer of properties that took place in July 2017 has given China a strategic foothold on a territory a few hundred kilometres from India’s shores.
Nepal has not borrowed much from China at this stage, but if it decides to use Chinese debt to build grand projects like the Kathmandu-Kerung railway without doing proper homework, then the country could come under greater Chinese influence. This could turn Nepal into a satellite state of China, a moniker earned by countries like Laos and Cambodia.
The two Southeast Asian countries are now firmly under China's thumb because of their dependence on Chinese aid money and investment. These two countries, especially Cambodia, even peddle China's interests, undermining the common voice of the Association of Southeast Asian Nations (ASEAN) on maritime and territorial issues in the South China Sea, where Beijing has laid claims to parcels of land that countries like Vietnam and the Philippines say belong to them.
What's more, Laos has been ejected from Vietnam's sphere of influence and is now ensconced in China's embrace because Beijing is the largest creditor to the small landlocked country with a population of around seven million. With China's debt, Laos is building several high-ticket projects under the BRI, including the USD 6.2-billion 422-km high-speed railway that will link its capital Vientiane to the Chinese border. But Laos's lofty dreams of achieving the economic success of its neighbours Thailand and Vietnam has come at a heavy cost.
Last year, Laos's state-owned transmission company had to cede a majority stake to China Southern Power Grid Co after it could not service the debt on time. Laos's debt service obligations stood at around USD 1.2 billion in 2020, but it had less than USD 1 billion in its foreign exchange reserves. The portion of Chinese debt stood at 45 percent of Laos's GDP in 2019.
Laos's experience has once again shed light on China's "debt trap diplomacy" promoted via BRI that enables Beijing to gain strategic advantage in countries struggling to repay loans. But BRI itself is likely to come back to haunt Beijing, as it is triggering an "overseas debt crisis". In December, the Financial Times reported that lending by China Development Bank and EXIM Bank of China–two banks that provide a majority of China’s overseas development lending–fell from a peak of USD 75 billion in 2016 to just USD 4 billion in 2019, an indication that BRI projects are suffering worldwide. Beijing has now found "itself mired in debt renegotiations with a host of countries". At least 18 processes of debt renegotiation with China have taken place in 2020 and 12 countries were still in talks with Beijing as of the end of September 2020, covering USD 28 billion in Chinese loans, according to a report by Rhodium Group, a consultancy. This is what happens when projects are funded without assessing debt sustainability.
As of now, Nepal's debt sustainability capacity appears to be robust as it has not defaulted on foreign loans. But its debt-GDP ratio has widened from 30.1 percent in 2017-18 to 37.7 percent in 2019-20. This ratio is not alarming. But a debt of an additional few hundred billion rupees could substantially widen this ratio, as the size of Nepal's GDP is not very big. So, Nepal should not be tempted to build unnecessary projects with Chinese money if they do not generate growth dividends. Instead, it should focus on advancing its trade relations with China by improving the condition of existing infrastructure. This could help Nepal to export more, embark on the much-needed journey of industrial development, create ample jobs and bridge the widening trade deficit with China.
Worrying Trading Relations
Nepal's trading relations with China date back to the middle of the seventh century, though some say it stretches back to the fifth century. But it was only in 1956 that Nepal and China formally signed a comprehensive treaty of friendship to foster economic and trade relations.
In the 1950s and 1960s, Nepal used to export food items, like rice, wheat, sugar, tea and chilies; horses, dogs, skins, hides, herbs; and commodities like batteries, shoes, matches and cigarettes, mostly imported from India. In return, Nepal used to import wool, salt, sheep, goats, horses, fur, blankets, yak tails, herbs, petrol and kerosene, according to an article published in The Economic Weekly in April 1962.
Nepal generated Rs 1.2 million from exports of goods to Tibet in fiscal year 1958-59, which grew by a moderate eight percent in 1959-60 to Rs 1.3 million. Nepal's import bill, on the other hand, stood at Rs 1.5 million in 1958-59 and surged by 87 percent to Rs 2.8 million in 1959-60. Imports almost doubled in 1959-60 as Tibetans fleeing China, following the Dalai Lama's exit, brought in food and other materials with them, said The Economic Weekly article.
Since that time, Nepal-China trade has ballooned to over Rs 200 billion per annum. But this bilateral trade is heavily skewed towards China. Nepal generated Rs 1.1 billion in exports revenue from China in the last fiscal year and ended up footing an import bill of Rs 181.9 billion. In other words, Nepal imported Rs 165 worth of goods from China for every rupee of goods that it exported in that year.
Nepal has made China aware of this issue during bilateral meetings. Beijing, in turn, has always responded saying it would take positive measures to facilitate Nepal’s export to China. But it has not taken meaningful steps to resolve this issue.
Like any other country in the world Nepal is eying China, as it is the world's largest market with a population of 1.4 billion. If China can provide concessions for entry of Nepali goods to its market, Nepal's foreign trade would receive a much-needed shot in the arm, helping Nepal to maximise its foreign currency earnings and attain higher growth.
But whenever Nepal raises the issue of concession and special treatment during bilateral meetings, Beijing points to the list of 8,030 items that enjoy duty-free, quota-free entry into China. This list, however, was not developed especially for Nepal and applies to all least developed countries in the world. Worse, most of the items included in the list are not produced in Nepal and neither are they likely to be produced in the near future.
Nepal has since requested Beijing to be more realistic and handed over a list of 512 items that Nepal can produce and export to China. Instead, China has handed over another list of 188 items, which, it claims, have great potential in its market. Nepalis view this uncompromising approach as an indication that it is not sincere in bridging the ballooning trade deficit or advancing trading relations with Nepal.
This indifferent attitude, coupled with problems faced by Nepali traders at border crossings, prompted Commerce Minister Lekhraj Bhatta to publicly state that a review of Nepal-China trade relations is necessary.
China is a country, which prevented Nepal's state-owned carrier, Nepal Airlines Corporation, from flying its aircraft to its territory for years despite a sharp jump in arrivals of Chinese tourists in Nepal. All the while its airline companies operated several flights a day to Kathmandu raking in billions of rupees. A similar delay is now being seen in the export of Nepali citrus fruits to China, though the matter featured in a joint statement signed between the two countries during President Xi's 2019 visit to Nepal.
This attitude is not expected from a nation which calls Nepal its "friend" and wishes to transform the Himalayan country into a land-linked nation. This raises the question: What benefit has Nepal reaped by protecting China's security interests and working as a natural buffer in the border area adjoining Tibet?
The rise of China has been extraordinary. Perhaps, it would not have been able to attain this success had it not gained access to American, European and Asian markets. And a rich China has served the world's interests as well, as poverty-stricken countries tend to be unstable, creating a breeding ground for conflicts, which creates a problem for the entire world. China should understand that a prosperous Nepal, and more importantly a prosperous neighbour, would create a win-win situation for both the countries. (With inputs from Madan Lamsal)