The Background: Nepal’s Pokhara Airport Loan

Nepal recently made a significant request to China, asking to convert a large loan into a grant. This loan, which amounts to about 1,378.74 million yuan (roughly $216 million), was used to construct the Pokhara International Airport, one of Nepal’s most ambitious infrastructure projects. Despite the grand opening in January 2023, the airport has faced numerous problems, including a tragic crash shortly after opening, which claimed the lives of 72 people, and an inability to attract regular international flights. These issues have significantly impacted the airport’s ability to generate revenue, making it hard for Nepal to service the loan as planned. As a result, Nepal’s Deputy Prime Minister and Finance Minister Bishnu Prasad Paudel formally asked China to consider turning the loan into a grant during a meeting with Yang Weiqun, Vice Chairman of the China International Development Cooperation Agency (CIDCA). The plea is also reflected in a letter sent by the Ministry of Finance to the Chinese government, underscoring Nepal’s urgent need for financial relief.

China’s Track Record on Loan Forgiveness

China’s approach to loan forgiveness has been complex and often selective. Typically, China prefers options like debt restructuring or deferment over outright forgiveness. This strategy helps China maintain influence and control over the borrower nations while ensuring that its financial interests remain protected. Through its Belt and Road Initiative (BRI), China has extended over $1 trillion in loans and grants globally, often leading to criticism that such loans create debt traps for developing countries. These traps make countries increasingly dependent on China for financial support and diplomatic backing.

However, there have been instances where China has agreed to convert loans into grants, especially when it aligns with its strategic interests. Nepal’s case could be seen as such a scenario. If China forgives the loan, it could enhance its political and economic influence in Nepal, a country strategically located between China and India. This would not only demonstrate China’s willingness to support Nepal’s economic development but also strengthen its position in a region where India has traditionally held significant sway.

What China Stands to Gain

China’s interest in Nepal is driven by several strategic and economic factors:

1. Geopolitical Influence: Nepal’s location between China and India makes it a valuable partner in regional geopolitics. By fostering closer ties with Nepal, China can counterbalance India’s influence and expand its own presence in South Asia. A stronger alliance with Nepal could serve as a foothold for China in a region marked by ongoing competition between Beijing and New Delhi.
2. Economic and Infrastructure Projects: Nepal’s request for loan forgiveness comes at a time when China is heavily invested in Nepal’s infrastructure development. These investments range from road and bridge construction to large-scale hydropower projects, all under the BRI framework. By granting Nepal’s request, China could secure a more favorable environment for these projects, ensuring long-term economic and strategic benefits. As Binoj Basnyat, a retired Nepali general and researcher, noted, “China would probably convert the loan to a grant because it wanted to build a strong relationship with Nepal’s communist party.”
3. Hydropower Development: Nepal’s immense hydropower potential is another key reason for China’s interest. The country is home to over 6,000 rivers, offering the potential to generate significant amounts of renewable energy. For China, controlling or influencing Nepal’s hydropower resources could not only provide a new energy source but also increase its leverage over regional energy markets. This would allow China to expand its economic footprint in South Asia, linking Nepal’s hydropower capabilities to its own western provinces.
4. Soft Power and Public Image: By converting the loan into a grant, China would also bolster its image as a supportive and benevolent neighbor, enhancing its soft power in the region. Such a move would strengthen China’s diplomatic relations with Nepal, paving the way for more cooperation in other areas, such as trade, education, and cultural exchanges. This is particularly relevant given the recent warming of relations between the two countries, including agreements on road upgrades and cross-border trade facilities.

The Challenges and Implications

While loan forgiveness could help Nepal by alleviating its immediate financial burden, it also comes with significant geopolitical implications. Nepal’s reliance on Chinese loans and investments has already integrated the country into China’s broader strategic vision under the BRI. If China agrees to convert the loan into a grant, it would deepen Nepal’s economic dependence on Beijing, potentially limiting Nepal’s diplomatic flexibility. Moreover, this move could be viewed with suspicion by India, which has a long history of rivalry with China over influence in Nepal. As geopolitical analyst Binoj Basnyat mentioned, “The investigation into the corruption charges will quickly come to an end… Nobody will talk about that anymore,” highlighting the potential for political maneuvering and concessions that could arise from China’s decision.

Nepal’s Strategic Importance

Nepal’s strategic location and its growing economic ties with China and India place it at the center of a broader geopolitical chess game. The country has sought to balance its relations with both of its powerful neighbors, but its growing economic ties with China, including projects funded under the BRI, suggest a tilt towards Beijing. This is further evidenced by the recent coalition government formed by Nepal’s largest communist party, which is known for its close ties with China. The coalition has already made significant strides to strengthen relations with Beijing, including overturning a previous ban on the Chinese-owned social media app TikTok and agreeing to develop infrastructure projects aimed at boosting connectivity between Nepal and China.

Nepal’s request for loan forgiveness from China over the Pokhara International Airport project reflects its urgent need to address economic challenges and bolster its infrastructure. However, the outcome of this request will have significant implications not only for Nepal’s financial future but also for its political and diplomatic relationships. If China agrees to convert the loan into a grant, it could mark a turning point in Nepal-China relations, solidifying Beijing’s influence in the region and potentially altering the geopolitical balance in South Asia. As both China and India continue to vie for influence in Nepal, the decisions made in the coming months will play a crucial role in shaping the region’s future and the broader dynamics of international relations.

ACZ Editor: From our perspective, China built a crappy airport (apparently most of China’s infrastructure projects for others have been crappy) for Nepal and is now demanding payment. Nepal is asking forgiveness of the loan, realizing that that brings them closer to China, but we are not sure that is the greatest idea. Remember that China has essentially declared war on ‘unapproved’ cultures within their borders, imprisoning the Muslim Uyghurs, attempting to modify the Christian bible and much more. It just shows that doing deals with China that involve investments in your infrastructure are hazardous at best.