Friends with benefits: Nepal successfully walks an economic tightrope between neighbors China and India

Nepal is politically divided between those want to echo its neighbors’ growth and those who are wary of falling into a debt trap

After several long years of uncertainty, Nepal and China have signed a framework agreement on cooperation under the Belt and Road Initiative (BRI) – Beijing’s grand plan to develop new trade routes connecting it with the rest of the world. It happened earlier this month during Prime Minister KP Sharma Oli’s visit to Beijing. 

In 2020, China’s government sent Nepal a draft framework agreement. Although Kathmandu had already signed a Memorandum of Understanding on the initiative in May 2017, it did not proceed with further steps.

The stated reason was the financing of the projects: China wanted to give loans, while Nepal wanted to get grants. Unspoken was Kathmandu’s caution to not upset its giant neighbor to the south, India.

Even before Oli visited China in the first week of December, there was uncertainty about what would be included in the framework agreement.

Nepal sent a draft only at the last minute. It included a clause on “assistance financing under a corporate modality,” language agreed to by both sides which took into account Beijing’s reluctance to give grants to Nepal but also explicitly avoided mentioning loans from China.

“It would have been fundamentally flawed to borrow from anyone other than China. If the conditions are bad, then it is also possible to secure grants,” Sudhir Sharma, former editor-in-chief of Nepal’s largest daily, Kantipur, said. “An aid-assistance financing model was finally agreed to, which was not mandated as either purely grants or loans. This means grants and concessional loans. Both China and Nepal demonstrated flexibility, which has prevented the agreement from being sidelined.”

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Nepal’s domestic political landscape also adds to the complexity. It currently has a coalition government led by two major parties: the leftist Nepal Communist Party (Unified Marxist Leninist, or CPN-UML), and the right-aligned Nepali Congress. These two parties are fundamentally ideologically opposed, which often complicates reaching a consensus on significant national matters such as the BRI.

The CPN-UML has been positive about the BRI from the beginning. However, the Nepali Congress has been less supportive, vocally opposing the acceptance of any loans under the initiative. Despite these differences, both leading parties ultimately agreed on the country's involvement in the BRI. Sharma called it a positive step for Nepal’s foreign policy.

“It is encouraging to see both parties standing together on foreign policy. It sends a strong message,” he said. “Now, Nepal should work to maintain relations in this manner with other countries, including India.”

Development plans

Nepal has proposed 10 projects under the BRI. The most significant ones are the Kerung-Kathmandu railway, the Tokha-Chhahare tunnel, and the Kerung-Rasuwagadhi 220 KV transmission line.

The BRI, referred to as the New Silk Road, is one of the most ambitious infrastructure projects in history. Launched in 2013 by President Xi Jinping, it was initially designed to connect East Asia and Europe through physical infrastructure. Over the years, it has expanded to include Africa, Oceania, and Latin America, broadening China’s economic and political influence.

Experts believe that implementing the BRI projects could be a game-changer for Nepal. Nepal's former ambassador to Russia Milan Tuladhar noted that mega projects under the BRI, such as railways, highways, and infrastructure development, could transform the country. According to him, China aims to expand transportation networks, including railways, to the Indian border.

“Nepal can benefit from the Trans-Himalayan Multidimensional Connectivity Network that includes infrastructure like optical fiber networks, electric power grids, and railways,” Tuladhar said. “This will help Nepal’s economy. China wants Nepal to develop and remain stable.”

Tuladhar added that China seeks to address challenges posed by the West while maintaining good relations with India. At the same time, the West is determined to counter Chinese influence, and Beijing is navigating these dynamics through cooperation with New Delhi.

India has also expressed an interest in connecting Kathmandu via railway, with the Raxaul-Kathmandu railway line currently under study. Sharma emphasized that Nepal should focus on infrastructure projects under the BRI, such as railways, roads, and hydropower.

“Now that our two neighbors are advancing in prosperity, we must carefully assess how we can benefit from this,” Sharma said. “Just as during the Malla era, Nepal can capitalize on its strategic position as a trading hub. The opportunity is here as our neighbors grow wealthier, creating a unique advantage for Nepal to seize.”

Indian and US Factors

Sino-Nepalese relations date back to 1960, but Nepal’s historical ties with Tibet go back much further. Today, the country's relations with China extend to people-to-people connections, economic partnerships, and cultural exchanges.

Nepal shares a 1,414-kilometer border with China, with 14 trading points, including major ones at Tatopani and Kerung, currently operational.

China’s investment in Nepal has sparked debates and uncertainty. After 2017, BRI projects faced several obstacles. According to Pawan Adhikari, a senior research fellow at the Center for Social Innovation and Foreign Policy, these challenges stem largely from the influence of India and the United States.

“The main reason for the lack of BRI implementation is geopolitical pressure. Both India and the US aim to reduce China’s influence in Nepal,” Adhikari said. “As Nepal strengthens its relationship with China, it must also consider the interests of other friendly nations.”

Adhikari cautioned that BRI implementation could pose challenges to Nepal’s sovereignty. However, Bishnu Rijal, a central committee member of the CPN-UML, disagreed, arguing that the country must keep all avenues open, including energy trade agreements with China.

“If Nepal does not embrace cooperation with China, it will face significant challenges and risk being left behind,” Rijal asserted.

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China’s active involvement in Nepal has become increasingly visible. Previously, Beijing refrained from commenting on the country's internal matters.

However, China has recently started speaking out on Nepal-related issues, particularly in response to US activities. In 2022, when the Millennium Challenge Corporation-Nepal Compact (MCC), a US grant project, was introduced in Nepal’s parliament, China reacted strongly. The MCC became a highly-charged geopolitical issue with both Beijing and Washington making frequent statements.

Prime Minister Oli made records of his visits to China, which outnumbered his visits to India – as highlighted by the Indian media. Likewise the Chinese media also highlighted his visit as significant. 

Senior journalist Yubaraj Ghimire insisted that Nepal is conducting independent foreign policy, saying the decision to visit a country should be autonomous, based on the demands and needs of the situation. “This reflects a positive aspect of Nepal’s diplomacy,” Ghimire said. He added Oli’s visits have been successful and demonstrate Nepal’s "pragmatic approach" to foreign relations.