[Analytics] Battleground Nepal: China’s BRI vs the US MCC Compact

The all-powerful Standing Committee meeting of the ruling Nepal Communist Party, which ended on December 22, did not ratify the Millennium Challenge Corporation (MCC) Nepal Compact, a $500 million grant to Nepal from the United States. A faction of the party leadership opposing the compact expressed four reservations. Achyut Wagle specially for The Kathmandu Post.

One, Nepal should not accept MCC if it is part of the Indo-Pacific Strategy promoted by the US, ostensibly, to counter the increasing influence of China’s Belt and Road Initiative. The argument from the faction in opposition is that the Indo-Pacific Strategy is deemed a key instrument now to further the geostrategic influence of the US in the region, and Nepal should not be part of it. Two, the real bone of contention remains Section 7.1 of the compact which states, ‘The Parties understand that this Compact, upon entry into force, will prevail over the domestic laws of Nepal.’ This is one particular clause that has drawn flak not only from the Nepal Communist Party but also from a cross-section of the country’s elite.

Three, as per the stated condition in Annex V (a), the compact needs to be ‘consented to by the government of India’ which allegedly jeopardises Nepal’s sovereignty. Four, there were reservations on some logistics, like the final auditing authority given entirely to US authorities—ignoring the country’s public audit systems led by the Auditor General of Nepal while Nepal is also spending $130 million of its own money.

It was also not clear why such an agreement related to development assistance entirely in grants, with 80 percent proposed to construct high voltage electricity transmission lines, and about 11 percent to develop strategic road networks, needed parliamentary ratification. In fact, Article 279 of the Constitution specifies that only treaties or agreements related to (a) peace and friendship, (b) defence and strategic alliance, (c) boundaries of the State of Nepal, and (d) natural resources, and the distribution of their uses, need the ‘ratification of, accession to, acceptance of, or approval of’ Parliament’. But MCC does not involve any of these unless it is considered to be part of the Indo-Pacific Strategy and Nepal’s association in it is related to ‘strategic alliance’. In comparison, when Nepal signed the agreement on the Belt and Road Initiative in 2017, the same year when the MCC was signed, no such debate of parliamentary sanction had surfaced.

Further, it is also equally unclear whether the government is planning to ‘ratify’ it with a two-thirds majority or only ‘approve’ it with a simple majority. This process also looks preposterous as the government through a cabinet-level executive order has already taken ownership of the MCC by forming a public entity named Millennium Challenge Account Nepal (MCA-Nepal) under the Development Board Act 1956 to manage the programme. It is governed by a board chaired by the finance secretary, with members consisting of joint secretaries from line ministries, representatives from the private sector and civil society, and the managing director of the Nepal Electricity Authority.

New condition

The Nepal Communist Party Standing Committee ‘recommended’ to the party secretariat that Parliament might ratify MCC only if the US government officially clarifies that it is not part of the overall Indo-Pacific Strategy as the latter is increasingly becoming an overarching instrument for US diplomacy in Asia and the Pacific region.

It will not be surprising if the US, for the sake of Nepal’s political consumption and, also, to save the MCC endeavour, may come out with such a statement. But the fact remains, MCC is now very much part of the Indo-Pacific Strategy. The most recent publication from the US Department of State entitled A Free and Open Indo-Pacific: Advancing a Shared Vision states, ‘To date, support has included $2.9 billion through the Department of State and USAID for the economic pillar of the Indo-Pacific strategy since the beginning of the Trump Administration, and hundreds of millions more through other agencies, including the U.S. Millennium Challenge Corporation (MCC) and the Overseas Private Investment Corporation (OPIC)… MCC, which delivers results-oriented development assistance based on core principles of good governance, country ownership, and transparency, has granted some $2.3 billion to Indo-Pacific nations since 2004.’

Incidentally, the publication carries a picture of Nepal’s Foreign Minister Pradeep Gyawali with Secretary Pompeo. Several high-level US officials, including Secretary of State Mike Pompeo during his New Delhi visit last week, have unequivocally asserted that all forms of economic and diplomatic engagements in the Asia region will be, naturally, under the Indo-Pacific Strategy.

Nevertheless, for the ruling Nepal Communist Party, there is no need to be worried about the MCC Compact being part of the Indo-Pacific Strategy. The Compact is purely a development project financing, unquestionably the largest single tranche of grant assistance in Nepal’s seven-decade-long development history. It is administered by a country-level board and investment is focused on Nepal’s most pressing infrastructure bottlenecks of electricity transmission lines and road connectivity. For resource-scarce Nepal, support of similar volume and flexibility is rare to come from any other source, even in the foreseeable future. No economic assistance from any country can be considered a free lunch, and there is no reason the US assistance should be an exception. How Nepal manages it in her best interest is the prime question here.

Cause for concern

MCC may easily sail through the parliamentary process given Prime Minster KP Oli’s determination for the same and his ability to flush out dissent. He has clearly hinted that the Nepal Communist Party can only have a recommendatory role, and cannot meddle in the day-to-day functioning of the government.

But the real concern is that Nepal has abominably become a strategic battleground for global superpowers, particularly the US, China and India. The vertical split in the opinion for and against MCC at the recent Nepal Communist Party meeting is a clear manifestation of the entrenched influence of both the West and China, and their evident success in creating respective loyal lobbies in large political parties. These interest groups on both sides of the aisle have their vested interests above national concern.

This has a direct implication on our foreign policy operations. Nepal, due to her location and compulsion to accept support from all her friends in development endeavours, cannot turn down offers like the MCC Compact to please China. But such balance centred on national interest is not a one-off ad hoc adventure as employed by the Nepal Communist Party in dealing with MCC, but warrants serious calibration in our foreign policy and institutionalisation of the same.

Dr Achyut Wagle holds PhD in economics and is currently professor (adjunct) at Kathmandu University School of Management. He is Nepal’s seasoned eco-political analyst, writing for The Kathmandu Post since its very early days.