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The Indo-Pacific Vs. the Belt and Road: Nepal’s Great MCC Debate

A $500 million grant under the U.S. Millennium Challenge Corporation faces opposition within Nepal’s ruling party.

By Kamal Dev Bhattarai
The Indo-Pacific Vs. the Belt and Road: Nepal’s Great MCC Debate

Nepal’s Minister of Finance Gyanendra Bahadur Karki, seated left, and acting CEO of Millennium Challenge Corporation Jonathan Nash, seated right, sign the Nepal Compact on Sept. 14, 2017 in Washington, D.C.

Credit: Photo by Steve Ruark for MCC

Nepal, which is in the club of Least Developed Countries (LDC), aspires to become a middle-income country by 2030. To achieve that goal, it desperately needs massive international investment in the form of both grants and loans. Yet despite that, the United States’ $500 million grant under Millennium Challenge Corporation (MCC) — one the largest U.S. grants in recent history for the development of energy infrastructure and road maintenance in Nepal — has faced opposition inside the ruling Nepal Communist Party (NCP).

The MCC, describes itself as an “independent U.S. foreign assistance agency that is helping lead the fight against global poverty.” Nepal formally requested an MCC grant back in 2012 and all successive governments – meaning all major political parties — supported that request.

Once Nepal made its formal request, the United States started its study of conditions that individual countries have to fulfill to get an MCC grant. Some of the necessary indicators are quality of the electoral process, political pluralism and participation, government corruption and transparency, and fair political treatment of ethnic groups. After Nepal was found to fulfill all the conditions, the two governments started to negotiate on specific ideas for cooperation. The projects were selected by Nepal based on its local needs.

Nepal and the United States signed a “$500 million compact to spur economic growth and reduce poverty in Nepal” on September 14, 2017. “The Nepal Compact, MCC’s first compact in South Asia, aims to strengthen Nepal’s energy sector, improve regional energy connectivity, and control transportation costs to encourage growth and private investment,” according to the official statement from the MCC.

There are broad two areas under current MCC project. First, the Electricity Transmission Project, which includes the construction of approximately 300 kilometers of high-voltage power lines and a second cross-border transmission line to facilitate greater electricity trade with India. This component also includes activities to improve sector governance to increase private investment. The second is the Road Maintenance Project, which includes maintaining up to 300 km of roads in Nepal.

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Opposition parties in Nepal’s Parliament, including the main opposition party, the Nepali Congress, strongly back the MCC compact. Some fringe communist parties also oppose the MCC deal, arguing that it would not serve Nepal’s interest. Those fringe parties always oppose U.S. ideology and values, labeling the United States an “imperialist force.” But the fate of the agreement is in the hands of the majority NCP, which is sharply divided on the MCC’s future in Nepal.

There are at least three opinions inside the NCP. Party chair and Prime Minister K.P. Sharma Oli and Foreign Minister Pradeep Kumar Gyawali are in favor of endorsing MCC as soon as possible. Other party figures, including influential leader Bhim Rawal, are objecting to some conditions under the MCC pact. Those leaders are of the view that there should renegotiations of some conditions of the MCC before endorsing it from Parliament. However, as the deal is already signed and is in the final stage of implementation, there is little chance of renegotiations. The duration of the project is five years and it should have begun in 2019.

There is another group in the NCP, mainly consisting of former Maoist leaders, that opposes the MCC outright, arguing that it is a part of the U.S. Indo-Pacific Strategy (IPS) and thus acceptance of this project would drag Nepal into a military alliance with America. This faction believes that the MCC is a part of the IPS, which is aimed at containing China, so Nepal should not accept it.  Some NCP leaders are also saying that the MCC aims to block China’s cross-border railway line.

In the recently concluded NCP meeting, the MCC became a hot issue and party divisions were on full display. The party is planning to present the issue at its Central Committee meeting, which is taking this week, expecting an endorsement from there.

