In a major blow to China’s multi-billion Belt and Road Initiative (BRI), Nepal announced on January 17 that it was scrapping 21 projects out of a total 35 to be developed under the ambitious project. The cancellation was shown as a revamp exercise by Kathmandu amid reports from several countries complaining about the Chinese ‘debt trap’ strategy through BRI. Nepal’s finance ministry has seemingly stated that “before negotiations, (Nepal has) to make our position clear on the financing modality, that is, whether these BRI projects should be developed under loan or grant”.

A recent report by US think-tanks based on sovereign credit risk ratings and World Bank sustainability analysis concluded that 23 out of 68 countries that have signed up for BRI are at the risk of debt distress. A prime example of the ‘debt trap’ is China’s acquisition of the strategic Hambantota port after the Sri Lankan government failed to service its debt.

However, it is China that has advised Nepal to cut down the number of projects due to sluggish progress. In the past two decades, Nepal has remained a politically volatile country. A 10-year-long insurgency from 1996 to 2006, which had overthrown the centuries-old monarchy, had took a heavy toll on the Nepalese economy. Following the introduction of democracy in 2008, no elected government has been able to complete a full five-year term. While political instability and red tape are obstacles to economic growth and development and remain a critical risk factor for foreign investors, China has often been on the back foot while investing in Nepal.

The ambitious BRI project spans over 68 countries. It is the pet project of President Xi Jinping, who aims “to build a trade and infrastructure network connecting Asia with Europe and Africa along and beyond the ancient Silk Road trade routes”. It comprises the Silk Road Economic Belt and the 21st Century Maritime Silk Road. The project has become the sole driver of China’s FDI after it was incorporated in the Constitution through a resolution approved by the 19th Congress of the Communist Party of China last year.

In a significant boost to BRI, China had been able to persuade Nepal to join the initiative in May 2017. It was seen as a key diplomatic success for Beijing amid an open protest by India to boycott BRI. India had stated that the China-Pakistan Economic Corridor (CPEC) - one of the major projects under the BRI that passes through Pakistan-occupied Kashmir - “violates India’s sovereignty and territorial integrity”. “No country can accept a project that ignores its core concerns on sovereignty and territorial integrity,” New Delhi had made it clear. Hence, India had outrightly rejected the Chinese invitation to join the mega project.

Notably, Nepal was the last country in South Asia to agree to be part of the project. It was just two days before the BRI Forum Meet was to take place in Beijing on May 14, 2017, that the then Prime Minister of Nepal Pushpa Kumar Dahal ‘Prachanda’ had signed an MoU with Chinese representatives in Kathmandu.

Since May 2017, a total of 35 projects had been identified under BRI between Nepal and China in the areas of hydropower generation, manufacturing, river development and infrastructure development, including the construction of a railway line connecting Tibet in China and Kathmandu. The cooperation took a major step forward during newly elected Prime Minister K.P. Sharma Oli’s visit to China in June 2018. The visit was strategically important for Beijing, which took Oli on a short tour to Tibet to showcase the importance of Nepal in its broader South Asian policy. Oli’s wholehearted embrace of China set alarm bells ringing in New Delhi, which was keeping a keen eye on developments as Nepal has been attempting to move away from the existing special relations and traditional socio-economic ties with India.

Soon after the BRI projects began to take shape in Nepal, Oli formed two committees led by the foreign and finance secretaries. The high-level committees were directly working under Oli’s chairmanship. By trimming the number of projects, Nepal has specified three road projects, two hydroelectricity projects, one cross-border railway, one cross-border transmission line and one technical institution under BRI. As the number of projects decreases, it will reduce fund inflow from the initially planned $10 billion investment. With Nepal failing to attract FDI from other quarters, the move will affect its development.

Of late, Indo-Nepal ties have been on a shaky ground. Notably, Oli’s pro-China posture has not only affected bilateral trade between New Delhi and Kathmandu, but Nepal’s attempt to prioritise Chinese investment over India has also seen the cancellation of India-led projects in Nepal. Considering the BRI climbdown, Nepal may shift its focus towards India, which won’t be an easy task for Oli.

Additionally, the Chinese government is feeling the heat from critics at home for lending money to risk-prone countries, especially in politically volatile Africa. In order to fix irregularities in ongoing projects across the world, it has started a review process. As part of the move, China had decided to temporarily stop funding at least three major road projects in Pakistan due to reports of corruption. Despite being a pet project under BRI, the decision to cancel the CPEC projects indicates Beijing’s priorities.

Hence, the cancellation of projects in Nepal shows that China does not plan to distribute freebies. While China uses its growing economic power as a tool to expand its footprint in other countries for strategic benefits, it shatters the development process of small economies such as Nepal. It shall be a litmus test for Nepal to fully understand the potential of its cooperation with India and flourish its relationship with New Delhi without disturbing its equation with Beijing.

Rishi Gupta is a doctoral candidate at the Centre for South Asian Studies, Jawaharlal Nehru University, New Delhi. The views expressed here are personal.