Nepal’s economic woes, following Sri Lanka’s crisis, turn up the heat on China’s belt and road loans

[Truth Hurts]

• Critics warn that Nepal risks being another indebted country facing economic ruin if it accepts loans from China, in the wake of the Sri Lanka’s debt troubles
• In Nepal, the Chinese infrastructure initiative is increasingly seen in the context of US-China rivalry

After Pakistan and Sri Lanka, Nepal is adding to the political turmoil in Asia. The country has been forced to restrict its imports of luxury items including gold, cars and cosmetics after foreign exchange reserves fell by more than 16 per cent over the seven months to the middle of February.

Adding to the troubles are the disagreements between Nepal’s finance minister and its central bank governor, which came to a head on April 8. Maha Prasad Adhikari, governor of Nepal Rastra Bank, the central bank, was suspended by the government on the charges of leaking sensitive information and failing to effectively fulfil his responsibilities. However, former finance ministers have come together to condemn the move, which they say is a smokescreen to hide the government’s inability to perform.
While some economists play down Nepal’s dwindling foreign exchange as a short-term problem, there are concerns that the issue may be conflated with a growing debt burden if it accepts Chinese loans for infrastructure projects. After all, Sri Lanka’s foreign exchange reserves have shrunk rapidly in a similar situation as it faces its worst economic crisis in decades.

Coming under increasing scrutiny is a policy that many believe to be the epicentre of these woes. China’s flagship Belt and Road Initiative, announced in 2013, has led to greater Chinese investment in Asia. It was meant to help build infrastructure to allow developing countries to grow quickly and establish themselves as middle-income economies. It also marked China’s growing influence in the region.

How Sri Lanka’s economic crisis has been decades in the making​

• Years of debt accumulation, policy missteps – including a failed experiment in organic farming – and ill-conceived infrastructure projects built with Chinese funds have led the nation to the edge of catastrophe

Sri Lanka has flirted with economic crises for decades, but it is now on the verge of an unmitigated catastrophe that could quickly turn into a humanitarian disaster. Sri Lankans are already suffering from oil shortages as well as power cuts, and there is growing concern that the country – recovering from recently enacted disastrous agricultural policies – might not be able to feed its people.
Facing nationwide protests, the government declared a temporary state of emergency from April 2-4. But even after the emergency period is lifted, the underlying issues that resulted in such economic calamity will persist.
As the richest country per capita in South Asia, it is worth considering what has gone so wrong in Sri Lanka.

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