Nepal’s Parliament Ratified A $500mn Grant From US As Part Of MCC
Nepal’s Parliament on February 27 ratified a $500 million grant from the United States as part of the aid agency Millennium Challenge Corporation’s Nepal compact. The biggest American financial pledge to Nepal so far, it was signed more than four years ago, but ratification was delayed by criticism that it undermined Nepal’s sovereignty. The funds are for road and power projects. While China had asked Nepal not to ratify it calling it a ‘Pandora’s box’, the US had warned that failure to do so may lead to a review of their 75-year-old bilateral relationship.
Nepal ratified the deal a day before the February 28 deadline set by the US, a sign that China’s influence on Nepal could be on the wane. And, in a sign of a growing bond with the US, Nepal at the United Nations General Assembly condemned Russia for its invasion on Ukraine — while India and China abstained. In 2014, Nepal had abstained from voting on Russia’s annexation of Crimea.
The deal was ultimately approved with an 12-point explanatory note stating that it has no military or security component and nothing to do with the US strategy in the Indo-Pacific — and that Nepal would be free to pull out if the US violated this understanding. What worked in favour of the MCC in the last hour was the ‘12-point Interpretive Declaration’ that was also passed by the Parliament at the same time when the MCC was ratified. This declaration helped mollify those who were protesting against the MCC as it ensured that the MCC was neither a part of the US Asia-Pacific strategy nor was it above the Nepalese Constitution. Yet, experts believe that the 12-point interpretive declaration is not meaningful as the MCC does not recognise anything that it does not mention.
The deal was signed in September 2017 between the acting CEO of Millennium Challenge Corporation (MCC), an independent bilateral foreign aid agency established by the US Congress in 2004, and Gyanendra Bahadur Karki, finance minister in the government that Deuba then headed. MCC, which sought to help low- and lower middle-income countries, found Nepal “qualified” for a grant of $500 million, with the recipient having to contribute another $130 million, for power infra projects including a 400KV transmission line, three power substations, and 655 transmission towers along a 315-km route touching India, and a 105-km four-lane road in western Nepal. Details of the deal were kept under wraps until July 2019, when Dr Yubaraj Khatiwada, finance minister in the K P Oli government, gave notice to the parliament secretariat for its “endorsement”. Although it did not require parliamentary approval, law ministry officials wanted to play safe because of a provision that in the event of a dispute over the law of Nepal and the deal, the latter would prevail.
While Deuba is considered close to the US, what would rankle with China is that none of the major communist parties — Maoist Centre led by Pushpa Kamal Dahal Prachanda, Unified Socialists led by Madhav Nepal, or Communist Party of Nepal-Unified Marxist Leninist led by former PM K P Oli — opposed the ratification. The first two voted with the government; the UML remained neutral. Until last June, the three parties were in the Communist Party of Nepal, and China had acted openly to bring them together and consolidate the friendship between Chinese and Nepali communist parties. All that crumbled when the Communist Party split into three, resulting in Nepali Congress leader Deuba replacing Oli as Prime Minister in July.
Critics point out that Nepal is often prompt in signing deals with external donors or friendly countries but does not execute them with the same urgency. After becoming PM for the first time in September 2015, Oli took Nepal close to China, retaliating against the months-long economic blockade launched by India to punish Nepal for refusing to defer the promulgation of its new constitution without meeting major demands of the madhesi people who have a close kinship with India. China’s involvement in four key areas — energy, tourism and hospitality, post-earthquake reconstruction, and trade and investment — has increased substantially since then. In recent years, it has begun to openly exercise its influence and preferences in Nepali politics.
China’s presence in Nepal grew as the circumstances evolved after 2006 — enhanced presence of the US and European countries, changing equations with India, and exit of the monarchy. When Xi visited in October 2019, it was over two decades since the last visit by his predecessor. He promised investment in energy, trade and investment, post-earthquake reconstruction, and tourism and hospitality, as China competed with India in investment. China also took an interest in Nepal’s politics, encouraging rival communists to come together in the parliamentary elections of 2018. It enhanced cooperation with government agencies including the Nepal Army, as well as with Left parties and influential leaders. And it has opened the door for thousands of Nepali students in its educational institutions, and opened Confucius centres in Nepal to teach Mandarin. In a way, China is investing in the future leadership of Nepal. So its interest is long-term, and it seems determined to confront competitors, primarily the US and India.
Wang’s visit was an opportunity for China to understand why its increased engagement in Nepal has failed to deliver results. Wang was not in Nepal to announce new big projects. For Nepal, it was an opportunity to assuage China that Kathmandu, and its political parties, would address legitimate Chinese interests in Nepal’s conduct of its foreign policy. If such an understanding was reached, Wang’s visit would have achieved its purpose. The China-U.S. geopolitical tug-of-war in Nepal is set to intensify, polarizing Nepali politics for years to come. The fragile political consensus on the MCC compact is already fraying.
Since the MCC is now passed by the Parliament, the life of the coalition government that was at stake has been saved. But this has made the government more accountable to use the huge funds under the MCC judiciously for the development of the energy and transport sector of the country. One of the major challenges before the Nepalese government is that it has not streamlined its capacity to spend. In such a situation, it would be difficult to achieve the desired outcome from the American grant assistance. So, all possible efforts need to be made by the government and the concerned agencies to complete the MCC projects in time and thereby, promote the export of surplus power to India. This would not only generate income and employment opportunities but would also accelerate the rate of economic growth of the country.