Nepal-China BRI Framework: What ‘Aid Assistance Financing’ Entails

Nepal and China signed a new framework agreement for implementation of BRI projects in the Himalayan nation. ETV Bharat looks at what this entails.

New Delhi: With Nepal and China signing a new Belt and Road Initiative (BRI) Framework Cooperation agreement on Wednesday based neither on grants nor on loans but on ‘aid assistance financing’, question arises as to what this entails.

The new agreement was signed during the course of Nepal Prime Minister KP Sharma Oli’s ongoing visit to China. While the Nepalese delegation was led by Oli’s economic and development advisor Yubaraj Khatiwada and Foreign Minister Arzu Rana Deuba during the negotiations, high-ranking officials of China’s Ministry of Foreign Affairs comprised the Chinese delegation.

Though Nepal and China signed the BRI framework agreement on May 12, 2017, and China forwarded the text of an implementation plan in 2019, no further progress was made mainly due to Kathmandu’s concerns over debt liabilities. Nepal had made it clear to China that it was not interested in taking commercial loans for implementing BRI projects.

The BRI is a global infrastructure development strategy adopted by the Chinese government in 2013 to invest in over 150 countries and international organisations. It is considered a centrepiece of Chinese President Xi Jinping’s foreign policy. It forms a central component of Xi’s “Major Country Diplomacy”, which calls for China to assume a greater leadership role in global affairs in accordance with its rising power and status.

Observers and sceptics, mainly from non-participant countries, including the US, interpret it as a plan for a Sino-centric international trade network. Critics also blame China for putting countries participating in the BRI under debt traps. In fact, last year, Italy became the first G7 country to pull out of the BRI. Sri Lanka, which participated in the BRI, eventually had to lease out the Hambantota port to China due to debt repayment issues.

India has opposed the BRI right from the beginning, mainly because its flagship project, the China-Pakistan Economic Corridor (CPEC), passes through Pakistan-occupied Kashmir.

Because of all these, Nepal is wary of getting trapped in unsustainable debt owed to China through BRI loans for expensive infrastructure projects. Nepal’s annual debt payments to China have already been rising rapidly over the last decade. Highly concessional terms offered by other lenders make taking on costlier Chinese commercial loans for BRI projects unappealing.

Ahead of Oli’s visit to China that started on December 2, the ruling coalition government partners – Oli’s Communist Party of Nepal-Unified Marxist Leninist (CPN-UML) and the Nepali Congress – engaged in hectic deliberations to revise the terms and conditions in the BRI implementation proposal that was forwarded by China. Eventually, the two parties came to an understanding that specific BRI projects in Nepal should be implemented based only on grants.

A four-member Task Force set up by the two parties - two from each side - revised the BRI implementation plan proposed by China and trimmed it down to specific projects. The revised plan was then sent to China for approval ahead of Oli’s visit.

This had set off speculations as to whether China would agree to Nepal’s terms and conditions which call for implementation of BRI projects through grants rather than loans. BRI projects are primarily implemented through loans, joint ventures and equity investments. However, grants also play a role in certain scenarios, albeit to a lesser extent. Grants are provided for specific purposes, usually targeting smaller-scale projects or as a diplomatic gesture.

China, after long deliberations, eventually did not accept the use of the word “grants” in the new BRI Framework Cooperation deal with Nepal. According to a report in the Kathmandu Post, the Nepali side proposed “grant financing cooperation modality”, which was amended by the Chinese side to “assistant financing modality”. Eventually, the term “aid assistance financing” was agreed upon by both parties.

According to Nihar R Nayak, Research Fellow at the Manohar Parrikar Institute of Defence Studies and Analyses and an expert on issues pertaining to Nepal, the new terminology means that it will leave space for flexibility for both sides.

“Certain projects will have more of grants and less of loans while others will have more of loans and less of grants,” Nayak told ETV Bharat. “In high risk projects where return possibility is less, grant portion will be more than the loan portion. It may be in 60:40 or 70:30 proportion.”

He said that this leaves space for both countries to decide on the mode of funding on the basis of the project.

“For example, in the case of railways, the risk will be high,” he explained. “For Nepal, the profits will be less. The funding will be high. In such a case, Nepal will expect more of grants and less of loans.”

According to Nayak, the two countries have basically adopted the India-Bhutan hydropower project funding model. Under this, India gives more of grants and less of loans to Bhutan. The loan portion need not necessarily be extended by India but can be taken by Bhutan from other financial institutions like the Asian Development Bank (ADB) or the Asian Infrastructure Investment Bank (AIIB).

Meanwhile, ahead of the signing of the BRI Framework Cooperation deal, Prime Minister Oli called on President Xi on Tuesday during the course of which the latter pledged China’s efforts to advance its strategic partnership of cooperation with Nepal.

According to a report in the Global Times, Xi said that China respects Nepal’s choice to follow a development path suited to its national conditions. He stated that China supports Nepal in safeguarding its national independence, sovereignty and territorial integrity.

“China is ready to work with Nepal to consolidate strategic mutual trust and provide staunch support on issues concerning each other’s core interests,” the report quoted Xi as saying.