Strategically-located Nepal needs to establish mechanisms to capitalise on its strengthened bilateral ties


Nepal and China signed Memorandum of Understanding (MoU) on three crucial bilateral agreements on economic cooperation, promotion of investment and exploration of oil and gas resources in Nepal. The Nepali side led by Deputy Prime Minister and Minister of Federal Affairs and Local Development Bijay Kumar Gachhadar and the Chinese delegation led by Vice-premier Wang Yang discussed on the matter of  further enhancing bilateral cooperation in the areas of trade, tourism, investment, infrastructure development, energy and cross-border connectivity. Furthermore, the two sides have also confirmed to organise regular meetings of established bilateral mechanisms including the Joint Economic and Trade Committee to strengthen the relationship between two countries.

Earlier in May, Nepal had signed MoU with China on the ‘One Belt, One Road’ (OBOR) development policy and had hoped to expand road connectivity with China and channel more foreign investment in Nepal. However, Nepal is still figuring out ways to utilise OBOR to its full capacity. So, it is equally significant how Nepal acts on the recent agreements and strengthens its bilateral knot with China through economic cooperation.

Bilateral relations

The formalisation of bilateral relations between China and Nepal in 1955 paved way for economic  cooperation between the two countries and over the years, China has been providing assistance to Nepal through grants, interest free loans and concessional loans and also other technical support. Being a second largest trade partner of Nepal, China plays a pivotal role in the development of the Nepali economy.

In the light of the recent MoU, the government has a substantial opportunity to boost the country’s economy and employ China’s resources to uplift the socio- economic status of the country. Stressing that the visit of Chinese delegation initiated a new chapter in Nepal’s diplomatic relationship with China, Ram Babu Dhakal, Under Secretary at Ministry of Foreign Affairs (MoFA) says, “The official visit of the Chinese Vice-Premier was very successful as Nepal and China inked three bilateral agreements on economic cooperation. The visit also laid foundation to further enhance bilateral cooperation between the two countries on mutual- support.”

Nepal has always adopted ‘One China Policy’ and has shared a strong bond with the northern neighbour but it has failed to subscribe to China’s speeding economic growth. As a result, Nepal is lagging behind as a developing country having to always rely on grants and aid. Khadga KC, Associate Professor of International Relations and Diplomacy at Tribhuvan University shares, “The recent MoU on the economic front should enable Nepal to move ahead with its economic growth. To be specific, Nepal needs more engagements from China in infrastructure development because inadequate infrastructure have stagnated the overall progress of the country. Furthermore, Nepal should diversify its foreign policy and extend balanced relationship with immediate neighbours.”

Agreements on economic cooperation

Under the agreement on economic and technical cooperation, the Chinese government would provide financial assistance and technical support for the reconstruction of infrastructures damaged by 2015 earthquakes. The amount of Rs 16 billion would be spent on upgrading the 115-km long Araniko Highway that connects Nepal to China and construction of a bridge in Timure of Rasuwa district. The construction of Araniko Highway will make it easier for Nepal to conduct trade with China via road network.

Nepal and China have also signed MoU on Framework Agreement on Promotion of Investment and Economic Cooperation. Under this frame work, China will promote public as well as private investments in Nepal via Chinese companies and also initiate economic cooperation in various fronts. Big projects such as infrastructure development, road, tunnels, railway, transmission line and tourism will be prioritised. China has already provided loans and grants for projects such as Upper Trishuli Hydropower Project- Power station and Transmission line projects, Kathmandu Ring Road improvement project with flyover bridges, Tatopani Frontier Inspection Station project, Pokhara International Regional Airport, et cetera. Speaking with THT Perspectives, Under-secretary at the Ministry of Finance (MoF) Yugraj Pandey says, “Agreement on promotion of investment will increase Foreign Direct Invest (FDI) in Nepal through Chinese business firms. It will also strengthen Nepal’s growing economy and encourage industrial productivity within the country. The agreement with China will prove to be very beneficial for Nepal in the long run.”

The third agreement on the Letter of Exchange for Oil and Gas Resources Exploration in Nepal will oversee the possibility of extracting oil and gas resources within Nepal. This will be more of a research-based operation which will be carried out under the financial and technical support of the Chinese government. Ministry of Industry (MoI)will undertake the exploration of oil and gas resources by collaborating with Chinese authorities.

Lack of proper policy

Despite having one of the world’s largest economies by its side, Nepal has not been able to attract Chinese investment in large numbers. In the past few years, China has expanded its investment all over the world and Nepal still lacks proper policy to create a favourable environment for investment and cater to the Chinese business sector.

There have been some investments from Chinese hydel firms in the hydro power sector but not in a substantial quantity. It is important that, proper policies and long-term frameworks are devised to promote FDIs from China. Gyanendra Lal Pradhan, Treasurer of Federation of Nepalese Chamber of Commerce and Industries believe that the state lacks specific planning to assemble investment in the country. He shares, “It is impossible to encourage investment in Nepal due to poor strategic planning and bureaucratic hurdles. Our government must set specific areas to capitalise on foreign investment in large chunks. Without foreign investments in bulk, there is no significance of small bilateral agreements.” He adds, “It is important to capitalise the innumerable opportunities provided by China’s large economy and if we can reform our bureaucracy and upgrade policies, within two years, we can witness increment in Chinese investment.”

In 2016, Nepal had signed the Transit Transport Agreement with China that allows Nepal to conduct third-country trade through the gateway of Chinese port. However, lack of road connectivity to China has created a hurdle in making this arrangement fruitful.

On the other hand, the nearest port of China — Port of Tianjin — which is close to Beijing, is 3,500-km away from Kathmandu which makes it very difficult for traders to transport cargos through trucks. Therefore, developing railway networks has also become compulsory for Nepal to exercise the trade transit route. Even though the Nepali delegation urged his Chinese counterpart to expand the railway network from Kerung to Kathmandu to Pokhara and Lumbini, it failed to put forth any concrete proposal in the recent visit.

Speaking with THT Perspectives, Baburam Bhusal, Under Secretary at Ministry of Supply says, “Nepal can turn into a trade transit hub if it succeeds in connecting the large markets of India and China through adequate infrastructures. However, the present scenario is quite different as Nepal heavily relies upon India for trade and any disturbance in the southern route hampers the supply of goods and services as it happened recently due to the floods in Bihar. Therefore, China’s support in reconstructing the Arniko Highway will have a greater impact on Nepal’s economy.”