Wednesday, May 17, 2017

Nepal joins Belt and Road Initiative (BRI). Now what?

On 14 March, Foreign Secretary Shanker Das Bairagi and Chinese Ambassador Yu Hong signed a memorandum of understanding, in Kathmandu, on the framework agreement on China’s Belt and Road Initiative (BRI), or commonly referred to as One Belt One Road (OBOR). The primary interest in joining the new initiative is to increase Chinese investment and assistance in Nepal, primarily in infrastructure, technology transfer, and connectivity. The signing of MOU comes ahead of the Belt and Road Forum for International Cooperation summit in Beijing on May 14-15. 

Now, Nepal has to come up with project proposals that suit the objectives of BRI. These projects will then likely be funded, mostly concessional or non-concessional loans, through Chinese public and private investment companies (plus AIIB, which invests in projects; Silk Road Fund, which is primarily designed for equity investment in projects;  EXIM Bank; China Development Bank; New Development Bank, etc).

Unveiled in September 2013, the initiative covers 65 countries (home to 62% of world's population and constitutes one-third of global GDP). It consists of two major parts: Silk Road Economic Belt (road stretching from China to other countries/continents that will facilitate trade and investment in infrastructure projects) and 21st Century Maritime Silk Road (sea-based network of shipping lanes and port development).

Here is a list of latest pledge ($124 billion) by China for the BRI initiative:
  • an extra 100 billion yuan ($14.50 billion) into the existing Silk Road Fund
  • 250 billion yuan in loans from China Development Bank
  • 130 billion yuan in loans from Export-Import Bank of China
  • 60 billion yuan in aid to developing countries and international institutions in new Silk Road countries
  • encouraging financial institutions to expand their overseas yuan fund businesses to the tune of 300 billion yuan
  • 2 billion yuan in emergency food aid
  • $1 billion to a South–South Cooperation fund
  • $1 billion for cooperation projects in countries on the new Silk Road

Now what? Nepal joined AIIB with great fanfare, but nothing substantial has come out of it. Similar with the transit treaty with China that theoretically ended the sole dependence on India for utilizing the transit right of a landlocked country. It would be great if Nepal secures funding for projects that caters to domestic demand and subsequently facilitates cross-country trade and investments. Let me outline some of the issues that need to be kept in mind going forward.

First, some people are taking Nepal joining BRI as a response to India's heavy-handedness in Nepali politics and economy after the promulgation of constitution in 2015. The trade embargo crippled the Nepali economy. The anger arising from the trade embargo-inflicted pain is understandable. But, joining BRI should not be a retribution strategy from which Nepal gets nothing in substance. The biggest task for Nepal is to present projects that are appealing to Chinese investors, both public and private sectors that are part of BRI. But then we also know that this is where Nepal is chronically lacking. Nepal’s fiscal operation is squeezed by a lack of project readiness and its neglect/inability to prepare a stock of investment-ready projects (referred to as Project Bank). Precisely because of this, capital spending is below 80% of budged amount. Nepal is not even able to fully utilize the highly concessional loans offered by multilateral institutions (ADB and WB). 

Second, Nepal needs to first present its own version for rapid economic transformation, with broad-based political support, and then seek funding for its implementation. It should align with domestic needs and development aspirations. We should collaborate (not wholly let them do it) with Chinese or whoever is competent to draw an economic corridor blueprint and then seek funding on the most cost-effective way. We should draw lessons (on what not to do) from $45 billion China Pakistan Economic Corridor master plan. The deal comes with a lot of economic, political and geographical influence.

Third, on what terms and conditions are the Chinese investments going to flow in? It is not going to be in the form of traditional aid for sure. The emphasis is on equity investment, i.e. partial ownership of projects and assets. What would be the fiscal implication and debt liability? We need to be clear on this before its too late. Nepal may be asked for sovereign guarantee of project investments even in the case of private players. Also, Nepal may be asked to revise/modify laws to accommodate investments (for concessions) and make regulations to suit Chinese procurement (of course, it will be single sourcing without competition). The devil is always in the detail. If Japan, India or any other multilateral institutions offer loan in more concessional terms (interest plus principal payment schedule) and easier procurement rules, then Nepal should not stick for project financing with BRI just for its sake (domestic politics plus response to Indian influence). 

Fourth, there are talks about developing Nepal as a vibrant transit nation between China and India (or transform it from landlocked into land-linked). That’s appealing in principle and is a great topic for never-ending workshops. However, as the reality is now, this is a distant dream. India is opposed to Chinese investment in disputed regions in Pakistan. India will want to expand its own interest along Nepalese border and increase connectivity, which is happening at snail’s pace. The geography is also on the Indian side: plains versus the rugged mountains. We may be chasing a chicken that may not lay much eggs, but creates a lot of noise. Nevertheless, Nepal's primary interest should be to attract investment and increase exports to both India and China (and not only a 'land-linked' transit nation, which to me sounds a bit unrealistic given the political and economic realities).

Fifth, it would be prudent to first prioritize what Nepal needs now and what is needed in the future to sustain high growth? There is unanimous consensus on increasing investment in hydropower projects, domestic transport networks (including airports), urban development, tourism, agriculture and education sectors. This is where foreign investment should be flowing in, be it Chinese through BRI or Indian and Japanese bilateral aid or any kind of aid from other countries and multilateral financial institutions. Then only we need to think of large-scale inter-country infrastructure linkages with China (like railways). The returns on such investments for now is too low and markets too small. A metro rail within Kathmandu is much desired for now than cross-country rail link with China. Similarly, upgradation of poor facilities and preservation of Lumbini is much desired than just a rail link to Lumbini. 

There is much to discuss on this issue. For now here are two good readings: 
  • The EIU's report on OBOR here
  • Akhilesh Upadhyay's take on why Nepali's don't share Indian ambivalence towards China here

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