Nepal currently stands at Ground Zero of the intense geo-economic and geopolitical competition between the world’s two global powers China and India. While Nepal’s strategic importance as a geographical buffer state presents an opportunity for development, the country’s weak sovereignty and prolonged internal instability have turned this opportunity into a serious geopolitical risk.
Nepal’s future now depends on how it manages the geo-economic and geopolitical dimensions of major infrastructure and development aid projects, particularly the US-funded MCC (Millennium Challenge Corporation) and China’s BRI (Belt and Road Initiative).
Nepal’s traditional principle of non-alignment in foreign policy is now in crisis. The US has leveraged the MCC grant as a tool to project power and expand its sphere of influence as part of its Indo-Pacific strategy. Countering this, China is using connectivity and development aid through the BRI, but with the evident danger of debt diplomacy.
This intense competition has constrained Nepal into a position where it must choose sides. Instead of maintaining diplomatic balance, political parties are prioritizing short-term power equations over national interest, causing the country to fail in maintaining a balance of power.
The acceptance of the US MCC grant was seen as an effort to expand Western interests in Nepal’s geo-economics. This created a deep political conflict within Nepal’s political circles, with communist parties opposing it by linking it to a security alliance. In 2021, when the bilateral agreement was ratified, the Maoist Center, due to external and internal pressure, adopted a middle path of passing it with an Interpretive Declaration.
This incident exposed the bitter reality that Nepal’s political leadership often fails to maintain a sovereign stance and succumbs to foreign pressure. It is clear that Nepal has failed to achieve diplomatic balance, when it should have avoided becoming Ground Zero. On the other hand, although Nepal signed China’s ambitious BRI in 2017, its projects have not gained concrete momentum.
China’s core institutional interest is to make Nepal a land-linked nation and establish a Trans-Himalayan Multi-Dimensional Connectivity Network. However, international criticism over high-interest rates and debt diplomacy, as seen in countries like Sri Lanka, has made the Nepali leadership wary of the loan conditions, raising the risk of economic colonialism in Nepal.
As a counter-strategy, after the MCC’s ratification, there are allegations that China viewed it as a US “checkmate” and attempted to draw its communist strategic partners in Nepal closer through ideological and defense diplomacy. Nepal’s inability to fully expedite the economic corridors under the BRI until it secures grant-based projects highlights a limitation that fuels strategic ambiguity.
The foreign policy of Nepal’s main political parties changes according to their power equations and strategic stances, further complicating the geo-economic game. The Nepali Congress emphasizes bilateralism with Western powers, while the UML stresses nationalism and strategic balance with China. The policy of the Maoist Centre, however, remains unstable and power-centric; it is seen at times adopting a strategy of Western hedging and at other times closer proximity to China.
Such fragmentation among the parties makes it easier for foreign powers to individually influence Nepal’s leaders and advance their interests. This has increased bilateral pressure instead of fostering multilateralism. These geo-economic projects have also created risks to Nepal’s sensitivity and national security.
China’s infrastructure development on the border and India’s road construction in disputed areas (Kalapani, Lipulekh, Limpiyadhura) have exacerbated border disputes and the issue of geocartography. Growing foreign investment and control over water resources could limit Nepal’s sovereign utilization of its water resources in the long term. This increases the risk that regional powers could pressure Nepal through water diplomacy in the future.
Lack of internal preparedness and the new dimension of geo-economics
Nepal has shown a serious weakness in building bargaining capacity to manage external geo-economic pressure. Before accepting any major project, Nepal lacks a clear national priority checklist or legal empowerment. There has been no effort to regulate projects like the MCC and BRI through a single special law or body, separating them from political tug-of-war. This means Nepal has consistently reacted to the agendas of foreign powers instead of setting its own independent agenda.
Furthermore, a new dimension of digital dominance has been added to the geo-economic game. Investments in 5G networks, information technology, and cyber security have become new fronts for expanding the interests of major powers. Nepal has not been able to clearly define its digital strategic stance alongside physical connectivity. Failure to address the risks of increased foreign control over Nepal’s internal data security and geospatial information will certainly create further threats to national security in the future. To escape this geopolitical squeeze, ‘Project-Oriented Sovereignty’ is essential.
The pressure of geo-economics is no longer limited to development projects; it is even influencing Nepal’s federal structure. Major powers have begun adopting a strategy of bypassing the federal government by bringing in direct foreign investment and grants at the provincial level. This increases the possibility of the balance of power within the federal structure collapsing and the center weakening. When provincial or local leaders prioritize external agendas without considering the national long-term interest, Nepal’s overall sovereignty is affected. Therefore, it is essential for Nepal to establish national standards and a code of conduct for development aid and implement them at every level.
Lessons from world history and Nepal’s critical takeaways
Nepal must learn serious lessons from the history of nations that were ruined or lost their sovereignty by getting caught in a geopolitical squeeze.
- Afghanistan – The Graveyard of Empires Revisited: Afghanistan was a buffer state in the 19th-century Great Game and a battleground for both the Soviet Union and the US during the Cold War. Continuous development aid and intervention by external powers empowered internal groups with ideology and weaponry, plunging the country into civil war. The internal division in Nepal over the MCC and BRI shows the danger of this history repeating itself. Foreign powers are easily exploiting Nepal’s political instability to expand their sphere of influence.
