By Hari Prasad Shrestha 9 June 2022
There is a big debate about the debt trap in Nepal after Sri Lanka fell into a severe economic crisis as a result of almost emptied foreign currency reserves and became unable to repay its principal and interest amounts of debts.
A debt trap is when a country spends excess than it earns and borrows more than capacity and is unable to repay by spending in unproductive and unnecessary sectors. Having inadequate savings to handle unforeseen costs can also result in a debt trap.
If we search in Google for the word ‘debt trap’, simultaneously China’s name will appear in most articles. Brahma Chellaney, a geostrategic and a professor of strategic studies at the Centre for Policy Research in New Delhi , coined the term debt-trap diplomacy to describe how the Chinese government leverages the debt burden of smaller countries for geopolitical ends.
He saw ‘debt trap diplomacy’ in China’s handling of Sri Lanka’s debt distress by taking over its Hambantota port on a long-term lease. The thesis caught on and began to be used widely, becoming “something approaching conventional wisdom”, especially in Washington DC. Other scholars have disputed the assessment, arguing that Chinese finance was not the source of Sri Lanka’s financial distress. Although the term is most associated with China with Belt and Road Initiative (BRI), it has also been applied to the International Monetary Fund (IMF); both allegations, however, are disputed.
Both the IMF and World Bank have been also accused of predatory lending practices to keep emerging economies in debt, including demanding structural adjustment programmes as a condition for loans, often to governments who see these loans as a last resort, pressuring for privatization and undue influence over central banks. The Committee for the Abolition of Illegitimate Debt wrote: “The [World Bank] and the IMF have systematically made loans to States as a means of influencing their policies.” The IMF has used geopolitical considerations, rather than exclusively economic conditions, to decide which countries received loans.
There are possibilities of debt traps for any country, who accepts any kind of loans haphazardly for unproductive purposes, whether such lending is from rich countries or from multilateral agencies, it would certainly be a burden for recipient country. If we observe global lending phenomenon, compared to other countries, China is in number one highlights due to its controversial, conditional and high interest rate with recipient countries.
Another hidden reason, which is igniting Chinese debt issues by westerners is China’s ambitious development strategies to be number one global economic and political power, which US with its allies want to stop it.
Thucydides Trap, or Thucydides’s Trap, is a term popularized by American political scientist Graham T. Allison to describe an apparent tendency towards war when an emerging power threatens to displace an existing great power as a regional or international hegemon. It was coined and is primarily used to describe a potential conflict between the United States and the People’s Republic of China.
Nepal has been a client of both debt trap and Thucydides Trap and a third trap, which is not popular, but Nepal has been severely damaged by it, is trade trap.
If we observe status of Nepalese economy, certainly it is under problems, however it is not under serious threats of debt trap.
Nepal’s total outstanding external debts stood at 934.14 billion Nepali rupees (7.82 billion U.S. dollars) at the end of 2020-21 fiscal year ending in mid-July, owes 87.89 percent of its foreign debts to multilateral donors, and the remaining to bilateral donors, the PDMO said in a recently released report.
The lion’s share at 471.17 billion rupees (3.94 billion dollars) goes to the International Development Association, followed by Asian Development Bank at 292.91 billion rupees (2.45 billion dollars), or 31.36 percent of Nepal’s total foreign debts.
Among the bilateral donors, Japan is the largest creditor to Nepal with a share of 4.41 percent, followed by China 3.39 percent in 2020-21, the report said. The debts owed to China are basically loans from the Export-Import Bank of China for various development projects. India is next bilateral creditors after China.
Nepal’s current debt situation is comfortable. Currently, Nepal’s total debt has reached from 36% to 44.5% within couple of years. As per reports, 77% public debt ratio to GDP could be comfortable for Nepal and above this point, it could be dangerous for economic health of nation.
As China is in limelight of global lending, and it is also applicable for Nepal, too. Therefore, it would be relevant to analyze pros and cons of external debts of China in Nepal as it is one of the most important bilateral lenders to Nepal.
Three important developments have deepened and widened Nepal China bonds. The first is the economic blockade imposed by India, the second is the One Belt One Road (OBOR) Initiative undertaken by China, and the third is China’s rise as the second most important global economic, military, and political power.
The China’s One Belt One Road (OBOR) initiatives is a modern expanded version of ancient Silk Road. The OBOR agreement signed by Nepal and China have five broad areas – economic development; transport connectivity; trade connectivity (economic zone, industrial park, and dry port development); financial integration through opening branch of Chinese bank and People-to-people contacts through visits and media cooperation.
There is heavy Chinese investment in Nepal and proposed additional investment through BRI would certainly bring it in highest position.
The economic incidents in Sri Lanka and some other countries, in which China has been blamed for some extent, made Nepal more cautious and it got a clear message that it should not take worthless debts and should not spend it haphazardly on unproductive and irrelevant products and projects as well.
Nepal realized that there are some complications and abnormalities in China’s lending procedures.
For example, China tends to lend at higher rates of interest, around 4% and four times higher than other multilateral agencies and western governments with shorter repayment period – average 10 – 15 years, compared to around 28 years for other lenders.
And China must change its investment strategy in Nepal by lowering interest rate in lending and allowing global tenders to allow all bidders to compete in bidding process as other lenders allow.
Sometime, China does not publish records of its foreign loans, and most of its contracts contain non-disclosure clauses which prevent borrowers from revealing their contents. It must be transparent.
However, the projects under BRI are favorable for economic upliftment of Nepal, only the question of investment modalities are concerns of Nepal. Nepal has ground to be more defensive as some China financed projects are bring seen as part of debt trap to Nepal.
Some experts in Nepal say that Nepal’s Pokhara International Airport is a part of unusual debt burden to Nepal. The overestimation of Chinese contractors than government estimation, high interest rate, and no other than Chinese contractors allowed in project are some reservations of Nepal.
Moreover, Nepal bought six aero planes from China on loan with partial grants from Chinese Exim Bank. However, these planes are grounded in Nepal since many years due to economic unviability , high operating costs, pilot training problems, insurance problems and unavailability of spare parts. It has been a debt burden for Nepal.
These are couple of examples. And for proposed BRI projects in Nepal, the burning question has been whether the trans-Himalayan rail line and other infrastructure projects under BRI would be built on loans or in grants from China.
Economists and planners in Nepal believe if this railway is built on grants, it would be beneficial to the country’s development, particularly it would end Nepal’s reliance on its traditional ally, India, for trade, fuel, food, and medical supplies.
Moreover, the blockade of the main trade route between Nepal and India in 2015 gave Nepali politicians greater rationale for diversifying the country’s trade partners and becoming better connected to global trade routes. The greater connectivity with China is also expected to boost Nepali exports of special herbs, agricultural products and some manufacturing items that are in high demand in China.
2.5 million Chinese tourists expected to visit annually by the train. And one study estimates Nepal’s trade could be boosted by 35% to 45% when the rail line and other BRI infrastructure projects are completed.
Lastly it is responsibility of Nepal to take greater responsibility for the evaluation of potential projects to ensure their viability and financial sustainability. It must develop own ability to bargain with development partners whether it is China or others to make certain that people must benefit from the projects and debts must be utilized for growth and to increase capacity to repay it.