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EFSAS Commentary

Pro-China tilt of Nepal’s new government evident in recent banknote controversy and renewed interest in Belt and Road Initiative


Two developments in the two months since Nepal’s Prime Minister Pushpa Kamal Dahal alias Prachanda, the leader of the Maoist Centre party, dumped his coalition partner the centrist Nepali Congress (NC) party in favour of the fellow communist United Marxist Leninist (UML) party led by pro-China politician K. P. Sharma Oli, have served to demonstrate that after a period of relative neutrality in international relations, Nepal’s new communist leadership is once again pushing the country into Beijing’s exploitative embrace. In March this year, Nepal and China renewed their long-stagnant pledge to sign the Chinese Belt and Road Initiative (BRI) execution plan. Observers and skeptics, mainly from non-participant countries including the United States (US), have interpreted the BRI as a deliberate plan to usher in Sino-centric international trade networks. Critics have also accused China of putting countries participating in the BRI into debt traps, a particularly disturbing prospect for a strategically located small country like Nepal that is also among the world’s least developed. In any case, the experience of Sri Lanka, which had participated in the BRI but eventually had to lease out the Hambantota port to China due to debt repayment issues, is still fresh in most South Asian memories. After reigniting interest in the BRI, the new Nepali government on 2 May made the controversial decision to announce a new currency note of 100 Nepali Rupees (NPR) denomination that showed territories claimed by neighbour India as belonging to Nepal.

Nepal and China had initially signed the BRI framework agreement on 12 May 2017, and China had forwarded the text of a plan to Nepal in 2019, but 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. However, in March-end this year, Nepali media reports suggested that Nepal and China had once again decided to implement the BRI in the Himalayan kingdom. The reports said that during the delegation-level talks between the visiting Nepali Deputy Prime Minister and Foreign Minister Narayan Kaji Shrestha and his Chinese counterpart Wang Yi in Beijing, the two sides had agreed to sign the BRI implementation plan at the earliest possible. The Kathmandu Post daily quoted a Nepali participant in the meeting as saying that the two sides had agreed to sign the implementation plan “as soon as possible”, and that even though no specific date has been finalized, “it could happen during an upcoming foreign secretary-level meeting in Kathmandu or on the seventh anniversary of the signing of the BRI on May 12, or during any other high-level visit between Nepal and China”.

Nepal had, since 2019, been wary of getting trapped in unsustainable debts owed to China through BRI loans for expensive infrastructure projects. Nepal’s annual debt repayments to China had already been rising rapidly over the last decade. Also, highly concessional terms offered by other lenders made taking on costlier Chinese commercial loans for BRI projects unappealing for Kathmandu. Frequent changes in government and coalition politics in Nepal made it further difficult for it to remain consistent on BRI policies. There were serious domestic political divisions in Nepal over the costs/benefits and potential loss of sovereignty from deeper BRI engagement with China. Implementation was also slowed by bureaucratic inefficiencies and difficulties meeting China’s approval conditions. Hence, despite the BRI framework agreement being signed as long back as in 2017, it has not yet been tabled in Nepal’s parliament. According to the Kathmandu Post report, the main opposition Nepali Congress and other parties have asked the government to table the agreement in Parliament and make public the terms and conditions of the BRI implementation plan before taking any final call on signing it.

Also, Nepal’s other influential neighbour, India, has opposed the BRI right from the beginning, mainly because its flagship project, the China-Pakistan Economic Corridor (CPEC), passes through Pakistan-administered Jammu & Kashmir (J&K). India also viewed some planned BRI infrastructure corridors through Nepal as impinging on disputed territory that it claims. Nepal had displayed understanding of India’s unease over BRI projects in its immediate neighbourhood, and Kathmandu was keen to avoid straining ties with its southern neighbour. New Delhi has historically exercised considerable influence over Nepali politics and policies.

Nihar R. Nayak, a Research Fellow at the India-based Manohar Parrikar Institute of Defence Studies and Analyses, believes that “The fact that the date for signing the agreement could not be finalized means that both sides are yet to agree on the financial terms and conditions. Recently, China has brought some changes in BRI projects implementation plans in terms of granting loans and showing flexibility”. On India’s apprehensions, he felt that “any BRI project coming up the Terai region bordering India will be a cause of major concern for New Delhi”. Nayak expressed the view that “China, on the other hand, will feel safer in making investments with a Left government in power in Nepal. In fact, in the last 15 days, there has been a sudden increase in the number of Chinese officials and delegations visiting Nepal”.