- Lebanon – Prey to Regional Powers: Lebanon’s civil war was not purely an internal conflict but a proxy war of regional powers like Israel, Syria, and Iran. In a weak internal political system, local parties became ‘proxies’ for regional agendas, which eroded sovereignty. The way Nepal’s parties change their strategic stances under foreign pressure and prioritize momentary power aligns with Lebanon’s situation.
- Yemen – Squeezed by Oil and Ideology: The Yemen conflict is a clear example of geopolitical competition between Iran (Shia power) and Saudi Arabia (Sunni power). Internal groups were continuously provided with external support based on ideology and control over vital sea lanes. If continuous external support is provided to one side in Nepal to counter the other, the country will remain limited by conflict and underdevelopment for a long time.
- Congo – The Curse of Geo-economics: The abundance of precious minerals like cobalt and copper in Congo led to various institutional interests and direct intervention by neighboring nations. This weakened the principle of multilateralism and focused on looting long-term national wealth. Growing foreign control over Nepal’s water resources could bring about limitations similar to those in Congo in the future. This is the biggest threat to Nepal, which could deprive the country of ownership over its resources.
- Syria – Battleground for Global Powers: The Syrian civil war was a result of direct intervention by powers like Russia, Iran, the US, and Turkey over their strategic stances and spheres of influence. This war not only completely devastated the nation but also displaced millions of citizens. If external powers use military and non-military cooperation as a competition by exploiting Nepal’s internal instability, a disastrous situation like Syria’s could arise.
Nepal’s internal instability is the main reason for inviting these external threats. If Nepal fails to establish its independent will, it risks being caught in the geopolitical squeeze and ruined like these nations.
Success in the great power game
Even when caught in a geopolitical squeeze like Nepal, various nations have successfully utilized external competition as a means to obtain development assistance and strengthen their strategic position. The experience of nations that achieved prosperity by maintaining geo-economic and geopolitical balance is highly relevant for Nepal. The core mantra of their success is clearly seen in building bargaining capacity by focusing on internal unity, transparency, legal empowerment, and the national long-term interest. These examples offer a practical roadmap for Nepal on how to become a successful ‘balancer’ among world powers:
- Vietnam’s Diversification of Multilateral Investment: After its long history of conflict, Vietnam adopted a policy of equal distance with the US (Western investment) and China (geographical and economic proximity). It embraced multilateralism, using the world’s major powers to counter each other and diversify foreign investment. Due to this strategy, Vietnam successfully integrated its economy into the global supply chain, resulting in rapid economic growth. Vietnam strengthened its strategic position by focusing on economic cooperation while avoiding any security alliances.
- Oman’s Role as a Neutral Mediator: Located in the unstable Middle East, Oman played the role of a ‘neutral mediator’ to maintain diplomatic balance among conflicting powers like Iran, Saudi Arabia, and the US. Its foreign policy is based on a ‘zero-problem’ approach, meaning it holds no hostility toward any country. Oman ensured respect and economic cooperation from all sides without falling into any sphere of interest. Its clear strategic stance helped it stay away from regional conflicts and maintain stability in its waterways and oil economy.
- Indonesia’s Active-Independent Policy: Since the Cold War, Indonesia has adopted an ‘Active-Independent’ foreign policy between the US and the Soviet Union/China. This policy aims to secure the national interest by not joining any one bloc and maintaining friendship with all major powers. Indonesia used the power of its large market and natural resources to balance by accepting infrastructure investment from China (e.g., BRI projects) and technology and security cooperation from the US and Japan. This shifted bilateral pressure to multilateralism, working for the country’s long-term interest.
- Finland and Sweden’s Steadfast Neutrality: During the Cold War, Finland and Sweden maintained an extremely sensitive diplomatic balance between the Soviet Union and Western powers. They adopted a policy of complete military non-alignment, a policy known as ‘Finlandization’ in Finland’s context. This clear and steadfast strategic stance prevented their internal instability from escalating and allowed them to continue economic development by drawing commercial and technological benefits from both sides.
- Malaysia’s Practical Neutrality: Malaysia accepted China’s large investments and infrastructure plans but simultaneously maintained deep security and economic ties with Western partners like the US, Japan, and Australia. While cooperating with China for economic benefits, it maintained diplomatic balance with Western powers for the security and sovereignty of its waterways. Malaysia ensured legal empowerment and transparency, regulating the terms of foreign investment according to national interest, which liberated it from the political pressure of any single power.
Conclusion and the concrete way forward
To break through the geo-economic labyrinth, Nepal now needs not just the slogan of ‘neutrality’ but a concrete strategy of ‘Project-Oriented Sovereignty’ and internal unity. Establishing Nepal’s independent will requires a singular commitment from the political leadership to abandon momentary power interests and focus on the long-term benefit.
Nepal’s bright future must be based on reform and empowerment. Foreign projects should be welcomed with a strategic stance, ensuring no involvement in any security alliance, making loan conditions transparent and fair, and guaranteeing that the benefits of development aid from every project directly reach the Nepali people.
Parties must establish a common minimum understanding on national issues to enhance bargaining capacity. Through legal empowerment, all projects like the MCC or BRI must be regulated by a single standard, separating them from political contention. Only by maintaining internal unity and transparency can Nepal transform its sensitivity into a ‘security shield’ and a ‘door to development’ and play the role of a successful ‘balancer’ among world powers. Utilizing its natural and human potential to the fullest, Nepal must firmly establish its foreign policy with confidence, rather than resorting to mere hedging.
