Nepal stands at a significant crossroads in its developmental journey. At a time when the country aims to implement large-scale development projects, the reality is that Nepal’s internal resources are insufficient to achieve its ambitious plans.
Consequently, loans or grants from neighboring and friendly countries, as well as bi- and multilateral agencies, have become a necessity. Nepal’s diplomacy, however, often struggles to successfully navigate these challenges.
A glaring example of this is the US-funded MCC and China’s Belt and Road Initiative (BRI). The MCC offers grant-based development funding, while the BRI provides loans for infrastructure. Both present opportunities for development but must be approached with caution to safeguard Nepal’s economic and political independence. To progress on this journey, Nepal must develop a coherent foreign policy that prioritizes its national interests.
Given the country’s economic slowdown and the limited scope for improvement in the near future, policies should focus on grant-based interventions rather than loans, address gaps in debt vulnerability management, and ensure transparency in all international agreements.
The decisions Nepal’s leaders make today will shape the nation’s economic model, diplomatic stance, and national independence for decades to come.
Political Fragmentation: A barrier to progress
Nepal’s foreign policy is hindered by deep political divisions, with parties split along ideological lines. The personal interests of powerful leaders often take precedence over national priorities, weakening Nepal’s ability to negotiate effectively and delaying critical development projects. As the Prime Minister heads to Beijing to sign the BRI implementation plan, it is important to reflect on key aspects of this initiative.
The first is Nepal’s communist forces and their unconditional tilt toward BRI.
Nepal’s communist parties, particularly CPN-UML, view China’s BRI as an opportunity to address infrastructure deficits through large-scale projects like the proposed Kathmandu-Pokhara-Lumbini railway. However, concerns about high-interest loans and a lack of transparency remain unaddressed. The Pokhara International Airport, a flagship BRI project, exemplifies these issues, with opaque financing terms and significant repayment obligations that could strain Nepal’s economy.
The second is Nepali Congress and its view on BRI and stand on Grant-based funding.
In contrast, the Nepali Congress advocates for grant-based financing, such as the MCC’s $500 million grant aimed at improving electricity transmission and road infrastructure. These projects align with Nepal’s development priorities while reducing debt risks. As a liberal and democratic force, the Nepali Congress bears the critical responsibility of ensuring transparency and accountability in foreign agreements. Transparent processes not only safeguard against mismanagement but also build public trust in international collaborations. If the Nepali Congress upholds these principles, it can set a governance standard that aligns foreign engagements, including the MCC, with Nepal’s long-term development needs without compromising national sovereignty.
Nepal’s communist forces, including CPN-UML, have long been supporting China’s BRI. They view it as an opportunity to address Nepal’s infrastructure deficits through large-scale projects, such as the proposed Kathmandu-Pokhara-Lumbini railway. Though there are concerns regarding China’s BRI such as high-interest loans, and transparency concerns, communist forces are not ready to discuss these matters. Even in Nepal, the Pokhara International Airport, a flagship BRI project, exemplifies these challenges. Despite its potential economic benefits, the airport’s financing terms are still opaque, with significant repayment obligations that could strain Nepal’s economy.
Why grant-based financing?
Grant-based financing is essential for Nepal, given the current state of its economy. Rising public debt, much of it incurred for infrastructure projects financed through foreign loans, has increasingly strained the country’s financial resources. While such projects are critical for development, their repayment terms often divert funds from essential sectors like health, education, and social services.
Nepal must also draw lessons from the experiences of friendly countries. Sri Lanka and Kenya, for example, have faced severe financial challenges due to reliance on Chinese loans. Sri Lanka’s Hambantota Port and Kenya’s Mombasa-Nairobi railway, both financed through BRI loans, resulted in unsustainable debt and loss of control over strategic assets.
These cases highlight the risks of loan dependency and emphasize the need for Nepal to prioritize grant-based financing and transparent agreements to safeguard its economic stability and sovereignty.
The MCC advantage
The MCC offers a compelling example of a transparent and open bilateral development model for Nepal. With a $500 million grant, it addresses Nepal’s infrastructure needs without adding to its debt burden, focusing on energy and transport sectors.
The project aims to strengthen Nepal’s electricity transmission system, enabling the export of surplus hydropower to India. This aligns with Nepal’s vision of becoming a regional energy hub, leveraging its abundant hydropower resources to drive economic growth.
