The Pulse | Diplomacy | South Asia

Should Nepal Ratify the MCC Nepal Compact?

A U.S. grant of $500 million would give the fund-starved Nepali economy a shot in the arm.

Should Nepal Ratify the MCC Nepal Compact?
Credit: Deposit Photos

On October 7, Nepal’s private sector business associations issued a statement calling on the government to ratify the Millennium Challenge Corporation (MCC) Nepal Compact.

“Timely completion of [the] power transmission line and road maintenance projects of strategic importance to Nepal’s development” that are envisaged under the MCC Nepal Compact “will help boost high economic growth,” the statement said.

At a time when Nepal is in the grip of an economic crisis and struggling for foreign aid and investment, the $500 million grant that the U.S. government will provide Nepal under the compact will boost the latter’s economy. “We urge the Government of Nepal, all political parties and stakeholders to immediately pass and implement it in the national interest,” the statement said.

The Compact is expected to “increase investment, accelerate growth, and reduce poverty” by increasing power supply and lowering transportation costs.

Nepal signed the agreement on the Compact in September 2017. However, Parliament has not yet ratified the agreement. A month ago, MCC Vice-President Fatima Sumar was in Nepal on a four-day visit when she met parliamentarians, civil society leaders, and the business community to clarify their doubts relating to the Compact.

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A U.S. foreign assistance agency that aims to fight global poverty, the MCC has partnered with nearly 30 countries worldwide to implement projects worth around $13 billion.

Under the MCC Nepal Compact, the $500 million grant from the U.S. government will be used for two major projects: a 400 kV electricity transmission line connecting Nepal to India (the Compact will cover the Nepal section only), and the upgrade of around 100 kilometers of roads along the East-West Highway.

The projects were finalized after extensive consultation with Nepali civil society, the private sector, and other stakeholders.

However, there is opposition to the Compact in Nepal.

Critics claim that the Compact is part of Washington’s Indo-Pacific Strategy (IPS) and since the IPS has a military component, ratifying it will mean that Nepal will have a U.S. military presence. Indeed some American officials have linked the Compact to the IPS. The task force formed by the Nepal Communist Party, which has now split into three parties, also concluded that the Compact was a part of the IPS.

Whether the MCC entails participation in the IPS is an important concern for Nepal. As a country with a non-aligned foreign policy it cannot be a part of any military alliance. Moreover, as a close partner of China, Nepal would not want its territory to be used against China, which is the primary target of the IPS.

The U.S. has clarified to Nepal that “MCC compacts are not under the IPS and that any decision by Nepal on IPS is separate and independent from MCC.”

There are concerns, too, that under the Compact U.S. laws will prevail over Nepal’s Constitution and that the Auditor General of Nepal will not have the authority to audit the Compact.

Based on my understanding and the clarifications provided by the MCC, the Compact fund cannot be used for any activity that violates U.S. laws, but it does not impinge upon Nepal’s constitution. The agreement is in line with most other international agreements or treaties that Nepal has signed previously. And Nepal has already conducted an audit of the Nepal Compact office.

Many have also questioned the need for parliamentary ratification of the Compact when other similar development projects or grants were simply finalized between the two governments.

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The MCC has said that it is to accord the Compact the status of an international agreement and ensure that there is no delay in the implementation of projects that ratification is necessary. Experts like the Vice-Chairman of National Planning Commission Dr. Biswo Poudel support ratification as it makes the process more transparent. Indeed, Poudel argues that all aid from other countries too should be ratified by parliament.

Public discussion and debate over the content and implications of such agreements is welcome. However, the debate over the MCC has not been productive. Political parties and politicians have used the MCC to score political points and further their personal goals. Prime Minister Sher Bahadur Deuba, who is pushing for the MCC’s ratification now, opposed it when K.P. Sharma Oli was prime minister. Now in opposition, Oli is ambivalent about the MCC. Some other parties are hiding behind the argument that a national consensus must be built on the issue.

It is interesting that the question of Nepal joining China’s Belt and Road Initiative was never discussed as vigorously as the MCC is being debated. Joining BRI was assumed to be urgently needed and Chinese interests in getting Nepal on board for the most part were ignored.

The debate on the MCC also reflects Nepal’s lack of strategic foresight and confidence. Geopolitical considerations have made Nepal the focus of interest of India, China, and the United States. Nepal should have confidently encouraged them to compete for influence by investing in Nepal’s development. But Nepal has been timid on the matter.

The debate has laid bare the ad hoc manner in which Nepal makes foreign policy decisions, with individual and party interests playing the central role in these decisions.

It has also laid bare Nepal’s poor understanding of international diplomacy. No grant from any country is “selfless.”  Instead of looking at the U.S. grant with suspicion, Nepal should recognize that Nepali stakeholders had identified transportation and energy as strategic areas for investment based on assessment of Nepal’s needs. Thus, the challenge before Nepal is to ensure proper management of the project to ensure that it is implemented in a way as agreed to further Nepal’s interests, and not for other purposes.

The key question that Nepalis should be debating is not whether the Compact is in Nepal’s national interest but whether Nepal has a strategy and a process by which it chooses to conduct foreign policy and finalize agreements.

Implementation of the MCC Compact might increase the American presence and influence in Nepal, as most grants do. However, the impact of such influence will depend on Nepal’s management of the project.

Non-ratification of the agreement will severely dent Nepal’s credibility, harm its relations with the U.S., and hamper aid and investment in Nepal.