Nepal’s economic woes, following Sri Lanka’s crisis, turn up the heat on China’s belt and road loans

Critics warn that Nepal risks being another indebted country facing economic ruin if it accepts loans from China, in the wake of the Sri Lanka’s debt troubles
In Nepal, the Chinese infrastructure initiative is increasingly seen in the context of US-China rivalry

Kamala Thiagarajan

Published: 3:30am, 19 Apr 2022

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After Pakistan and Sri Lanka, Nepal is adding to the political turmoil in Asia. The country has been forced to restrict its imports of luxury items including gold, cars and cosmetics after foreign exchange reserves fell by more than 16 per cent over the seven months to the middle of February.

Adding to the troubles are the disagreements between Nepal’s finance minister and its central bank governor, which came to a head on April 8. Maha Prasad Adhikari, governor of Nepal Rastra Bank, the central bank, was suspended by the government on the charges of leaking sensitive information and failing to effectively fulfil his responsibilities. However, former finance ministers have come together to condemn the move, which they say is a smokescreen to hide the government’s inability to perform.

While some economists play down Nepal’s dwindling foreign exchange as a short-term problem, there are concerns that the issue may be conflated with a growing debt burden if it accepts Chinese loans for infrastructure projects. After all, Sri Lanka’s foreign exchange reserves have shrunk rapidly in a similar situation as it faces its worst economic crisis in decades.

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Coming under increasing scrutiny is a policy that many believe to be the epicentre of these woes. China’s flagship Belt and Road Initiative, announced in 2013, has led to greater Chinese investment in Asia. It was meant to help build infrastructure to allow developing countries to grow quickly and establish themselves as middle-income economies. It also marked China’s growing influence in the region.

In 2017, Nepal and China signed a memorandum of understanding to cooperate over the Belt and Road Initiative. Other big contracts were also signed in countries such as Sri Lanka, Cambodia, Pakistan and Malaysia.

Over the years, debate about the effectiveness of the Belt and Road Initiative has been rife. Supporters say it is a means of boosting the global economy by US$7 trillion by 2040. However, it has also come under a great deal of criticism, especially as it is seen to have triggered the so-called “debt trap diplomacy”.

The term “debt-trap diplomacy” was coined during Donald Trump’s presidency, and it marks the West’s growing unease with China’s widening sphere of influence in this region. Detractors who are deeply suspicious of China’s intentions argue that debt-trap diplomacy has the potential to put borrowing nations in a tailspin.

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They point out how these policies can even affect other nations in the region that haven’t directly borrowed from China, but must reach out in humanitarian support in times of crisis. A recent case in point is how India extended a US$1 billion credit line to crisis-hit Sri Lanka.

Belt and road spending in developing countries has raised serious concerns about how practical this initiative is and whether it is just a means of furthering China’s burgeoning influence. Borrowing too much, expanding too quickly and sinking money into unprofitable ventures, such as the building of infrastructure, is seen as the undoing of many Asian developing nations now and widely regarded as the reason behind Sri Lanka’s cascading woes.

But belt and road supporters point out that in 2017, Sri Lanka’s national debt had already crossed US$51 billion – and only 10 per cent of it was owed to China at the end of that year.

For those dead set against the Belt and Road Initiative, the story of Hambantota port has emerged as a cautionary tale. Built with US$8 million from China, the Hambantota port once held the promise of flourishing trade.

However, Sri Lanka struggled to pay off the five loans it had secured from the Exim Bank of China to construct it. In 2017, former prime minister Ranil Wickremesinghe negotiated an unusual settlement, leasing a 70 per cent stake of the port to China Merchant Port Holdings for 99 years at US$1.12 billion.

The storage yard of the Hambantota Port in Sri Lanka, seen in March 2019. Photo: Xinhua

What is clear is that China has become the world’s biggest creditor nation, exerting control over low- and middle-income nations in a stranglehold of dealings, even as they are offered up as a means of help and support. Economists are concerned that the conditions around these loans are rather secretive and lack transparency.

China now accounts for 65 per cent of bilateral debt, worth hundreds of billions of dollars across Africa, Eastern Europe, Latin America and Asia, according to the data set compiled over three years by AidData, a US research lab. There are records of 100 Chinese loan contracts extending to 24 low- and middle-income countries.

As the debate over Chinese debt rages on, there is one observation that lingers. Instead of creating interconnectivity and growth, the Belt and Road Initiative is increasingly seen as a source of US-China rivalry.

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Nepal is being viewed as a bone of contention between Chinese investments and the grants offered by the Millennium Challenge Corporation (MCC), an independent US foreign aid agency that helps developing countries alleviate poverty. In 2017, the Nepal government and the MCC agreed on a programme that included the building of roads, seen as key to furthering development in the Himalayan nation; Nepal only managed to ratify the agreement recently.

As US-China rivalries intensify and more developing countries spiral into debt defaults on Chinese loans, threatening the greater stability of the Asian region, the concerns around the belt and road only grow. Ironically, a scheme to boost global connectivity may well end up creating a rift, deepening geopolitical fault lines.

Kamala Thiagarajan is a freelance journalist based in Madurai, southern India