Additionally, by upgrading Nepal’s road networks, the MCC seeks to reduce transportation costs, enhance trade competitiveness, and promote economic integration in South Asia.
The MCC’s accountability and transparency ensure that funds are used effectively, minimizing risks of corruption and mismanagement. If successfully implemented, it could serve as a model for attracting further grant-based investments to Nepal.
Risks of the BRI
First and foremost, the BRI agreement is not transparent. Despite, it can be said that the BRI offers ambitious infrastructure opportunities. However, its loan-driven model presents significant challenges and risks including but not limited to debt dependency, lack of transparency, geopolitical risk.
First, high-interest loans for BRI projects, such as the Pokhara International Airport, increase Nepal’s financial vulnerabilities. Without renegotiation, these obligations could divert resources from critical sectors and limit Nepal’s economic flexibility.
Second, many BRI agreements lack clarity, with hidden costs and unfavorable terms that could jeopardize Nepal’s sovereignty. Enhanced transparency and public oversight are essential to ensure that BRI projects align with Nepal’s development goals.
Third, over-reliance on Chinese loans could compromise Nepal’s geopolitical autonomy, limiting its ability to support balanced relationships with other global powers. Expanding partnerships and prioritizing grants can mitigate this risk, preserving Nepal’s strategic independence.
Nepal and BRI: A Focus on Grants
Nepal can leverage the BRI for development by shifting its focus to grant-based collaborations rather than loans. Through this approach, Nepal could benefit from China’s expertise and resources without the burden of repayment, avoiding debt dependency and preserving economic sovereignty. Advocating for grants instead of loans could pave the way for a more sustainable and equitable model of partnerships under the BRI, setting a new precedent for fairness and long-term viability.
If loans under the BRI are pursued, transparency and accountability must be non-negotiable. Every detail of the agreement—interest rates, repayment terms, penalties, and costs—must be publicly disclosed to mitigate hidden risks. Clear and measurable benefits should be established to ensure projects align with Nepal’s development priorities. Robust oversight mechanisms are crucial to prevent corruption and inefficiency, issues that have plagued similar projects in the past.
Strengthening diplomatic ties with global powers like China while prioritizing grants over loans could significantly enhance Nepal’s developmental efforts. Grant-based partnerships would enable Nepal to achieve its infrastructure goals without the financial strain of debt, fostering economic stability and preserving sovereignty. Such well-negotiated agreements would also showcase the strength of Nepal’s diplomacy, ensuring that partnerships genuinely align with the country’s long-term interests.
Way forward
Nepal’s path to sustainable development hinges on adopting a cohesive foreign policy that addresses domestic political challenges and global geopolitical realities. Political leaders must overcome ideological differences and factionalism, which have historically stalled progress, to present a unified stance on international partnerships. This unity is essential to enhance Nepal’s bargaining power and ensure collaborations that serve national interests. On this front, it is really a welcome move of Nepali Congress and CPN-UML, the major ruling parties of Nepal, that they are claiming that they stand together in terms of BRI agreement.
Prioritizing grant-based financing over loans is key to reducing debt dependency and ensuring fiscal sustainability. Nepal should also renegotiate unfavorable loan agreements and push for greater transparency in all international dealings, including those under the MCC and BRI. Public scrutiny and alignment with long-term goals will foster trust and minimize risks of mismanagement.
Successful implementation of grant-based initiatives like the MCC can further demonstrate Nepal’s commitment to sustainable development, attracting additional support from global partners. While Nepal should welcome development partnerships, it must prioritize agreements that align with its economic capabilities and national interests. The focus should remain on securing grants that provide critical support without the burden of debt, ensuring economic stability and sovereignty.
Maintaining balanced relationships with allies is crucial for fostering collaboration that advances Nepal’s sustainable growth agenda. The steps taken today will define Nepal’s future, positioning it as a regional leader in sustainable development while preserving its independence and economic security.
These choices are not just strategic imperatives but ethical obligations to future generations.
(Mahesh Dulal is a student of Masters in Public Administration at Notre Dame de Namur University, Belmont, California.)
Authors’ disclaimer: The article contains some sections generated with AI assistance.
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