KATHMANDU: Incumbent Prime Minister of Nepal Pushpa Kamal Dahal Prachanda inaugurated the long-awaited regional international airport at Pokhara on January 1, 2023, in the spirit of the new year.
Despite the controversy surrounding its development, the much-anticipated ceremony was attended by the Prime Minister, Finance Minister, and other top leaders, sending a clear message about Nepal’s commitment to expanding its transportation infrastructure.
However, since its opening, the airport has not received a single international flight, leading to questions about its viability and concerns that it may become another “white elephant” project for the country.
The airport’s grim operational outlook and lack of preparedness have added to the skepticism, despite the initial optimism expressed by government officials and the public.
China is Nepal’s largest foreign lender, having invested heavily in infrastructure projects in the country.
In 2017, Nepal signed an agreement with China’s Exim Bank for a loan of $215 million to fund the construction of the Pokhara International Airport.
Another example that is often cited is that of Kenya, where China financed the construction of a railway line from Nairobi to Mombasa.
While the loan was welcomed at the time as a much-needed boost to Nepal’s infrastructure development, concerns have been raised about the terms of the loan.
The interest rates on Chinese loans are notoriously high, with some estimates suggesting that they can be as much as 2-3% higher than those of other lenders.
This means that Nepal will be paying significantly more interest payments over the long term, potentially creating a significant burden on the country’s finances.
Background of the Project
JICA conducted a feasibility study of the project and advised it to be constructed in Phases to which Asian Development Bank was ready to fund.
However, due to various twists and turns and interests involved, the then government wanted to construct this mega project all at once. Due to this decision, ADB backed out of the project.
One allegation involves the role of Barshaman Pun, a former Minister for Energy, Water Resources, and Irrigation in the Nepalese government.
In 2018, Pun signed a memorandum of understanding (MOU) with the Export-Import Bank of China (EXIM) to provide a $215 million loan for the Pokhara International Airport project.
The MOU was signed during Pun’s visit to China, and some critics alleged that the loan was granted without a competitive bidding process.
The Controversial Chinese Loans
China has been investing heavily in Nepal’s infrastructure sector, and Nepal has become increasingly reliant on Chinese loans for its development projects.
China is Nepal’s largest foreign lender, and the Pokhara International Airport project is not the only infrastructure project that Nepal has undertaken with Chinese assistance.
The critics of Chinese loans argue that the interest rates are much higher than those of other international lenders. If compared to the western governments, the Chinese interest rate is almost 300% more.
In addition to this, loans from China have shorter payback periods almost at a difference of 15-20 years.
The interest rate on the loan is significantly higher than the rates on loans provided by other international financial institutions, such as the World Bank and the Asian Development Bank.
For example, the World Bank provides loans to Nepal at an interest rate of 0.25-0.75 percent, while the Asian Development Bank provides loans in a similar range.
The Japanese loan for the Nagdhunga-Thankot project has a low-interest rate of 0.01% with a repayment period of 40 years, including a grace period of 10 years while the Chinese loan for the Pokhara airport project has a higher interest rate of 2% with a repayment period of 25 years.
This means that Nepal could have secured a loan at a lower interest rate if it had explored other financing options.
The high-interest rates are a significant concern for Nepal, as they may lead to a high debt burden in the long term.
The repayment of the loan will require a significant amount of foreign currency, which Nepal may struggle to generate.
The repayment of the loan may also require Nepal to increase taxes or cut down on public spending, which may have adverse effects on the economy.
According to a study, of the 165 countries (since 2000), 42 of the countries have borrowed debt from China that is equal to or greater than 10 percent of the GDP.
This is a significant share of the GDP of any country. In almost 40 countries, spending on health and education decreased between 2014 and 2016 while debt repayments rose.
The Uganda Airport Disaster
Chinese lenders, the Export-Import Bank of China have taken over the Ugandan Entebbe International Airport and other assets in the country over the failure of the Ugandan government to repay a loan.
The loan terms and payback period are exactly the same as for the Pokhara International Airport. Uganda, however, sought to renegotiate the deal but the latest visits and pleas to alter the original terms with Chinese authorities were declined. As a consequence, Uganda is compelled to surrender to the only international airport in the country.
Hambantota Port Capture
The critics of Chinese loans often point to the example of Sri Lanka, where China financed the construction of the Hambantota port.
Sri Lanka took a $1.1 billion loan from China for the project, but it struggled to make the repayments on the loan.
However, the increasing reliance on Chinese loans for infrastructure development could lead to a rapid increase in Nepal’s debt burden, which could have adverse implications for its macroeconomic stability.
Sri Lanka eventually had to hand over control of the port to China on a 99-year lease in order to meet its debt obligations.
The Hambantota port is now a symbol of China’s debt-trap diplomacy, and many countries are cautious about accepting Chinese loans for their development projects.
