Thursday, 18 July, 2024

Revitalising Nepal-Japan Ties

Navin Subedi


President Bidhya Devi Bhandari recently attended the enthronement ceremony of Emperor Naruhito of Japan. This visit at the highest level is an opportunity for both sides to chart the course for future engagement. Japan has been a significant development partner in Nepal and reliable source of infrastructure financing. It is not a surprise that the infrastructure financing figured in the meeting with President Bhandari's meeting with Japan's Prime Minister Shinzo Abe in Tokay.
The Japanese have been a traditional financing source for infrastructure development since the 1960s. The most crucial Japanese infrastructure financing vehicles are through the Japan International Cooperation Agency (JICA) and Japan Bank for International Cooperation (JBIC) or the Asian Development Bank. The ADB is active in major regional programmes, including boosting connectivity in the Bay of Bengal Region. ADB is the financing partner for The Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation Group (BIMSTEC).
In recent years, Japan has tried to strategise and scale-up its infrastructure financing in the Asia Pacific. The region faces a massive shortfall for infrastructure financing to meet the growing demands of urbanisation and keep the burgeoning economic growth afloat. Japan has floated an ambitious plan for infrastructure development in the Asia Pacific in May 2015.
The 'Partnership for Quality Infrastructure' is a more than USD 110 billion financing facility for quality infrastructure in the region for the five years. Around half of the funding will come from Japan while the reminder has to be invested in by the ADB. PQI is said to be the economic counterpart of Japan's free and open Indo-Pacific policy. Nepal has been a regular recipient of the grant and preferential lending from both Japan and the ADB.
In addition to public funding, PQI aims to leverage private sector financing for infrastructure development. The Japanese pension funds, which manage trillions of dollars of wealth, are under pressure to identify and invest in the sector outside Japan that generates a reasonable rate of return in the long-term. The long-term rate of return in Japan is negative for the past decades.
Announcement of any infrastructure financing facility in the region is good news and deserves serious scrutiny from Nepali perspectives. The PQI is not an exception for that matter. On the other hand, infrastructure financing is very complex processes, and to develop a pool of projects that generate direct financial of return is a challenge. Infrastructure financing is also strategic to cater to the long-term needs of the funder. PQI - for that matter - is termed by analysts as Japan's response to the Belt and Roads Initiative (BRI) of China. China and Japan both share a complex and challenging historical relationship.
Independent studies have shown that Japan is losing its competitiveness as the financing and developer of infrastructure in the region to China. According to a survey conducted by the Nanyang Polytechnical University in 2018, China and Japan account about 10 and 7 per cent by the value of the infrastructure development contact in Asia and the pacific.
In terms of the publicity, China's Belt and Road Initiative (BRI), announced in 2015, has stolen the limelight from the PQI. The recent visit by the Chinese President Xi Jing Ping to Nepal was an attempt for both sides for implementing connectivity projects under BRI.
Similarly, Japan being the first generation of Asian countries to achieve developed country status has significant influence over the decision making of multilateral development financing agencies. Given Japan's and ADB's long term investment, Nepal is expected to benefit from the initiative as well. Recently, JICA has given an affirmative nod to invest in Nepal's hydropower sector, including much-awaited Nalshingadh in western Nepal. Early indications show that financing in the project will be a blend of private and public investment.
The decision of the Nepal Government for the participation of President Bidhya Devi Bhandari in the royal event in Japan is a mature decision. Making development financing a priority in the management of foreign policy is also a welcome move by the Nepal government.
The Japanese financing terms and conditions are attractive for a resource deficit country like Nepal. In the absence of a high-level visit to Nepal from the Japanese side, the relationship has become more transactional. A reciprocal high-level visit to Nepal from Japan will instill much-needed vitality in the relationship.

(Subedi is a political-economy analyst)