In an article titled ‘Why India and the West Should Be Concerned About New Ruling Alliance in Nepal’ that appeared on News18.com, analyst Arun Anand underscored that “With Oli’s return to power, there is a growing risk that Nepal’s strategic autonomy may be compromised, potentially undermining its cooperative relationships with India and the US. Past instances of Chinese Embassy interference in Nepali politics serve as a cautionary tale, highlighting the dangers of undue influence. The current Nepalese regime would be wise to avoid repeating such instances, as succumbing to Chinese pressure could jeopardise the country’s sovereignty and regional stability”.

Anand also pointed out that “China’s desire to leverage the unity among communist parties in Nepal poses significant concerns, particularly regarding the potential signing of an extradition treaty. Such an agreement could prove disastrous for Tibetan refugees sheltering in Nepal, granting China unchecked authority to apprehend and extradite them. Moreover, while Nepal has joined the Belt and Road Initiative, this decision has not been ratified by the parliament, raising questions about transparency and accountability. The lack of public disclosure regarding treaty texts further underlines the opacity surrounding China-Nepal relations”. Anand cautioned that “Nepal’s political stakeholders, civil society, and the international community must vigilantly monitor political developments to prevent the exploitation of Nepal by authoritarian regimes like China, which thrive on instability”.

In the second development, the new Nepali government angered India by announcing a new 100 NPR currency note that displays a map showing territories claimed by India, thereby reigniting a longstanding border dispute that has soured relations between the two countries in recent years. Competing claims on Lipulekh, Kalapani and Limpiyadhura areas escalated into a bitter dispute in 2020 when India, with an eye on China, built a road to connect its northern Uttarakhand state with the strategic Lipulekh mountain pass. When Kathmandu responded by publishing a new map showing the contested areas as lying inside Nepal’s borders, New Delhi protested that the “artificial enlargement” of Nepal’s claims was not based on historical fact or evidence and, therefore, wasn’t tenable. The new map had allegedly added 335 square kilometers of land to Nepal. Nepal, which unlike its neighbours was never under European colonial rule, locates its claims on Limpiyadhura, Kalapani and Lipulekh in the 1816 Sugauli treaty with the British Raj. However, the areas have been controlled by India since its war with China in 1962. In reality, all three contested areas have been firmly under India’s control for the past 60 years or more, and the people living in these areas introduce themselves as Indian citizens, pay taxes in India, and vote in the Indian elections.

Shweta Sharma reported on 6 May that Nepal’s Information and Communications minister Rekha Sharma had said that the decision to print the new currency note was taken at a meeting chaired by Prime Minister Pushpa Kamal Dahal on 2 May. The minister informed that “The meeting of the council of ministers chaired by Prime Minister Pushpakamal Dahal ‘Prachanda’ took a decision to print the new map of Nepal that includes Lipulekh, Limpiyadhura and Kalapani in the NPR 100 denomination bank notes”. She added that the “redesign of the banknote of NPR 100” was approved to “replace the old map printed in the background of the bank note”. The cabinet’s decision will be conveyed to the country’s central bank, the Rashtra Bank, which is expected to take up to a year to print and issue the new note.

India’s reaction to this development was quick. External Affairs Minister (EAM) S. Jaishankar criticized Kathmandu for taking a “unilateral” action while diplomatic talks to resolve the issue were ongoing. When asked about the development, he responded, “Our position is very clear. With Nepal, we are having discussions about our boundary matters through an established platform. In the middle of that they unilaterally took some measures on their side”. Nepal shares a border of over 1,850 km with five Indian states – Sikkim, West Bengal, Bihar, Uttar Pradesh, and Uttarakhand. In June 2023, Indian Prime Minister Narendra Modi and his Nepalese counterpart Prachanda, during the latter’s visit to India, pledged to resolve the boundary dispute under the spirit of friendship. However, there has been little movement on the matter so far. While the strategic Lipulekh pass connects the Indian state of Uttarakhand with the Tibet region of China, the Kalapani area is strategically significant as it is at the tri-junction between India, China, and Nepal.

These two new developments, therefore, may have endeared Prachanda and Oli’s government to Beijing, but they have also caused concern among Nepal’s Western partners and in New Delhi, and have raised the pertinent question of whether these moves by Kathmandu are really in the interests of its people, especially given how dependent the land-locked country is on India in practically every sphere.