Failure in Kenya
Another example that is often cited is that of Kenya, where China financed the construction of a railway line from Nairobi to Mombasa.
The loans for the project were given without a competitive bidding process, which has led to concerns about inflated prices.
The critics of Chinese loans argue that the loans are often given without transparency and accountability, which may lead to corruption and inefficiencies.
There are concerns that the loans may not be used effectively, and the projects may not have the expected economic benefits.
Concerns of ROI
One of the main concerns about Chinese loans is the lack of adequate revenue streams to pay off these loans.
The primary source of revenue for the Pokhara airport would be through the landing fees and passenger charges. However, these revenues are unlikely to be sufficient to cover the debt servicing costs of the loan.
For example, Sri Lanka’s Hambantota Port, which was also mainly financed by Chinese loans, has been struggling to generate sufficient revenues to pay off its loans, resulting in the government handing over a 70% stake in the port to China Merchants Port Holdings for a period of 99 years.
This has raised concerns about the long-term implications of relying on Chinese loans for infrastructure development, as it could lead to debt trap situations, where the borrower countries are unable to repay the loans, and thus, are forced to give up their strategic assets.
There are also concerns about the capacity of the airport, which is expected to handle up to 1.5 million passengers per year.
Some experts have suggested that this may be an overly optimistic estimate, given the current state of Nepal’s tourism industry.
The Pokhara International Airport, which is currently under construction in Nepal, has been criticized for its potential impact on the environment, particularly because it was approved without a comprehensive Environmental Impact Assessment (EIA).
This could potentially lead to lower-than-expected revenues from the airport, making it difficult for Nepal to meet its debt obligations.
Debt sustainability and Geo-political tensions
Another concern is the potential impact of these loans on Nepal’s debt sustainability.
According to the World Bank, Nepal’s public debt stood at 34.4% of its GDP in 2019, which is relatively low compared to other developing countries.
However, the increasing reliance on Chinese loans for infrastructure development could lead to a rapid increase in Nepal’s debt burden, which could have adverse implications for its macroeconomic stability.
While this is still within manageable levels, taking on more debt at a high-interest rate could put a strain on the country’s finances.
This could result in reduced spending on social welfare programs, as well as increased taxes and fees to repay the loan.
Moreover, Chinese loans often come with conditions such as the use of Chinese contractors and equipment. This could lead to cost overruns and inefficiencies in the projects, resulting in subpar outcomes.
The Chinese-funded projects in Sri Lanka, Pakistan, and other countries have faced similar issues, with cost overruns and delays leading to low returns on investment.
In addition to the financial risks, there are also geopolitical implications of China’s increasing influence in Nepal. China has been providing loans and investments to Nepal for various infrastructure projects, such as the Kathmandu-Pokhara railway and the West Seti Hydropower project.
China’s Belt and Road Initiative (BRI) aims to enhance connectivity and trade among countries in Asia, Europe, and Africa, and Nepal is a part of this initiative. This increased influence can poke India leading to increased geo-political tension.
Poor Transparency
Experts have also raised concerns about the lack of transparency in the financing terms of Chinese loans. China does not disclose the terms of its loans, which makes it difficult for recipient countries to assess the risks associated with taking on the debt.
This lack of transparency has also been criticized by international financial institutions, who argue that it hinders their ability to provide assistance to countries that are struggling to repay loans.
There have been reports of corruption and lack of transparency in the procurement process of these projects, which could further increase their cost and reduce their effectiveness.
There are several examples of other countries that have struggled with the repayment of Chinese loans for infrastructure projects, and Nepal must take care to ensure that it does not fall into the same trap.
In addition to the high-interest rates and lack of transparency, Chinese loans have also been criticized for their focus on funding infrastructure projects, rather than investing in productive sectors that could boost economic growth.
While infrastructure development is important, it is not sufficient for sustainable economic growth.
Environmental Aspect
The Pokhara International Airport, which is currently under construction in Nepal, has been criticized for its potential impact on the environment, particularly because it was approved without a comprehensive Environmental Impact Assessment (EIA).
The EIA process is a critical component of infrastructure development projects. It is intended to identify and evaluate the potential environmental, social, and economic impacts of a project and propose measures to mitigate any negative impacts.
In the case of the Pokhara airport, however, the project was approved without a comprehensive EIA, which could have serious implications for the environment and local communities.
While the construction of the Pokhara International Airport is an important development for Nepal’s tourism industry, the use of Chinese loans to fund the project raises concerns about the country’s long-term financial stability.
There are several examples of other countries that have struggled with the repayment of Chinese loans for infrastructure projects, and Nepal must take care to ensure that it does not fall into the same trap.
As such, it is crucial that Nepal carefully re-considers the terms of its loans and works to ensure that the Pokhara International Airport is a viable and sustainable project in the long term.
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