Nepal's new government seeks to balance its ties with India, China in growth pursuit

Nepal's new government, led by a former Maoist rebel commander, will try to balance ties with its immediate neighbours China and India for the economic growth of one of the world's poorest countries, officials of the ruling coalition told Reuters.

Pushpa Kamal Dahal, who still goes by his nom de guerre Prachanda, surprisingly became prime minister on Sunday after leaving his previous coalition and with the support of the opposition Communist Unified Marxist-Leninist (UML) party and five other smaller groups. Last month’s elections returned a hung parliament.

UML's leader and Nepal's former prime minister, Khadga Prasad Sharma Oli, is believed to be pro-China.

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Nepal is one of several South Asian countries where India and China seek influence. India has long considered Hindu-majority Nepal, a Himalayan country of 30 million, as a natural ally based on their close historical ties and long open border.

"We'll maintain relationships of equi-proximity with both our neighbours," Narayan Kaji Shrestha, a senior member of Prachanda's Maoist Centre party and who is expected to be a cabinet minister, told Reuters.

"We must immediately focus on containing inflation, maintain reserves, raise capital expenses, narrow the trade deficit and lower interest rates."

Other party leaders, speaking on the condition of anonymity before a swearing-in of new ministers, echoed Shrestha's view.

Beijing and New Delhi have poured billions of dollars in aid and investment in Nepal, which is rich in potential to generate hydroelectric power.

Prime Minister Narendra Modi of India, which is Nepal’s biggest trade and economic partner, was one of the first foreign leaders to wish Prachanda, who has been prime minister twice before.

"The unique relationship between India & Nepal is based on deep cultural connect & warm people-to-people ties," Modi said on Twitter. "I look forward to working together with you to further strengthen this friendship."

A Chinese embassy spokesperson in Kathmandu, in a Twitter post, also congratulated Prachanda on his appointment.

Analysts said Nepal's $40 billion economy, emerging from the Covid-19 pandemic, needed immediate attention of the new government which must regain the trust of investors and businesses as well as boost production.

Inflation is at more than 8 per cent, the highest in six years. Nepal also faces dwindling foreign exchange reserves, with an increasing dependence on imports of basic goods.

Former Finance Minister Yuba Raj Khatiwada, who worked under Oli, said Prachanda must focus on boosting manufacturing products like cement for export, and agriculture to substitute imports.