After the intense debate inside the NCP as well as among the media and civil society, the U.S. Embassy in Kathmandu on January 17 issued a 10-point clarification emphasizing that the MCC does not have any military components. Defending the MCC, the embassy stated that “The $500 million is a grant, with no strings attached, no interest rates, and no hidden clauses. All Nepal has to do is commit to spend the money, transparently, for the projects that have been agreed upon.”

The embassy statement also noted that “Recently Nepali citizens, politicians, and members of the media have been asking questions about the Millennium Challenge Compact (MCC) in Nepal.” Indeed, lately social media have been filled with the comments related to the MCC and debate on it has reached the grassroots level.  The opinion pages of newspapers are filled with articles related to the MCC.

This debate should have taken place before it was signed, but in Nepal the debate is only breaking out now, when the deal is in the implementation phase. The supporters MCC are of the view that if the agreement is not endorsed it will severely the investment climate in Nepal — and also reflect poorly on the credibility of the government.

As per the agreement with the United States, the MCC should be endorsed from Parliament to ensure that all political parties take ownership so the project can be implemented in a smooth way. However, some politicians and civil society members argue that there is no tradition of endorsing aid projects from Parliament.

As geopolitical analyst Tika Dhakal argued:

The most unjustifiable condition of MCC is the parliamentary endorsement. Our constitution clearly lays out two legislative functions of parliament: endorsing bills to make them laws and endorsing treaties and conventions. Either you have to present the MCC accord as bilateral treaty, like the Mahakali Treaty, but it is not a treaty. Now, it is in the form of a bill.

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The MCC compact has been already registered in the Parliament Secretariat but is yet to be tabled in the full house for an endorsement. Due to divisions inside the ruling NCP, previous Speaker Krishna Bahadur Mahara — who has since been removed in a sexual harassment case — did not table the agreement in Parliament. Prime Minister Oli in an interview publicly accused Mahara, a former Maoist leader, of intentionally delaying the process. Oli is hopeful that the new speaker, Agni Sapkota, will play an active role to endorse the MCC from Parliament, but Sapkota is also from the former Maoist party.

There are also conspiracy theories that China could be behind the opposition to the MCC as Beijing strongly opposes the U.S. Indo-Pacific Strategy. However, China has publicly said that it does not oppose any foreign aid. In a press conference held on January 3, Chinese Ambassador to Nepal Hou Yanqi said that China welcomes any foreign economic assistance to Nepal. “We welcome any international assistance to Nepal if it is for economic cooperation. We would like to see the ratification process of the MCC and the Nepal government take a positive decision for its interest,” Hou said.

In Nepal, the IPS is perceived as a counter to China’s Belt and Road Initiative (BRI). Similarly, there are perceptions that, through the IPS, America is trying to forge a military alliance to that end. That is why Nepal’s foreign minister and defense minister so frequently aver that Nepal will not join any military alliance, as that would be against the nonalignment policy, the cornerstone of Nepal’s foreign policy while dealing with major powers. The MCC was plunged into dispute in Nepal when senior American officials being repeatedly saying that the MCC is a part of the IPS.

Nepali perceptions that the IPS is in direct opposition to China’s BRI have only increased since the Indo-Pacific Strategy Report was issued by the U.S. Department of Defense in June 2019. The various communist parties are of the view that if Nepal subscribes to the IPS, its relationship with China will be affected. There are also perceptions that the BRI is purely a connectivity and infrastructure-driven strategy but the IPS is a military strategy. Rupak Sapkota, deputy executive director at the Institute of Foreign Affairs (IFA), a government think tank, says, “As the IPS states military engagement and the U.S. itself has defined it as a military project, we cannot compare it with the BRI. Yes, tomorrow we could discover that the BRI too has security components.”

Despite opposition from ruling party leaders and some civil society, there are strong voices calling for the MCC compact to be endorsed without any delay. If there are more difficulties, it will severely affect Nepal’s declared policy of inviting more and more investment from the international community, mainly from major powers.

Kamal Dev Bhattarai is a Kathmandu-based writer and journalist. He writes on foreign policy issues.



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